Monday, January 23, 2012

Thomas Molloy: There's a notable change in behaviour on property - Good study of buyer behaviour! Worth a read.

Saturday January 21 2012

USER statistics for property websites are one way of measuring our obsession with bricks and mortar.

Around 450,000 people visit alone each month to gawk at its pages.

Rival websites claim even bigger audiences at a time when only 2,000 houses a month are actually being sold.

Those surfing habits speak volumes about the pent-up demand that exists in the property market these days following a gut-wrenching property crash that forced hundreds of thousands to put their dreams on hold.

While there are many rational reasons to hold off buying a new home, behavioural economists have found compelling evidence of much deeper forces at work in our subconscious that are far from rational. These forces often make us fearful of trading up or moving sideways.

A property crash is, after all, one of the best times for families to ditch their small homes and move into something bigger.

The 50pc declines we have seen in the past few years mean that somebody living in a €250,000 house who had their eye on a €500,000 house back in 2007 now requires just €125,000 to get that house today, compared to €250,000 back in 2007.

The snag for many is that while they can easily accept the new value of their dream house down the road, they just can't bring themselves to admit that their own house is also worth half what they paid for it despite all the work they put into it.

The reason for this is that most humans suffer from what economists call "loss aversion".

The term comes from behavioural economics, which is a relatively new field within economics that attempts to explain why people act the way they do when it makes little sense. Risking your life to save a stranger, for example, cannot be explained by most economic models that assume we all pursue our own self-interest.

A series of relatively simple experiments carried out in the 1970s and 1980s proves quite convincingly that we have an irrational hatred of losing money. The economists found that most people will refuse if somebody offers to flip a coin and give you €10 if it lands on heads and take €10 from you if it lands on tails.

They will also refuse a deal if the offer rises to €15 for heads and €10 for tails. In fact, the research shows that an average person demands odds of two-to-one before they take the risk.

This led the researchers who first identified this trait in the mid-1970s to conclude that the pain of a loss is about twice as potent as the pleasure generated by a gain.

Christopher Mayer, another behavioural economist, used this as the basis for his research into why the property market operates so differently in practice to economic theory.

Mr Mayer summed up his conclusions by saying: "Economists tend to think people are crazy because they won't sell their houses for less than they paid for them -- and people think economists are crazy for thinking things like that."

His conclusions followed a study of a three-year slide in the Boston property market in the early 1990s, which pushed down prices by almost 40pc. The study showed that people who bought at the peak of that property boom demanded 35pc more for apartments than people who had bought identical apartments after the collapse because those who bought at the peak simply could not bear to take a loss.

Professionals who trade all day have learnt to overcome loss aversion. Good traders shrug and say to themselves that a tonne of coffee, a house or a bushel of grain is worth whatever the market will pay. The trader wants to know how much a pork belly costs today and what it can be sold for in a week's time. The past is over.

Writing about the Boston market, Prof Mayer concluded that "people who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower. Properties listed above the market price just sat there... much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay".

He could have been describing post-Tiger Ireland.

Many people "trapped" in houses today will have to develop a similar attitude if the market here is ever to recover. How this can be done is another matter, although you could do worse than listen to the advice the professor gave his own family.

"If you want to sell your house then you list it at the market price and you sell it," he said.

"If you don't really want to sell then don't put it on the market. But don't say you want to sell and then set the price so high that you spend the year cleaning up every morning, having people walk through your living room and look in your medicine cabinets and reject you. That's just painful and expensive."

Assuming you do want to sell your home, what other advice do economists have to offer? Chris Janiszewski and Dan Uy, who looked at five years of home sales in Alachuan County in Florida, have concluded that quoting a precise price gets you a higher price.

The researchers found that sellers who listed their homes with $100 endings got closer offers than those who listed homes with $1,000 endings, who got closer offers than those with $10,000 endings.

Another tactic (from Australia) is even stranger; list a house with two prices. Down Under, sellers often give a minimum and a maximum asking price. Researchers suggest that two prices confuse those making a bid and leaves them wondering where they should make a bid along the spectrum.

The belief that this works is based on a 1995 experiment by Max Bazerman, Sally Blount White and George Loewenstein that has volunteers playing a simple bargaining simulation which shows people were more likely to accept a given price when it was presented with a second, less advantageous offer.

In other words, they rejected an offer of $3, when it was the only offer on the table, but accepted $3, when the choices were $2, $3 or no deal.

Behavioural economics has limitations (and is still unable to explain why we fall in love) but there are many lessons for the hundreds of thousands of people who log on to property website every month to check out houses.

Posted via email from quirkeproperty's posterous

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