1. University of Canterbury
Psychological factors in investment choice between shares, bank deposits, and residential real estate in New Zealand, Hong Kong, and Germany
Simon Kemp
University of Canterbury
(with May Chan, Zhe Chen, Detlef Fetchenhauer, William S. Helton, and Tim Steiniger)

2. Original question
Virtually every economic commentator in New Zealand has noticed that New Zealanders invest in real estate and not much else. Why? (Actually NZ is not unusual. Anglo-Saxon countries, Spain, Japan, etc, etc not that different… see Turner, 2016.)

3. Old-style NZ house

4. Newer NZ house

5. NZ block of apartments (often bought for investment)

6. NZ holiday home (sometimes bought as 2nd house)

7. Reasons
Lots of different reasons – including economic. For example, returns may be better (or not); the share market is thin (true elsewhere too?); government more likely to support people’s housing than shares. This paper focuses on psychological reasons. (Well, it’s an economic psychology conference.)

8. Research strategy
Compare different countries (NZ & Hong Kong in Study 1; NZ & Germany in Study 2). Compare countries on investment preference. Look at relationship between investment preference & psychological factors (Risk preference in Study 1; Risk, Trust, & Social Norms in Study 2). Are differences in investment preference within and between countries linked to differences in psychological factors?

9. Study 1 (NZ & HK): Method
Sample: 133 NZ and 130 HK residents. Non-students, mix of ages: median age years. Measures: Risk tolerance using Wärneryd’s (2001) 6-item Investment Risk Attitude Scale. e.g. “If I think an investment will be profitable, I am prepared to borrow money to make this investment”. All answered on a scale from 1 to 5. (3 items reverse coded.) Also measured ownership of shares, mutual funds, term deposit accounts, and real estate, and how they would spend a small (NZ$10K) or large (NZ$100K) inheritance windfall.

10. Investment Risk Attitude Scale
1. I think it is more important to have safe investments and guaranteed returns than to take a risk to get the highest possible returns. (R) 2. I would never consider investments in the stock market because I find this too risky. (R) 3. If I think an investment will be profitable, I am prepared to borrow money to make this investment. 4. I want to be certain that my investments are safe. (R) 5. I am becoming more convinced that I should take greater financial risks to improve my financial position. 6. I am prepared to take the risk to lose money, when there is also a chance to gain money. All on a scale from 1(strongly disagree) to 5(strongly agree)

11. Study 1: Windfall investment results (as %ages of the sum)
__________________________________________________ Low sum High sum HK NZ HK NZ __________________________________________________ Term deposit * Unit Trust Shares * * Real estate * SDs large (~20+%) * = significant effects

12. Study 1: % owning asset
_________________________________________________________ HK NZ Term Deposit Unit Trust Shares 48 31** Residential real estate 55 89*** 1 property 38 64*** More than one property _________________________________________________________Test of significance between two proportions: ** p < .01; *** p < .001.

13. Study 1: Correlations between risk tolerance and assets
_________________________________________________________ HK NZ Larger windfall allocation Term Deposit -.47* -.42* Unit Trust Shares .32* .22* Real Estate .19* .11 Owning a Term Deposit Owning shares .18* .24* Owning Unit Trust .22* .20* Owning residential real estate ________________________________________________________ * p < .05

14. Study 1: Risk tolerance
No significant difference between HK (M = 16.1, SD = 3.9) and NZ (M = 15.1, SD = 4.9; t(261) = 1.80, ns) on risk tolerance. So differences in investment preference, especially the preference for shares, are not due to HK people being more risk tolerant.

15. Study 2 (NZ & Germany): Method
Sample: 431 non-students, 240 in NZ & 191 in Germany. Median age in both (& similar distributions). Measures Risk tolerance again Actual ownership of shares, term deposits, and real estate; and preferences for spending low and high capital windfalls.

16. Study 2 (NZ & Germany): New measures
Trust. Rating between 0 (no trust) and 10 (complete trust) of 9 occupations or organisations (e.g. company managers) and 6 processes (e.g. trust in government to protect bank deposits). Investments of close others. (e.g. Did you grow up in a house your parents owned? Does your best friend own shares?). All Yes/No

17. Trust items
NZ/German people in general, NZ/German experts, banks, company managers, government, the market economy, insurance companies, trust in the government to protect bank deposits, housing investments and share investments (3 items), and trust that things you buy in a shop, shares, and houses, are priced fairly (3 items).

18. Close others
Six questions about housing, each answered yes or no: Whether the respondent grew up in a house owned by their parent(s); whether a parent had ever bought a house that was not lived in but rented out; whether the respondent’s paternal and maternal (two questions) grandparents had lived in a house they owned; and whether the respondent’s best and second best friend (two questions) had ever bought a house. Four questions asked about shares: Whether either parent had owned shares; whether any grandparent had owned shares; and whether the respondent’s best or second best friend had ever owned shares.

19. Study 2: Windfall investment results (as %ages of the sum)
__________________________________________ Low sum High sum NZ Germany NZ Germany Term deposit Shares Real estate No significant differences between countries.

20. Study 2. % owning asset.
_________________________________________________________ NZ German Term Deposit 29 63*** Shares 24 36** Residential real estate 47 31*** Test of significance between two proportions: ** p < .01; *** p < .001.

21. Study 2: Trust & Risk
A single Economic Trust factor summed 14 items (first principal component; α = .92 for both samples). Av Economic Trust lower for Germans (M = 4.50; SD = 1.42) than NZers (M = 5.09, SD = 1.36; t(306) = 3.67, p < .001) Av Risk tolerance higher for NZers (M = 15.6) than Germans (M = 14.4; t(428) = 2.78, p < .01). So Germans were more likely to own shares and less likely to own real estate despite having lower economic trust and risk tolerance.

22. Study 2: Ownership by close others (% responding “yes”. Don’t know = No.)
______________________________________________________________________ NZ German Grew up in parent-owned house 96 73*** Parent(s) rented out a house 46 24*** Paternal grandparent owned house 83 67** Maternal grandparent owned house 87 67*** Best friend bought house 51 35** Second best friend bought house 51 34** Parents owned shares 59 45** Grandparents owned shares 31 13*** Best friend bought shares Second best friend bought shares Note. Results of a test of proportion shown. * p < .05, ** p < .01, *** p < .001.

23. Study 2: Predicting share ownership with logistic regression
Variable Odds ratio (/unit)
Parents own(ed) shares
(0 = no or unknown; 1 = yes)
Age Group (6 age groups, coded 1 to 6) 1.8
Sample (0 = NZ; 1 = German) 3.1
Risk tolerance (Possible range 6 to 30) 1.1
Method: Stepwise on Likelihood Ratio; F to enter = Variables ordered by entry.
Model: χ2 (df = 4) = 60.2, p < Cox and Snell R2 = .19. Hosmer-Lemeshow Test ns for 4 variables.

24. Study 2: Predicting real estate ownership with logistic regression
Variable Odds ratio (/unit) Age Group (6 age groups, coded 1 to 6) 2.5 Best friend owns house (0 = no; 1 = yes) 3.7 Sample (0 = NZ; 1 = German) 0.37 Method: Stepwise on Likelihood Ratio; F to enter = Variables ordered by entry. Model: χ2 (df = 3) = 91.7, p < Cox and Snell R2 = .28. Hosmer-Lemeshow Test ns for 3 variables.

25. Conclusions
International differences in investment choice are not based in international differences in risk tolerance or trust.
Some evidence that the behaviour of close others (social norms) is important.
We know a bit about how people choose share vs term deposit investment. But the important factors here may not be so important for predicting real estate investment. This is a worry because world-wide most investment is in real estate.

26. Further reading
Braithwaite, F. D., & Kemp, S. (2007). Safe as houses: Investor confidence in New Zealand. New Zealand Economic Papers, 41, Turner, A. (2016). Between debt and the devil: Money, credit and fixing global finance. Princeton NJ: Princeton University Press. Wärneryd, K-E. (2001). Stock-market psychology: How people value and trade stocks. Cheltenham, UK: Edward Elgar.