House prices in most of the country have dropped significantly since late 2021.

This has led to many households who want to sell their house, to holding onto it.

Many are tied in to 2021 prices and won’t sell until prices get back to near that point or higher. It feels like a loss in money even though in reality it isn’t a loss. It is just a change a value.

This is known as the anchoring bias. We become anchored to the 2021 prices and use that as the reference point as to where house prices should at least be. But the reality is, prices are not at that level.

I have a confession to make. I’m not a robot. I also suffer from the same biases as others. We left Wellington in early 2024, but before we left, we had a decision to make. To sell our house or rent it out.

In late 2023 when we were weighing up the decision, our house had gone down in value by about $200,000 from the peak of the cycle in 2021. $800,000 down to $600,000, It was an incredibly hard pill to swallow. Despite the fact that 2021 prices were crazy, and that 2023 prices were still much higher than what we paid in 2015, we felt like we lost money! We, like many others, felt anchored to 2021.

There was no way we would sell for such a hit to our pockets so we decided to rent it out.

But it really is flawed thinking.

First of all, even at lower prices today we are still better off. At least for us anyway, because we bought the house a while ago. Many others who bought before 2020, would be better off with todays lower prices than when they bought too. But we can’t help the feeling that we are worse off just because prices have dropped from 2021.

Secondly, there is always the opportunity cost. Many people are thinking they will sell their house when house prices get back to 2021 levels. Then they won’t feel like they have lost money. But at what cost? Many people don’t think about what they would be doing with the money if they sold now and the benefit that could bring.

In our example, selling the house in 2023 near the market bottom (maybe), still would have seen us with around $550,000 after closing costs. We would have needed to pocket some of that money in cash to make up for the loss of rental income we would otherwise be receiving. Say $100,000 for around 3 years rental income. The other $450,000 could have been invested fairly aggressively. A globally diversified share market investment has probably returned around 20% in the last year. Assuming a very conservative 12% return by chucking some bonds in the mix, our $450,000 may have grown to $504,000. An increase of $54,000.

Even if more typical returns of 6%, we would still have made around $27,000.

This also doesn’t include the small amount of interest from the $100,000 in cash too.

Whereas, keeping the house, we receive about $10,000 after expenses.

This past year around $45,000 less income by not selling. Typically, with no house price increase, it may be closer to $20,000 less with more modest investment returns.

House prices would need to have risen about 7% or so in the past year just to be in the same financial position as selling the house for a lower price and investing.

By waiting around for house prices to increase, we are missing out on these investment returns, which will also compound over time.

Sure, investment markets could just as easily go down in value too. This is the risk of investing and nature of the markets. In that case, holding onto the house would make more sense.

We can’t know these things in advance.

But one thing we can know, or consider, is the opportunity cost of our decisions.

I just wanted to share my thoughts on people holing on to property longer than they want. I am seeing a lot of it right now.

Anchoring to 2021 prices and not considering the opportunity cost of your money are two big mistakes in my opinion. If you understand you are anchoring and have considered the opportunity cost and are still comfortable holding onto the property then great. You have gone through a comprehensive thought process. But if you have disregarded these, that would be a mistake in your decision.

For us personally, even though we were anchoring to 2021 prices, we were also attracted to the rental income aspect. We knew 2024 may be a challenging year income wise with me leaving my management role and spending so much on a new build house with a significant mortgage. The rental income provided a nice point of difference from the share and bond markets.

If we were anchoring only, and didn’t feel strongly about rental income over investment income, then holding on to the property was probably the wrong decision for us. But for now, we are happy enough keeping the rental property. If the property market did ever heat up again then we may consider the decision to sell or hold again.

I just hope it doesn’t take too long and investment returns continue to soar! I say that in jest as I don’t really care. I may have a quick wince, but I get over it quick. I don’t live with investment regrets anymore as we have structures in place that allow for us to make the right decisions for us. We don’t make decisions based on what we think the markets may do. We make decisions based around what is best for us at the time.
 
   

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