• Thursday, June 20, 2024
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Are we seeing the beginnings of a property price crash?

Are we seeing the beginnings of a property price crash?

The house price slump that began in the US and Britain a few years ago has spread across the globe, and according to international property experts Knight Frank. You only have to hear the old saying, location, location, location, to understand why it is the mantra for those who buy and sell property. As can be seen in Lagos, choice areas like Victoria Island, Lekki and Ikoyi are beginning to witness a slowdown in house sales and lettings. This is nothing new and has been documented in studies from other parts of the world in the Socionomics Wave Principle. Socionomics is the science of social prediction pioneered by Robert Prechter that explains that people act emotionally (rather than rationally) when it comes to investments, engaging in unconscious herding behavior. We have seen this clearly over the last ten years years or so in Lagos where everyone put their money into stocks, when this ceased to yield the returns expected, attention was turned to the property market where everyone seems to be focused now.

The reason we can use Socionomics to evaluate property trends is that property values do not follow the basic laws of supply and demand as do mainstream purchases such as cars, shoes or computers. That is because people can be dispassionate about consumer goods but not about investments like stocks, bonds and real estate. (This is derived from Robert Prechters article, The Financial/Economic Dichotomy, which said, when a popular retailer discounts a 50-inch, HD TV that you have been coveting by 30 percent, you buy it. But if that nice house in Ikoyi you have coveted drops in price from N300mill to N100mill, you are more likely to think, what is wrong with it rather than, great I will buy it. If you compare the basic supply-and-demand for consumer goods versus investments this shows that when prices are high, consumers buy less, and producers supply more. When prices are low, consumers buy more, and producers supply less. In contrast, for investments both the issuers (sellers) and the investors (buyers) want the price to go higher. This situation is intensified in the Property market, where the four Bs (builders, brokers(agents), bankers and buyers) want prices to increase all the time:

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• Builders want prices higher so they can better sell their inventories of homes.

• Brokers(Agents) want prices higher so they will earn more commission.

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• Bankers want prices higher to protect the value of their collateral.

• Buyers want prices higher to make more money on their investments.

Real estate investments are long-term affairs, and the Wave Principle may be useful in assessing major turning points in the value of property and land in Nigeria. The beauty of having the Wave Principle at hand to study these charts is to predict when that first turn might happen which appears to be happening now. We can look at previously studied countries like New Zealand, Denmark and Lithuania who joined the group of countries where house prices fell rapidly over the past few years, but rose again. Even countries where prices did not fall are witnessing a rapid deceleration in price increases. In South Africa, the rate of house price inflation has slowed. The head of international research at Knight Frank, said: “The index shows that global house price inflation has slowed, with much of Europe now seeing low or negative growth. Housing markets in countries such as Spain, Denmark and Ireland were all were all severely challenged by the global credit squeeze but have found their way out of it

Since we can observe that house prices and stock prices do go down even though both buyers and sellers always want them to go up, and we know supply and demand is not the answer, what then does move investment prices.  It is very simply, Social mood. Studies have looked at collective human social behaviour and explains how human social behaviour results in social mood trends, which lead to changes in financial, political, and cultural trends. Its primary thesis is that people have an unconscious impulse to herd in situations of uncertainty, leading to the emergence of social mood trends (or trends in mass psychology). These social mood trends, which are reflected in data such as shares bought and sold, properties bought and sold, etc., are patterned and therefore predictable and can be monitored. We can already see signs of this uncertainty in our behaviour, by the rush to buy up bonds and property which will ultimately result in falls in prices of these acquisitions, but as surely as property prices are slowing down, they will eventually stabilize and rise again.

Caroline A. Akinlotan