Does it pay to wait?
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 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 response 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 speed of money, that’s how often consumers spend money in a 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 the fall in incomes and the higher rate of 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. Without the “hidden risk of inflation,” it may be wiser 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 further 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 short-term interest on Treasury bills, the end result is a more valued national currency and higher interest rates. In these times of economic globalization, such movement results in an influx of foreign capital to compensate for the shortage of domestic investment. The fact that price expectations are not attractive for domestic consumers does not mean that they are not for foreigners.
In addition, the real estate sector is possibly the economically inefficient market par excellence because the different participants tend to have variable amounts, degrees and qualities of knowledge of the market and interest in participating actively in it. An investor’s reason for purchasing a rental property is very different from a first-time buyer’s reason for purchasing an apartment or house. So 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 look forward to living in their newly acquired property for years to come. And even investors, in fact, may want to buy and hold properties, and not immediately resell them. Just like builders, for example, who don’t have to build and sell, but can very well build and move.
And, finally, price deflation increases the purchasing power of money against inflation, which decreases it. Thus, a continual fall in prices leads to the point where the very balance between price and value is upset. The relationship between the perceived value of a capital asset versus 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 full monetary value realized by reducing risk exposure and liability. Simply put, ‘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 changing prices this house has progressively lost ground and is now worth $500,000, and so on. losing land. 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 come to a point where, in the eyes and mind of a buyer, this house will be a bargain, regardless of future expectations of profitability. 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 increase. 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