People often refer to the “property market” like the “Stock Market”- as if the two markets are in some way similar… let me tell you they are not.
In fact, they are so different it begs the questions why the property market is called a “market” at all.
The Stock Market – a Real Market!
Let’s have a quick look at the stock market. A stock market is a place where stocks and shares are bought and sold … it’s a usually a physical location where buyer meets seller.
In the stock market, it is easy to ascertain the “market value” of a particular share as there are thousands of buyers and sellers all “in the market”. The price of any one stock is simply determined by supply and demand… as the demand drops so does the price and vice versa. (We all know how quickly demand can be affected with the smallest piece of news).
When you want to buy shares you will find that there are
- Thousands of sellers
- All selling the same stock
- And Thousands of buyers all wanting to buy that stock
The result is that you have to pay “market price” because you are “in the market”.
But property is very, very different… in fact
The “Property Market” is an Illusion!
Yes there are thousands of buyers and sellers of property too, but when you want to buy a property you will find that
- Every single property is unique – there is only one of every property – not thousands (Even if you’re talking about flats – you can’t have the same flat of the same style in exactly the same place. Can you? It might be down the hall with a different view, or on a different floor, near the lift or not, It’s just impossible to have two properties in the same space!)
- Every seller is unique. It probably goes without saying that if every property is unique then every seller is unique as well.
- There usually aren’t other buyers involved. Yes there are sometimes other buyers (By the way if your real estate agent says that there are other buyers for the same property based on my experience I’ll bet that 99 times out of a 100 he’s bluffing) – but again if there are other buyers I can guarantee that they are not in the same situation as you are in! Have you ever heard of a property sale going to the lower offer…because of the buyers “situation”. To paraphrase George Orwell..” All buyers are “equal” but some buyers are more “equal” than others”
These 3 reasons mean that in the “Property Market” there is
- One seller
- One property
- One buyer
That’s hardly a market, is it?
But, in the Stock Market,
- The same product is sold (on the same terms)
- To buyers (who are all equal)
- By sellers (who are all equal too)
And the price is dictated by the simple law of supply and demand.
But the property market is a different beast!…
- No two properties are the same,
- No two buyers and sellers are in the same situation,
- Sales are made through a complex process, and
- Where the general laws of supply and demand are not 100% appropriate.
Quite a difference… but what’s the value in knowing this?
Armed with this knowledge you can …
Become a “Market Maker”
In fact, if you analyse it carefully, when you go out to buy a property you’re actually creating a market by the sheer fact that you are going to buy that property.
You become the market maker… and that’s a very powerful position to be in.
In the stock exchange, unless you buy a huge amount of stock this is just not the case.
So as a property investor when buyer meets seller, there aren’t thousands of other people bidding for the property, there aren’t thousands of other sellers selling the same property is there?
And that begs the question…
So How is the Value of a Property Determined?
If there is only one seller and only one buyer… Who determines the price? And how?
When you ask someone the price of a property the common answer is that the property is priced at “market price”. But in reality, there are only other “comparative” markets to go by. Other transactions that might be similar – but not the same…
You see you just can’t have the same person selling the same property to the same buyer at the same time… (unless parallel universes exist! Note The debate on the existence, or otherwise, of parallel universes is beyond the scope of this article)
So how then is the price of a property determined when every single property transaction is different?
I don’t care who you are…
- A scientist,
- A mathematician, or
- An economist,
Even if you had access to all the computing power known to man…
It is still impossible to determine the “market value” of a property…
Because there is no “market”!
So What Does This Mean For You?
Well if there is no property “market”, then YOU can, and YOU should, determine the price of EVERY property you buy. Period.
When you understand that every time you buy a property you create a market you can make yourself a killing
So the next time someone says “it’s market price”… you will know better and you don’t have to believe them… they are trying to fool you!