If you ask your real estate agent if it’s a good idea to delay your real estate purchase when prices are falling, the answer you’ll probably get is no, it’s not a good policy to wait for the market to come out because sometimes, somewhere, somehow, in an unspecified region of the planet, prices will go up again, so you will miss it. in the opportunity of your life. Conversely, if you ask me the same question during regular business hours, my standard answer will probably be, “No, don’t. I want my commission now” (I’ve been known to give these kinds of answers, on occasion).
But seriously, is it really worth delaying the acquisition of a real capital asset in times of deflation?
Deflation, by definition, is a sustained fall in prices, so sustained, in fact, as to affect the velocity of money, that’s how often consumers spend money in any given month. Due to its effect on profits, deflation causes a slowdown in business activity and the consequent flight of investment capital. In its extreme forms, deflation affects employment and wages, thus spreading falling incomes and higher unemployment to other sectors of the economy, seriously hampering growth. Thus, deflation is caused by a collapse in demand and is associated with recession and, more rarely, long-term economic depression.
Since deflation discourages investment and spending, because there is no reason to risk future earnings when the expectation of earnings may be negative and the expectation of future prices is lower, it usually leads to a collapse in aggregate demand or is associated with the. Without the “hidden risk of inflation,” you can become more cautious simply to hold onto money and not spend or invest it. Thus, deflation is a tax on borrowers and holders of illiquid assets such as real estate, a tax that accumulates for the benefit of savers and holders of liquid assets and currency. Because of this, therefore, prospective real estate buyers may decide to hold on to their purchases, as future expectations of realized earnings and prices are lower than current ones.
So, therefore, are the proponents of the ‘waiting game’ right? Is it better to wait for prices to drop more than to buy now?
Central Banks have a special monetarist tool to combat deflation. By tightening the Federal Reserve’s control over the money supply, as well as the short-term interest rate on Treasury bills, the end result is a more valued national currency and higher interest rates. In these times of economic globalization, such a move results in an influx of foreign capital to make up for the shortage of domestic investment. The fact that price expectations are not attractive to domestic consumers does not mean that they are not attractive to foreigners.
Furthermore, the real estate sector is arguably the most economically inefficient market because different participants tend to have varying amounts, degrees and qualities of market knowledge and interest in participating actively in it. An investor’s reason for buying a rental property is very different from a first-time buyer’s reason for buying an apartment or house. Therefore, the first-time buyer, or married couple looking to upgrade to a detached single-family unit, will go ahead with their purchase even in times of falling prices, as they expect to live in their newly acquired property for years to come. And even investors, in fact, may want to buy and hold property, and not immediately resell it. Like builders, for example, who don’t have to build and sell, but may very well build and move.
And finally, price deflation increases the purchasing power of money compared to inflation, which decreases it. Therefore, a continued fall in prices leads to the point where the very balance between price and value is disturbed. The ratio of the perceived value of a capital asset to its intrinsic risk of acquisition is called “value.” Clearly, the lower the risk, the higher the value. It follows, therefore, that the perceived value – or simply ‘value’ – of a real capital asset is the total monetary value obtained by reducing risk exposure and liability. Put in elementary terms, ‘value’ is the total net benefit a buyer expects to receive from a purchase, measured in currency. The measure of the ‘exchange value’ of the real estate transaction is the sale price.
When average prices fall below a certain level, almost everything becomes a bargain, and expectations of future returns take a backseat. For example, let’s say a five-bedroom house on a large lot overlooking a golf course was worth $600,000 last year, and due to the change in prices this house has progressively lost ground and is now worth $500,000, and continuing. losing terrestrial. When will a buyer decide to buy it? When its price has dropped to $450,000, or $400,000 or even $350,000? It will reach a point where, in the eyes and mind of a buyer, this house will be a steal, regardless of future profitability expectations. Therefore, the general rule is that in any market the velocity of money will increase again and that the relationship between supply and demand will tilt in favor of demand once again, thus stimulating a new inflow of capital through investments and growth. This is what is known as ‘market consolidation’.
Which then ultimately means your real estate agent was correct. It is not good policy to delay a purchase simply because prices are falling.
louis frascati