Real Estate Economics

I have always been puzzled by the intractability of the real estate economic theory.

While the applicability of the demand supply elasticity theory of economics is highly questionable when it comes to real estate dynamics, any buyer would hope that a low demand would bring down prices. And, any seller would hope that a high demand would boost up prices. The latter expectation works well in a supply-constrained city such as Singapore or Mumbai. Even in such cities, low levels of demand could occur, as are being witnessed currently.

But are the prices going down ?

Not at all.

While all stakeholders (except the seller of course), especially the buyers and the government, expect that prices would correct significantly in the near term (meaning, at least a 5 to 10% reduction in market prices), that does not happen. There is a correction of 1.3% for example. How is that when it comes to a significant price reduction ?

But the good thing is that the buyers keep away from the market. Here, I am referring to the median range of regular buyers, not those at the upper fringes for whom price elasticity of demand does not mean anything. At the upper end, price is inelastic to presence or absence of demand. The high end buyer is always prepared to part with the right prices for the right kind of property, irrespective of the market situation. But that high end market is less than 2% of the total volumes of the overall market.

As long as the bigger slice of the volume market decides to stay away from the market, there will be inevitable pressure created on the sellers at the fringe first – I mean, the sellers who cannot afford to wait for long to download their properties. There could be several reasons for their anxiety to sell off, but the point is that they might easily drop their prices to the “significant range” of 10% or more to sell, without considering what the market “was” willing to pay only a couple of months ago.

The bigger slice of the sellers will wait without getting impacted by this fringe sellers. However, the time that they are willing to wait will be proportional partially to the tenancy that they have on their properties which potentially could be yielding 3% or more when the interest rates are below 2%. Their ability to wait could, however, be impacted negatively by the anticipated drop in real estate prices in their surrounding areas or in the overall city market.

While a collapse of the real estate market is not a possibility in the absence of big external economic or political factors, a serious correction becomes inevitable after a duration when the transaction level reaches less than 50% of the peak month of the previous 12-months duration. When sellers become convinced that there will be no buyers at all, irrespective of the marketing efforts that have been undertaken, and the market volumes are heading seriously down, then a correction of 15 to 25% is entirely possible.

This is the situation that we are entering in the Singapore real estate market. While Mumbai is not that much different in terms of price in-elasticity and the ability of the sellers to hold on, apparently there are other economic factors in play which seem to be keeping the prices at the current stratospheric levels.

The conclusion is that the market is headed downwards, given that the interest rates are also going to eventually go up very soon, apart from other control measures that have been put in place in the Singapore real estate market. It would be wise to keep your liquidity in ready condition, and keep a tight watch on the market, if you are a buyer. If you are a seller, this is about the right time to download and make close to the profit that you had imagined you would get.


Vijay Srinivasan
03 August 2014


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