False price signals in the market

The Irish Property Bubble (2006) The Republic of Property
#1

Here is something that I haven’t seen touched on in the Pin yet. THe issue of false price signals in the property market which might be hampering the adjustment to a clearing price.

First, the situation as I see it. Excess supply. At current asking prices there is a (massively) larger number of sellers than buyers. Cause: the current observable price, at which a very modest number of transactions are taking place and sellers continue to ask for, is a long way above that which will clear the market and allow all those people who want to buy a house at the current market price to get one **and **all sellers who want to sell at the current market price to secure a sale in a reasonable period of time.

That is simple and not too controversial around here. A very large amount of excess supply exists, so prices need to and will fall - sooner or later.

Which brings me to false price signals, something I suspect now might be having a very significant retarding afftect on the pace of unavoidable adjustment.

What is a false price signal? If you are a seller, with an asking price on your property and your are getting any offers close to your asking price, you are encouraged to believe there exists a buyer in the market at a price close to whatyou want.

Moreover, estate agents can get the same impression as the witness these events. And it doesn’t take many occurance for this to happen. Just one person offering you your asking price after many months on the market can be strong enough to reinforce your preferred view - that you won’t have to reduce your price by 40-50%.

That is fine, so long as those offers can be made good. But here is the problem. The people making the offers may think they can make good on them, but often they are premised on an assumption that they will be able to sell their house close to their own asking price, which in turn is reinforced because they may have had an offer close to their asking price (but not yet close enough), or their agent might be telling them that they have witnessed offers for similar houses close to asking prices.

What you build is a chain built on unrealistic expectations. Some of this might actually come off, a part of the chain can be completed by someone who has cash, or is an FTB with a bullish view on the market, savings and earnings. Clearly this is going to be the exception rather than the rule, but every occurance will reinfoce the beliefs of agents and sellers and these false price signals will be given too much weight.

I am seeing a lot more evidence for this.

  • A goodly number of housing staying sale agreed for months on end.
  • Houses coming back on the market.
  • Agents (who I believe are not lying) telling me the offers that some owners are getting for houses, but they still remain on the market.
    Of course, the way agents and sellers interpret what they see is moulded to fit their desired view of the world. They see offers and some sales being made at and around current asking prices and so are convinced it is simply “confidence”, nothing “fundamental”. But they are mistaken.

What is going to happen? Well this all continues to point to slow burn, unless agents really do wake up and start any new listing with some cold hard fact and bring properties to market at prices 25-30% below stock already there. Only then will all market participants begin to see genuine price signals.

#2

Agree with your point but I’m hoping that relatively widespread lowering of prices by developers on new houses will be enough to jog the decline back into gear.
Maybe I’m being a bit naive but until rents drop due to migration I can’t see many other significant calalysts.
Sentiment will be a big hitter when it really turns but it’s hard to put a timeline on it. I think it needs one of the other two to ignite it first.

#3

Yer right geckko about the false signals impeding the market’s ability to find a proper level. I think it’s always been an implied subtext on here and most of us are aware of it, it’s just never been clearly extracted out into a thread of its own before.

Markets only work properly if all actors have access to the same, reliable, information. If information is deliberately obscured from certain market actors or entirely missing, then you get market failure.

I wouldn’t hold my breath on getting quality easily available data any time soon in Ireland though, particularly for as long as FF are a major political force.

#4

Perhaps not false signals, you are assuming people can understand the signals or assume they do not apply to them, since they are evidently they are not signals people want to hear in a lot of cases

In addition, there is obviously not enough pressure to force the drops, so they are not happening.

#5

What we are seeing is widespread collective cognitive dissonance*. I’d imagine that people work through cognitive dissonance as slowly as their circumstances will allow. The flow of information is crucial and in Ireland that information is scarce.

****Cognitive dissonance *is a psychological phenomenon which refers to the discomfort felt at a discrepancy between what you already know or believe, and new information or interpretation. It therefore occurs when there is a need to accommodate new ideas, and it may be necessary for it to develop so that we become “open” to them.

#6

I have heard this idea promulgated in a few different forums - that prices are artficially high as people have yet to accept the reality about to unfold.

However, the true price is what buyers and sellers agree on. At the moment, people are not prepared to sell their houses for what they feel is less than the true value. One could take the view that buyers are being unrealistic in thinking that sellers will drop 20% of their asking price. Most sellers are not in a hurry to move and can stay put if they do not get a fair price.

Just note a few points:

  • There is no widespread house repossession
  • The average house price (currently around €275k) is affordable. A quick look at the daft mortgage calculator indicates that a couple on the average wage (€35k each) would get a 92% mortgage of €308k over 25 years. So the average couple can more than afford the average house.
  • The economy is strong. We have just experienced a decade of unprecedented growth and even the gloomiest of economic forecasts expects a return to growth in the next 2 years.

It is a fact that no-one knows where house prices will go next. The media have been over doing the ‘housing crash’ for months. Is it possible that the slide will go too far and then make a small but sharp upward correction? If it does all the smug wait-and-see-ers will be kicking themselves…

#7

I did see a headline at lunch where it said houses will be 70K more expensive after 2012 because of the costs of carbon neutrality. Whether there is a glimmer of truth in it I don’t know. I’ve felt that house prices are more dictated by the amount banks will lend than anything else. However headlines like this do copper faster the idea for some that holding on and squeezing the eyes tightly shut is the best approach. While I don’t agree with you 3cc there is certainly merit in the argument that things could take a lot longer than folks would hope for a return to sane prices.
Back to sentiment again.

#8

In reply to 3cc’s post:

Isn’t there something wrong when 2 working adults have to spend 25 year of their life paying back a mortgage to live in a very average house?

Isn’t it a fact that people are choosing not to purchase, despite the sums making it possible?

The economy is strong???

#9

They are only sellers if they decide to sell into the market, if they don’t decide to sell into the market then they are just flaunting their goods with no intention to sell. This might work in Angels but you don’t get paid for showing people your house.

#10

I can’t believe this tired old VI spin is still being put forward.
To borrow Isabel’s analogy for a minute, do you walk into a shop to buy a loaf of bread, look in your wallet, and tell the shopkeeper “I can afford to give you a fiver for it, even though I know it’s only worth 2”?

True value is not based on the lowest standard for the maximum price, in fact it’s the inverse.

#11

Of course, the flip side of all this is that in a country with a population little more than that of Berlin, there are a lot fewer people to convince than in the UK or US.

From my experiences talking to people, it seems to me that the message is really hitting home. Those that were bullish just a year ago are now starting appreciate just how serious the situation is and I can now see their fear. It is only those selling property that cannot (or will not) see the true picture.

And, in my area of North County Dublin, I have seen prices drop 10-15% over the last twelve months. That is most certainly “crash” pace. It would be greedy to expect anything more than this.

#12

Now, now people; go easy on 3cc, it looks like She/He is a recent refugee from AAM, & so isn’t used to actually discussing the possibility that Property is a one-way bet, or even discussing property prices at all :slight_smile:

It may take them awhile to adjust to the notion that its just possible those doom & gloom merchants are absolutely correct. 3cc, if you want to see how bad thinks could get, take a look at the property market in the US. They’re about a year ahead of our market.

Oh, please don’t trot out the line that Ireland is different & doesn’t have Sub-Prime lending. The pricing of Irish Banks shows exactly what the International markets think of the loans the Irish Banks are holding.

#13

The reality is unfolding. People aren’t buying at the current asking prices, banks aren’t lending at the multiples they were before.

Yipee, if I don’t sell my house it is still worth the value that I have attributed to it in my head.

Not yet anyway but who knows what the future holds

But no children, thats a sustainable model for the future of Ireland

Yep, the fundamentals are sound. The economy is guaranteed to grow substantially after this little blip. Sure add to that house prices only ever go up.

Its a fact that they are currently going down.

Yep it is possible that the slide will go too far, 70% **might **be wiped off the value of a house but at the end there will be a sharp upward correction of about, hmmm, let’s say 5%. The wait-and-see-ers will be really kicking themselves.

My advice is to sell now, you are not going to get any consolation here. I presume that you are here to try and rationalise a purchase.

#14

Nobody mentions one group of buyers who have almost disappeared from the market entirely. The mom and pop buy to let investors who accounted for 30% of new home purchases at the latter stages of the bubble. (some sources say 40%). How many secondhand properties investors were buying is anyone’s guess, but I’d imagine it was a significant proportion of the overall market.

When will the housing market again see this extraordinary level of investor involvement? And without them what will the market look like?

#15

Good for them. I’m still holding onto my $80 Cisco shares from March 2000.

I’m not in a hurry to move, just waiting for a fair price :slight_smile:

Yet.

As recently as the mid 90s, it was perfectly normal for an average house to be purchased over 20 years using a single income. Now you’re telling us that 50 years of average earning to purchase an average house is “affordable”. I don’t think so.

The economy is going into recession and the stock market is down 50%. The gloomiest economic foreacast for the property market two years ago was the fabled “soft landing” with prices growing in line with inflation.

Pardon me while I go and wipe my arse with the economic forecasts.

#16

Ozzy, I take your point. I am not suggesting the houses are worth what is affordable. My point is that affordability is often posed as a reason for a necessary house price correction. I do not think that argument has any sway at present. If they wish to, the average couple can afford the average house. I accpept that in many cases they choose not to buy at that level but the reason is not one of affordability.

Homeboy. Is there something wrong with taking 25 years to pay for a house? That’s a social question really but I think the important point is that people are generally prepared to do just this. My parents did it and I suggest everyone home purchaser between then (the 1960’s) and now has accepted that idea so I do not see that changing too dramatically.
As for the economy benig strong: In the last 15 years, it has risen every year except for the last obne and is expected to rise again int he next 2 years. If I could say that about any share/stock/investment, I would describe this as strong growth.

Bearbait: yes sellers who choose not to sell are not sellers. And equally buyers who do not buy and not buyers. But in cases where sales are completed, both parties will have compromised. My point is that buyers are not the only ones to set house prices. The price is arrived at by the resolution of the expectations of BOTH parties.

fishfoodie: You got me. I thought everyone on AAM was also here also, if only as a spectator. For the record, I accept that property is dropping but there are no one-way bets. If there was it would not be a discussion. I accept that the doom and gloom brigade may be correct; or that they may not.

I am just speculating that IF houses are affordable and IF the economy holds good and IF sellers are not under pressure to sell; then the only factor left influencing prices is purely a speculative one. Would you guys accepts this as even a possibility?

#17

What we are seeing is the bursting of a speculative price bubble. Yields are underwater, supply far exceeds demand in many markets, credit is crunched and speculators who accounted for a significant number of buyers have lost interest in buying. As for the economy holding good that’s a chicken and egg paradox. The chicken being the housing market and the egg the economy, what comes first?

#18

Go easy Ray… I never said that the economy is guaranteed to grow and that house prices will always go up. By all means disagree with me but to exaggerate my statements to ridiculous levels and then pick holes in these mis-statements is a bit of a waste of time.

Agreed, prices are currently dropping. Your example of a 70% drop followed by a 5% bounce is a bit extreme. If I buy shares tommorrow and suffer a drop followed by a sustained growth period, I would be happy. Historically, property has proved a sound growth investment in the long term.

You asumption is incorrect. No recent house purchase.

#19

With the greatest respect 3cc you need de-briefed as it seems you have been recieving a rather one-sided view from that other website which is inclined to distort ones perspective from reality to the realm of fantasy.

I know the journey back to the real world wont be easy but it will be rewarding and once you get past the muck you have been fed you will be shocked at what you see and how people have been manipulated. 8)

#20

Historically we have not had a house price bubble with prices increasing by 400% over a decade while incomes grew by 100%.

Historically when asset bubbles burst they give back most of all the gains achieved during the bubble.

Historically the stock market is a leading indicator for the economy. Our stock market has halved in just over a year.