Why does market confidence affect us?
Now, this is a really interesting question, and I am sure many of us have pondered on it from time to time. Then why does market confidence have such a huge effect on real estate and real estate sales? Surely, people still have to sell their properties for any amount of reasons. They may need a bigger home or need to downsize now that the family have moved or perhaps, they may have to change where they live to follow a good career move, or have even decided on the ultimate tree change. Whatever the reason, people need to buy and sell property, so how can market confidence bring the real estate market to a virtual standstill? The sellers and buyers still need to do what they need to do, that hasn’t changed, so what has?
Well, for all our education, states of awareness and various other progressive ideas, we are all still virtually ruled by our primal instincts. We still have those old instincts which helped us survive… and with survival comes fear or flight… and with fear or flight comes panic! We also still very much have the sheep mentality. You only need to see what happens to the stock market when there is bad news around, stock values plunge, and panic sets in. Of course this is not the only reason property sales slump but as lack of confidence spreads across the corporate world… banks tighten their belts, money gets harder to get hold of, the government starts tightening its belt, and the incentives are reduced, until finally things just get downright tough and no one does anything… frozen by fear. We had that happen in the very recent crash, and there are still people and businesses not to mention the government, trying to claw their way out of it, or trying to recover from getting burnt by it.
Yes, there are those who do win on the stock exchange as the prices begin to drop, and those that are disciplined enough to start buying property, when no one else wants to know because prices just might drop further, but they are a rare breed. And the question is why is that? Surely, the best time to buy is when the market is flat, just think of the all the bargains we have all missed out on. We all have a real estate story that starts… if only I had decided to go ahead… look what the property is worth now. But we don’t, we prefer to hang in with the crowd or should I say sheep?
Whilst most Australians are pretty free and easy about spending their extra cash when times are good, when times start getting hard they are also most exceptionally good at tightening their belts. They stop spending, the retail sector and small business starts feeling the pinch as the dollars stop coming in. Business owners are great spenders but they can’t spend what isn’t coming through the door, so they tighten up their belts and that leads to less orders for all the distributors and wholesalers, which then in turn affects the industrial and import sectors and so it goes on. Soon the whole country is weighed under what we could call the confidence slump. The government then starts panicking and tries to put in measures to ease the pain, lowers interest rates, starts spending money on infrastructure but by then it’s all a bit too late and things take a long time to work their way up again.
So, in the meantime what happens in real estate. Well, properties don’t sell no matter how many times they try to meet the market. For no sooner we are brave enough to make one reduction on our property and count the cost of that, the market price has moved just below that. We are then once again faced with the question do we reduce again or not, and again by the time we make that decision, yes you’ve guessed it. It’s gone down again. Real estate is on a downward spiral until the property market bottoms out altogether and finally adjusts itself to a point where buyers are prepared to buy again. Pretty much the same happens as a market heats up, the prices are forever going higher and higher and seemingly without end. But for those who wait too long to get the highest price, they may well find themselves trying to sell in a crashed market… not a pretty thought.
Wouldn’t it be great if we could all just be sensible and buy when the market is low and sell when it is high? Well, yes, there are a few either very brave or very canny sellers and buyers that have worked this out, but for most of us who have to rely on banks to buy and sell our properties, that isn’t always so easy. So we end up following the trends up and down like a flock of sheep and many incur really heavy losses doing so.
What can be done about it? Not that much, it’s just the human condition and that’s why we have cycles. However, if common sense prevails we soon realize that if we sell in a bad market, we can buy in a bad market so we are really no worse off than if we sold in hot market and bought in a hot market… same difference.