Investor sentiment in real estate markets

Property decision-making is typically characterised as a structured, rational process, using fundamental data and leading to optimal decision making. To augment, or substitute for deficiencies in, such data, property investors may turn to perceptions of investor or market sentiment. While reliance on sentiment in the wider financial markets is generally regarded as leading to mis-pricing, its use in property markets, characterized by poorer information quality, may not necessarily reflect sub-optimal behaviour. This conclusion is suggested by Gallimore and Gray (2001), who surveyed UK property investment decision-makers. This survey also found that, despite its neglect in formal explanations of property market functioning, investor sentiment is regarded as an important factor in property investment decision-making, attaining status equivalent to that of fundamental data. The paper develops these findings. It explores their relevance to the wider literature on the functioning of real estate markets; examines the argument for incorporating sentiment into explanations of the way these markets move over time; and addresses the problems in empirically pursuing these questions.