Tags

, , , ,

It is fashionable to say that economic ideas are wrong, at best, and, at worst, dangerously misleading.  This fashion is not new.  Since the most familiar pieces of the traditional economics model have survived for many decades, it is worth seeing how they appear in the world of real estate.

Rationing by price: A recent guest to my market analysis class shared a colourful story of residential real estate markets in Toronto.  He was working at a new development site and, before prices had been announced, some people arrived three days early: more people than available lots.  When prices were announced, about half of them gave up immediately.  Since the prices were higher than some of the remaining people had hoped, they thought that organizing a boycott would force the builder to lower prices.  That tactic worked for the front of the line but, when the builder started calling in people further back, the tactic crumbled: some people were willing to pay the high prices.

The lesson is that high prices are annoying and that most alternatives creates excess demand.  So, rationing in some form is always needed, just as said in Econ 101.  The added challenge with housing is that misallocation has bigger consequences for society.

FOMO: During the summer, lots of people were talking about panicky buyers driven by a Fear Of Missing Out.  As a matter of individual psychology, FOMO makes sense.  The problem is that psychology can be unstable.  Currently, the fear is motivated by rising prices.  In other words, rising prices creates fear which creates excess demand and bidding wars (i.e. higher prices) which …  This argument is circular.  It may be true, and that dangerous path leads to irrational price bubbles.  Or, FOMO may persist only as long as something else causes both a shortage and prices to rise.   More evidence is needed to distinguish these two possibilities.

Until a real or perceived shortage is resolved, excess demand can be expected to raise prices.  When prices reach the market equilibrium, some people will be happy to rent, just as said in Econ 101.

These examples illustrate how local colour illustrates ideas which should not be forgotten.  Some critics of the economic model point to the work of researchers who discover violations of the standard model.  Understanding human behaviour in the interactive and dynamic situation known as the market is not easy.

In some cases, and as we teach, violations point to additional features of real estate markets which many outsiders fail to recognize.

Since some aspects of psychology, marketing, medicine and other disciplines are under fire for poor and misleading research [1] [2], understanding and decisions require something more substantive than cute stories about (what some have labeled as) “stupid human tricks”.

PA

Advertisements