Myth #2 : Lowering home prices would result in larger demand for homes

(Category: Marketing)

Also published in CNBCTV18.com

Purpose of Myth Series :

While real estate is amongst the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.

For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false. 

The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.

The ten myths have been classified into three categories – Finance, Marketing and General Business Reading.  

=====================================================

When prices of iPhone drop, its demand increases. The same happens to commodities like jute, aluminium, polyester fibre etc. Lower prices increase the affordability of consumption items and thus expands the market.

An exactly opposite response to lower prices is seen on the stock market. In a falling market, most investors believe that they would derive more value by postponing their purchase of equity shares. Equity shares are purchased not for consumption but with the sole purpose of selling them at a higher price in future. The fall in prices of equity shares generally results in lowered demand for equity shares and one sees lower turnover on stock exchanges.

When it comes to demand for homes, the situation gets very complex. Home demand comprises Investment Demand as well as Consumption Demand.  

Even the Consumption Demand comprises two kinds of buyers - those who see value in postponing their purchase during a falling market AND those who see value in buying in a falling market because falling markets offer a large number of options. 

Moreover, when prices of homes fall, home buyers get lower realisation for their old homes. This results in lowering of budgets by home buyers which effectively means lower demand for new homes. Effectively, a lower price means lower demand….!!

Due to such intricacies, generating a Demand curve for homes is a complex exercise. Inefficiencies and imperfections associated with real estate only work towards further increasing the complexity involved.  

Hence, many principles of economics that are used to analyse markets for commodities and various consumer products actually do not apply to real estate. Real estate market does not respond the way microeconomics suggests, therefore, lowering prices does not expand the market, as one would normally expect.