The Black Box of Property Market

black box of property market v2
The Black Box of Property Market

A black box refers to a complex system where its concepts are not readily understood, and to most people the behavior of the property market qualifies it to be described as a black box. Many people only see a tiny part of the process, which are introducing a unit into the black box and closing the deal with a unit out of the black box. Furthermore, there are some who understand a little more eventually find themselves lost in the black box as a result of their limited knowledge. I feel that the first step to maneuver through the black box effectively is to understand the fundamental characteristics.

Heterogeneous

In the property market, each individual unit is unique. From exterior to interior factors, no two properties can be considered identical. These factors play a significant part in deciding the initial asking price from both parties.

  • Exterior factors
    • Locations
    • Environment
    • Height
    • Directional facing
    • Accessibility
  • Interior factors
    • Layout, size, shape, frontage
    • Design theme
    • Furnishing

Data Inefficiency

Despite having past transacted prices published online, this data only serves as the best reference one could collect to start setting the price of the unit of interest. In order to get closer to the initial asking price, the physical conditions of the house need to be ‘quantified’ subjectively by the parties themselves with their own senses. “One man’s meat is another man’s poison”. Hence, data collection is inefficient and inexperienced individuals will only make this adventure riskier and less enjoyable.

  • Published Data
    • Last transacted prices of similar units
    • X-Value
  • Subjective Data
    • ‘Large’ frontage/common space
    • ‘Superior’ directional facing

“One man’s meat is another man’s poison”  -Lucretius

No Central Market

In the stock market, trades are transacted real time at a common marketplace; this pooling of supply and demand provides the focused environment for trades to happen at high volume, at a reasonably agreed open price. However, without a centralized market in the real estate arena, properties are transacted at a much slower pace in private treaty where price variation is relatively higher due to different power balance between parties. Despite the increasing usage of online multi listing platforms, an attempt to create a ‘central market’ environment, many good listings actually didn’t make it there before it is sealed.

“Many good listings actually didnt make it there before it is sealed”

Imperfect Market Structure

In a perfect property market structure, all units are identical (such as external and interior factors mentioned above), large number of sellers and buyers has perfect knowledge (data) about the market, and none have control over price as it is entirely driven by market forces. However, you must already realize that this is not true in reality.

Certainly, the general sentiment of the property market is very much affected by the market forces such as government policies and global financial outlook. However at the end of the day, it still boils down to matching of different needs of the seller (landlord) and buyer (tenants). Once the matching of needs is done, the next step forward is to reach a common price point which is essentially the art of negotiation and ideally striking a win-win situation for both parties. This step happens behind closed doors, unless you are a property agent, you probably won’t get to experience it very often.

Illiquidity

Due to the huge sum involved, real estate purchase cannot be converted back to cash quickly compared to stocks and shares. On top of the time people take before making such major decision, the paper work that follows can easily stretch to 3 months before the entire process is completed. Furthermore, some frequently overlooked, but necessary, cost of transaction such as title search, stamp duty, valuation and agents’ service commission, will pose additional challenges for parties with a tight cash flow. At such level of complexity, it makes unfamiliar individuals to feel overwhelmed and often label the real estate market as a black box.

 

I hope these 5 fundamentals of the real estate market do shed some lights on the black box you see in your endeavor in the real estate market. This article is certainly insufficient but I am sure it is a good start to find out more and gain knowledge to make a wiser decision in future.

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