Supply and Demand, or, Sentiment?

[s_t]

What determines prices?

It's a common phrase - supply and demand determines prices - but I'm thinking it isn't quite accurate (at least in the short term).

If two parties are negotiating price for the sale of a property, what determines the outcome - what each side think prices are going to do in the future. In a hot market, the buyers are scared they will 'miss out' and offer higher, in a slow market, they do the opposite and low ball. For example, in the hot market there might be the same demand - same number of buyers wanting to buy - they are just leapfrogging each other on price. Or because of the sentiment (hot market) more people might want to jump in before its too late. That would be sentiment driving demand up.

Of course physical constraints of supply and demand will have an effect on prices and sentiment over the long term, but in the short term, emotional behaviour (sentiment) overpowers it.

Another example might be share prices over or under shooting their fundamental/theoretical values - due to sentiments of euphoria/greed or doom and gloom. In that situation it is purely outlook/sentiment that is driving the supply or demand (buy and sell orders) of shares.

So then in our current property market, it is quite possible that house prices could fall significantly, regardless of immigration, affordability, IR's etc. if sentiment gets quite bad. It is sentiment that causes people to not buy, but to share houses etc. Again, in the long term they will get sick of sharing etc, and sentiment will turn positive again.

With the media now more prevalent than previous decades, and reinforcing/pushing the sentiment that's out there (as opposed to the boring logical long term fundamentals), are we in for bigger booms and bigger busts simply due to sentiment?

Is this logical or flawed? Or maybe obvious and boring?

 

[Ausprop]

if rents were about 10% then you could say the market is in balance. till then you are probably talking about a sentiment driven market.

 

[FelixL]

Its still down to supply vs demand, sentiment is just an indicator that affects the level of supply or demand.

In the current environment, sentiment is reducing demand, people afraid of buying property and alternatively choose to live at home, share rental accommodation etc. Sentiment is also affecting the supply side as developers weighting in on the risk to build new property.

Demand side sentiment is usually short term and changes quickly. But supply side can not. For example, if a developer is in the middle of the development already when the market sentiment turns sour, it is usually not feasible to just stop and wait, or after the build you won't just knock it down to reduce supply.

This is one the reasons why Aus prices don't fall like US did. Although both AUS and US is negative on market sentiment, our lack of supply is putting a bottom to the price fall

 

[BayView]

Buyer sentiment has a strong influence on prices. In a way, this is supply and demand at it's simplest form. No buyers equals lower selling prices. Lots of buyers equals better selling prices.

When a Vendor puts their property on the market, it is usually at a price comparable to recent sales of similar properties in the immediate area.

The agents know pretty much to within $10k what a house is worth, but there can be some unusual sales outside the pattern from time to time. That's the "fall-in-love" factor where someone simply MUST have the property at any cost. Rare.

So, if the recent sales have been good, then the price will be higher for the Vendor looking to list his property for sale. In boom times, people will offer above the asking to secure their dream home. Seen it happen numerous times.

If the recent sales were very slow, and the time taken to sell them was longer than usual, then the price for the new Vendor's property will usually be lower - if they agree to sell at the lower price. If the Vendor is in a "must sell" situation, the result can be disastrous in a market like this.

If there is bad buyer sentiment, they will disappear in droves until the newspapers and A Current Affair say it's alright to go back into the water, or the rates drop a few percent, or both. A few long stares at the tea leaves in the cup doesn't hurt either.

For an investor with a full cheque book, this is a good time.

For a seller with the Bank on the phone every other day, this is hell on earth.

I don't think our prices will fall significantly, despite bad buyer sentiment, because not everyone has to sell their house. Nay-sayers often forget this little factor. Yes, there are reports of house prices dropping all over Aus in the last few days, but remember; the only people selling right now are those who HAVE to, and there are no buyers around, so the VOLUME of sales is way lower, and it's only those poor b@stards who are in distress who are selling at any cost to get out.

Anyone who chooses to sell when they don't need to in such a climate is asking to do their dough, so why would you?

Our credit regulations are different to the US, and I don't see anywhere near the same number (percentage) of defaults as the US had happening here. The rising rates will catch a few out of course, but most people will sacrifice all the other doodads before they give up the house. This will keep our property prices at steady levels - despite what is in the news, and on the tips of the typing fingers of our resident Trolls here at SS.

 

[HiredGoon]

Price is set by supply and demand, but remember that demand is not fixed - it can drastically change based on sentiment (and credit conditions)

For instance, prices rose while we were constantly building houses faster than population growth. So while supply was was up, demand was up more. The same thing happened in all of the other bubble countries where demand was so strong that they believed they had a shortage, but then when demand returned to more normal levels they realised they had significant over building.

The houses were always there, it just took a change of sentiment to switch from shortage to glut.

I don't think our prices will fall significantly, despite bad buyer sentiment, because not everyone has to sell their house.

Prices are set at the margin by transactions that occur. Transactions that do not occur do not set prices. Works the same in all markets - not everyone has to sell their shares or commodities but those that do set the price for all of the other ones.

Not everyone bought or sold houses during the boom, but you would have been happy to use the few transactions that occured to revalue everything else upwards. Something that is very interesting this time is that people revalued their houses according to other transactions then borrowed against that value. In effect assuming that they could all sell it at that price or greater. Very interesting times!

Anyone who chooses to sell when they don't need to in such a climate is asking to do their dough, so why would you?

Because you are making a cashflow loss depending on capital gains that are no longer there? Holding makes no sense at all, and once people realise this, there will be a flood of sales.

Our credit regulations are different to the US, and I don't see anywhere near the same number (percentage) of defaults as the US had happening here.

Remember we have more household debt, our houses are much more expensive than the US and our wages are lower and interest rates higher. People only get in trouble when prices stop rising, because while they are rising they can refinance their way out of trouble.

The rising rates will catch a few out of course, but most people will sacrifice all the other doodads before they give up the house.

What will this do to our consumer/service economy?

 

[chilliaa]

Once again i strongly suggest reading George Soros's new book. It really changes your mindset.
Generally i am very wary of books by investment gurus, anyone who has managed to achieve personal wealth of more than a billion dollars from investing deserves to be noticed.

The central theme of his book are the flawed investment theories based on the efficient market hypothesis. He argues that instead of prices/returns approaching a equlibrium based on the presumption of perfect information and investor self interest, prices/returns are normally in a state of diequlibrium because
1) we do not have perfect information,
2) we try to use information to adapt, which removes the possibility of economics being a scientific study and becomes totally a social study. (in traditional thinking economics has been viewed as a social-economic study).
The uniqueness of human beings (compared to say a rat in a scientific study), means that any results of a study will gradually be used by humans who will adapt to the benefits of the study, thereby rendering the results useless.

 

[chilliaa]

How can Soros paragrims relate to say the property market:
1) For starters with reference to the US market, the belief that house prices cant fall on a NATIONAL basis. ie one particular region may have a fall, but this will be countered by rises in other parts of the country. This was standard belief based on numerous historical studies. Effect: Securitisation took off because investment products could be created using loans 'blended' from the nation as a whole. The interest rate differential should be lower because 'risk' should be lower based on historical studies.
2) What is the real 'instrinsic' value for a property. This answer will depend as much on peoples perception of that value (which will be influenced by historical information) as well as traditional valuation methods.
3) Explains the *%&% thats happening in the stock market for shares such as BnB, Centro, GPT etc. In very simple terms these companies have applied on a megabasis, what has generally been percieved as the way to get rich in residential property.

Therefore, to be honest both LA Aussie and hired goon are actually presenting valid posts.
I am not trying to be a doom and gloom forecaster here (actually im very much a long term optimist, i think humans are very creative in adapting to new situations), but i think the real answer to long term secure investment results is to realise that the future is unknown, that what worked in the past is no guarantee that it will continue to be or can be replicated in the future (there is a difference). Therefore build as many protection buffers into your investment paramaters as possible.

 

[Bill.L]

Hi all,

On first look at this thread, my thoughts were "here we go again".

HG,

Price is set by supply and demand, but remember that demand is not fixed - it can drastically change based on sentiment (and credit conditions)

OMG, I agree.

Prices are set at the margin by transactions that occur. Transactions that do not occur do not set prices. Works the same in all markets - not everyone has to sell their shares or commodities but those that do set the price for all of the other ones.

OMG, I agree again!!!

Not everyone bought or sold houses during the boom, but you would have been happy to use the few transactions that occured to revalue everything else upwards. Something that is very interesting this time is that people revalued their houses according to other transactions then borrowed against that value. In effect assuming that they could all sell it at that price or greater.

AND, I'm still agreeing, well mostly.

How many people, and what did they do with the money. Did they buy investments that will provide cashflow in the future?? Did they add value to their property?? Did they spend the money on do-dads and holidays???

Very interesting times!

When were they not??

Because you are making a cashflow loss depending on capital gains that are no longer there?

I knew the agreeing would eventually end. Both parts of this are assumptions. Much of the borrowings used for investments could now be cashflow positive and showing cap gains, with no desire by the owners to have a CGT event (sale). Meanwhile some of those who are showing a cashflow loss, are using the deductions to reduce tax, and hate paying tax. There preference is to save on tax.

our houses are much more expensive than the US

Do you have evidence of this?? Can you buy a similar House, not apartment, say 3 x 1, 25km from the centre of a major city, that has high livability, and low unemployment, and population growth, on a reasonable block of land, and local property taxes of under $1500 a year, for say under $250k????

Like this one..

http://www.realestate.com.au/cgi-bi...er=&cc=&c=2072532&s=vic&snf=rbs&tm=1216082079

Where???

bye

 

[s_t]

I tried reading one of Soro's books (can't remeber the name) a while ago Chillia, but found it rather abstract and philosophical for my liking. Is the more recent one any better in this regard?

Its still down to supply vs demand, sentiment is just an indicator that affects the level of supply or demand.

I'm thinking more that it affects supply and demand and can determine the price.

In the current environment, sentiment is reducing demand, people afraid of buying property and alternatively choose to live at home, share rental accommodation etc. Sentiment is also affecting the supply side as developers weighting in on the risk to build new property.

Yes, but I think there is more to it than just that too. If someone has decided that they are going to buy, sentiment determines the price they offer. In a non-efficient market (like housing - where an agent may only have the one person considering the house), sentiment then determines the price.

No buyers equals lower selling prices.

Not if sentiment remains high? Only if the seller lowers his expectations/sentiment as to what they'll accept.

Lots of buyers equals better selling prices.

Not if sentiment remains low? eg. Lots of buyers interested but not willing to 'leapfrog' other offers-just keep looking and try for another place. Obviously this can't last forever - at some stage people will get fed up with missing out and start offering more.

Prices are set at the margin by transactions that occur. Transactions that do not occur do not set prices. Works the same in all markets - not everyone has to sell their shares or commodities but those that do set the price for all of the other ones.

Yes, makes sense. A desperate seller accepting a stupidly low offer in a moment of stress, might have got more if they had a good agent or readvertised at an intermediate price. That sale will become part of the benchmark for future sales though.

 

[chilliaa]

no its still bloody hard reading. Its been more than 10yrs since i last read accademic research papers at Uni, at this book is write up with the best of them. Lots of 10/15/20 letter words that i have never heard of before.

I plan to wait several weeks and then read it again to better understand the concepts. I was always skeptical of mainstream financial theories, even at uni. I had alot of trouble accepting standard economic doctrine, thats why this book was so useful to me. It provides a frame work for alternative thinking. A bit like the austrian schools of economic thought vs kensian and modern economic rationalisation.