Effects of investor psychology on real estate market prices in Nairobi,Kenya

Abstract

This research project is a study on the effects of investor psychology on real estate market prices in Nairobi, Kenya. Chapter one is an introduction to the study which covers the background to the study, statement of the problem, objectives of the study and significance of the study. The background to the study covers some brief explanations on investor psychology, real estate prices, relationship between investor psychology and real estate prices and real estate market in Kenya. In the statement of the problem, the controversy between standard or modern finance on one hand, and behavioural finance on the other, is re-visited. Standard/modern finance is based on rational utilitarianism while behavioural finance focuses on psychological factors which influence people to deviate from rationality in decision making. The objective of the study is stated as being the effects of investor psychology on real estate market prices in Nairobi, Kenya. The significance of the study is that it will be of benefit to investors and more specifically, real estate investors; investment advisors and financiers; and academicians and scholars in the field of behavioural finance. Chapter two is on literature review. It discusses theories such as prospect theory, disposition effect theory, efficient markets hypothesis and random walk theory. It also reviews past literature on psychological factors that influence investment decisions such as overconfidence, mental accounting, frame dependence, affect, herding and representativeness. A review is also done of past studies on real estate investment markets both in Kenya and other parts of the world. Chapter three is on research methodology. It discusses the research design adopted in the study, which is the descriptive research design. The population of the study is specified, which is institutional real estate investors whose offices are located within Nairobi CBD, who were found to be 68 in number. The sampling design is also specified as simple random sampling technique. A sample size of 40 respondents was arrived at by using Slovin’s formula. The data collection method is in form of structured questionnaire to facilitate ease of data analysis. Appropriate models have been used in the study to show the relationships among the variables being studied. Chapter four is on data analysis and presentation. It contains responses to research questions, analysis of the responses and the presentation of outcomes through tables and charts. The tables and charts show frequency distributions, percentages and means appropriately. Ratings have been used to measure the extent and importance of psychological influences on real estate investment decisions and market prices. Chapter five is on summary and interpretation of findings. It is found out from the study that indeed, psychological factors influence real estate investment decisions and market prices. Psychological factors cause shifts in supply and demand, which causes changes in market prices, that deviate from values based on fundamentals. Fundamentalists can thus take advantage of resultant mis-pricings. The study recommends that real estate property dealers be acquainted with the fact that investor psychology plays a great role in determining investment decisions and market prices. The respondents’ rankings of psychological factors in order of their importance from the most important to least important are overconfidence, frame dependence, representativeness, mental accounting, herding and affect. The chapter ends with the limitations of the study and suggestions for further research.