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Why aren’t prices falling as much as they should?

The short answer to this interesting question is that property prices tend to be “sticky” on the way down as a lower sales price can often be dismissed as being uncharacteristic of the market.

WHEN prices are going up there are numerous transactions, market signals that show to vendors/buyers where prices are. Thus, once a transaction concludes all other vendors raise their asking prices almost immediately to match, if not exceed, that achieved price.

In contrast, when the market is going down there is little, if any, market evidence as to where prices are. Thus, vendors tend to leave asking prices where they are as they don’t know what the market value/price of the asset is. Also, if a transaction does conclude at a significantly lower level than the asking price, this is often dismissed as being “uncharacteristic of the market” or that the property is dissimilar to theirs.

Of course there are other factors at play. With the financial problems of owners, developers and borrowers spreading like wildfire there is little interest by financial institutions to “push” anyone in disposing of their asset. If banks were to do so, their thinking goes, either the owners of large properties would simply default as there is simply no demand for their assets, or the achieved price would have a dual impact on the financial institution:

Firstly, the income from the sale of the asset would be lower than the loan amount which means that the bank would need to write-off the difference.

Secondly, it would give a clear market signal as to where property prices are which would result in a downward revaluation of the market value of other properties which would in turn result in a lowering of collateral values.

The effect of the above is a frustrating case of “chicken”. Either the bank pushes the owner of the asset to sell it thus resulting in possible losses, or the bank doesn’t push them and continues to hope that the market will turn to its favour.

The chicken in this case has been met by a butcher’s knife called PIMCO and thus this dilemma has ended. Banks will soon be forced to take their losses upfront.

Are lower property prices good for the economy? The short answer is “it depends”. Lower property prices mean that property should be more affordable and that rents should be lower making business more profitable as real estate is typically a company’s second highest expense.

However, if salaries fall more than property values, then relatively they are more expensive and thus still unaffordable. Also, lower property prices without the availability of credit to finance an acquisition isn’t really of any help unless you have significant savings.

If one were to consider that most companies in Cyprus raise debt by mortgaging their property assets and that most property assets are already collateralised by banks, then the impact of lower property prices, although good in theory, would have, and is having, a significant negative impact in practice as the collateral is “shrinking” and the loan to value ratio is rising often above 100%.

Property prices will continue their apparent slow fall to the bottom. However, it’s a buyer’s market. You the buyer calls the shots and there is no-one out there who is not in need of hard cash.

Make a lowball offer and you will be surprised by the reply.

About the author

Pavlos Loizou MRICS is the lead consultant at Leaf Research

Leaf Research is a real estate consulting firm, providing high quality real estate market research, strategic consultancy, valuation, and financial modelling.

Readers' comments

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  • Steve says:

    Fifty years ago, most people wanted a house to live in and that was the reason for the purchase. In the meantime, houses have become for many a commodity, like minerals or soya beans, to be bought and sold as investments.

    Recently, I overheard a couple bragging about how they doubled their money in two years. However, like other investments, the housing market moves in cycles that have become more and more extreme and amateurs in particular can get hurt.

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