Australian investors are likely to buy an investment property located in the same area as their primary residence. However, experts said this practice might be risky.
Property investors often think they have a "home advantage" in knowing their location better than non-locals, said María Yanotti of the University of Tasmania and Danika Wright of the University of Sydney in a think piece in The Conversation.
"There are several good reasons for this. First, the time, effort, and travel costs are typically lower when investing in your local area than investing further away," they said.
Another reason is that some investors plan to self-manage without an agent, making proximity an advantage for them.
Also read: 7 Reasons To Diversify Your Portfolio
Yanotti and Wright said the practice of investing in the local area manifests a home bias, which essentially means putting all the eggs in one basket.
“For example, investors in the stock market are more likely to hold shares in Australian rather than international companies,” they said. "This is even the case for superannuation funds, which set aside a sizeable portion of their assets for investment in Australian stocks – far more than the Australian stock market would represent in a global stock portfolio.”
By doing this, they said investors are not able to diversify away from the risk embodied in that specific suburb they are planning to invest in.
"If you are wondering whether this is unwise, or unwise enough to outweigh the advantages of local knowledge, consider this question: How likely is it that the location you happen to live in will always outperform every other location?" they said.
Also read: 5 Golden Rules Of Diversification
The high concentration of property investments in a specific location increases the risk of defaults and foreclosures in a market downturn, Yanotti and Wright said.
"Interestingly, we find that 'sophisticated' investors are more likely to invest outside of the suburb in which they live than less sophisticated investors," the two said. "Australians have a lot of wealth tied up in property, and the property market, in turn, is highly connected to the financial system through bank lending."
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