The real estate prices are always fluctuating and the property market is always uncertain. Once you invest your money in the market, you come across various illiquidity and pricing biases. To put in simple words, illiquidity and price drive this market down.
Illiquidity and pricing biases in the real estate market
What does illiquidity mean?
The basic meaning is the opposite of liquidity. To put in simple words, it means when you cannot sell an asset in the market readily. Most importantly, you cannot exchange it for cash. If you want to exchange it, you would have to incur a lot of loss. This has many high-risk investors who are ready to play the gambling. Real estate transactions are highly illiquid because the amount of funds involved in any transaction is huge. The amount of money present in a transaction is in direct relation to the liquidity constraints.
Liquidity constraints
The market is not effective if it has a lot of liquidity constraints. There is no number of investors in the market and asset should be sold at any time. But in the real estate market, this is not the case. With the advancement of technology, the procedure is very fast. However, people still do not prefer to buy and sell their ready- property. This is a huge issue for all the people who have put in their money currently in the housing sector. It also has a very huge impact on the way the houses are priced.
People are opting out of real estate transactions: Why?
Now, many people are moving away from real estate transactions because they do not want to incur this loss. Because of this factor, many people tend to lose out on good deals and often end up incurring plenty of losses in one single day. This is the reason why people have started investing in the share market and not the real estate market.
Market structure dwindles
There is always a market structure present and the market structure can only move freely is the money flow is consistent in the market. As soon as there is a blockage in the money flow, all the processes in the market tends to stop. This is the time when the banks and the government try to inject a lot of money in the market. But even with the injection of money, if the money cannot move freely, the liquidity principal again deteriorates.
Now that we know the adverse effects of negative liquidity let us try to look at the pricing biases that are present in the market.
People feel that biases only exist in psychology. They do not realise that it also exists in the economy and in the various transactions that we do.
Illiquidity and pricing biases: Understanding the pricing biases
With the perception that we have about the area and the seller, the pricing decision and the amount that we are willing to pay for the property also changes. This decision is also influenced by the seller’s end. Often we notice that sellers are partial to customers familiar to them. The real estate prices are also calculated and formulated with the help of other factors that are not economical. Some of those factors are related to biasness. The property market is always fluctuating. Sometimes the way it fluctuates is at a subconscious level and sometimes it is at a very obvious level.
Let us understand a few issues that are prevalent in the real estate market that lead to this.
Illiquidity and pricing biases: Backwardness
With the backward approach that the Indian society has towards people, various houses are not available for sale and also for rent for unmarried couples, bachelors, any other kind of relation that is not allowed by law. Because of this, many people who are actually willing to buy a house cannot buy a house. The people around for a huge fear of the buyer that are available in the market. Now what will happen to the property if the prospective customers reduce? It is obvious that the demand for the property will go down. With the demand decreasing, the price of the property will also go down. In the long run, it will not be beneficial for anyone.
Prejudice
The next point would be about the social prejudice that is prevalent in the area. Many people refuse to give out their house for certain people who belong to a religion. This not just creates a lot of bad environment in the society but also creates many hindrances for the demand and supply of the properties available. The property is available for sale in the area I will always be limited. They cannot grow overnight. It is for the people to understand to believe that to overcome all the issues that are prevalent in the market, we need to be open and accepting to what is happening.
Summing up
With the liquidity and pricing bias present in the market, real estate is suffering a lot. It is for the people to realise that we need to move on beyond all these things and help the economy grow. If we do not come out of her shell, the economy can never elevate.
The liquidity problem will always be prevalent in the market because people in our country do not have enough money to actually replace the investment outflow they have done. For this, much the government must launch a number of schemes and help people overcome this. Treat real estate and housing like an investment and not as a burden. Only then you will be able to mint money from it. The art of getting money from real estate solely lies upon the demand and supply and also on the amount of money you can invest readily in it. Apart from this, do not indulge in unhealthy practices that promote long credit periods. These only create more issues in the market and never solve any real-time problems.
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