PropertyHong Kong & China
CONCRETE ANALYSIS

'Rigid' demand for homes is more of a marketing myth than reality

People often say that property prices on the mainland will just keep on rising, but this is not grounded in reality

PUBLISHED : Wednesday, 20 February, 2013, 12:00am
UPDATED : Wednesday, 20 February, 2013, 4:40am

Commentators on the mainland property market have often attributed the resilience of home prices and their resistance to pressure to "rigid" buyer demand. I have my doubts.

First, the need for accommodation should not be confused with the need to buy and own a home.

People's physiological survival, let alone their emotional well-being, is very much diminished if they don't have a roof over their head for prolonged periods - unless perhaps they are marooned in a tropical paradise. Whether a home is rented or bought has little, if any, impact on survival.

But wouldn't hard-earned money be better used to pay off a mortgage instead of rent - to accumulate wealth and not have to worry about finding accommodation in retirement? Of course, and I think buying a home is a good move for most families in the long run, for social and financial reasons.

However, the decision still depends on individual circumstances, external and internal, and timing - just ask Hong Kong homeowners who bought at the 1997 peak, or for that matter the Americans who entered their market in 2006.

In short, buying a home is not an optimal or even a good choice all the time in all places and for all people.

While the human need for accommodation tends to be rigid, the need to buy a home is not. It is comparatively flexible, or "elastic" to use economics terminology.

For instance, when the economy grows, people accumulate money and want to buy things, including homes. Conversely, when the economy contracts, people tend to spend less, and some homeowners may offload their homes, whether forced to do so or not.

This is flexibility, not rigidity. Rigidity implies something that one must have, regardless. Some people night behave that way, but most are sensible about what they can afford.

Do not confuse a strong urge to buy with rigidity. When a real-estate market is in an up cycle and prices are rising, people tend to "feel" more confident (there is comfort in numbers). As a result, there are more buyers, hence higher transacted prices, which in turn entices others to enter the game. This fuels the cycle and prices rise higher.

Indeed, it such circumstances it can easily appear that demand is rigid - that is, the higher the prices, the higher the demand.

But this view is delusional. It is not that the case that buyer demand for homes is rigid; rather, it is human nature to pursue investment returns and capital gains out of fear of being left behind in the game.

This phenomenon crosses cultural, national, and ethnic boundaries. Whenever economic conditions and market opportunities present themselves, you can bet that this behaviour will happen.

If demand to buy homes really is rigid, then - by the same rationale exhibited above - home-buying demand should remain the same, no more and no less, with the same prices, when the market turns down.

Naturally, we don't observe such market behaviour.

In some societies, marriage and home-buying are bundled together ("you don't marry my daughter, or son, if you do not buy a home first") which perhaps adds to the demand side. Yet the rigidity lies with the parents, and the peculiar culture, to link the two activities.

There is no scientific evidence that home-buying makes a marriage sounder, happier or longer. If anything, the reverse is probably more likely: when there is money to be split from selling a home, divorce may appear, at least, a sounder option.

As such, the idea that there is rigid demand for homes probably has more to do with marketing than reality.

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