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davidg

When House Prices Drop, Owners Pay Double

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I thought this was interesting, from our friends over the Channel at Bulle Immobilier

http://www.bulle-immobiliere.org/forum/vie...f=3&t=41787

The housing market is a market of expectations where the decisions of purchasers are guided by certain simply mental processes

You'd be wrong to think that purchasers make long term calculations of profit including inflation, maintenance, tax, rental costs. Generally calculations are limited to the capacity of individuals to make some additions, subtractions and multiplications. Mental arithmetic in other words.

So what is the mental arithmetic used by a purchaser?

After studies by our association where we have asked both buyers and sellers and analyzing the thousands of posts on our forum the thinking goes as follows:

> When prices climb:

Purchasers note the purchase price and calculate the future sale price using the previsions in the press. Between 2000 and 2007 the official figures hovered around the 10% per annum mark. The purchaser who spends 300.000€ for a tiny apartment in Paris can hope to sell it for 330.000€ next year. A gain of 30.000€ for a small amount of cash up front.

The danger is that the purchaser sees speculating on housing as a free-lunch, it costs nothing but brings big rewards.

> When prices drop

The purchaser knows he will sell the property for less. He works out how much, in the previous example a drop of 10% will equal a loss of 30.000 €. However purchasers will tend to overestimate the losses "to be on the safe side". From a psychological viewpoint the purchaser

* loses part of his capital each month (say 2,500 € in our example - not taking into account inflation),

* pays the bank interest plus capital on the debt (say 2,000€)

Often the capital losses are bigger than the mortgage payments and in a crash 3 to 4 times paying rent on a similar property. In our example the purchaser is in effect paying 4,500€ per month!!!

Therefore when prices drop the purchaser has the impression of paying a kind of double rent which can rapidly become insupportable especially when his friends and family harp on about how he shouldn't have bought at the top. Housing rapidly goes from being a sound investment to a disaster.

Professionals involved in the housing market know the psychology of purchasers that they see each and every day. A drop in prices leads to a freeze of the market. That's why, in our opinion, the pros only announce small drops of the order of 2 - 3 % so that the anticipation of loss remains low.

In the US, Spain and UK we are seeing very large price drops. Once these start it is impossible to revive the market in the short term. Anticipated losses seem huge and any purchaser is seen as a "mug".

In France, because of a large drop in transactions, we are heading for a large drops too, the result of too many unsold properties on the market. When those drops filter through into the public domain it will be impossible to maintain current prices and the result will be a massive purge in market because no buyer will accept to pay a "double rental".

A possible solution is for the pros to purge the market as quickly as possible. Announce that there will be large drops in prices, the market drops rapidly to find a new equilibrium. It seems that this message has been understood in the states.

The worst case scenario is that of Japan, with drops of a few % but over many years. In France we still believe in fairy tales, encourage by corporatism from another epoque.

Jean-Michel Pouré

Président de l'association Bulle Immobilière

-- edited for spelling

Edited by davidg

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I thought this was interesting, from our friends over the Channel at Bulle Immobilier

http://www.bulle-immobiliere.org/forum/vie...f=3&t=41787

Very perceptive article indeed.

Says it all.

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Therefore when prices drop the purchaser has the impression of paying a kind of double rent which can rapidly become insupportable especially when his friends and family harp on about how he shouldn't have bought at the top. Housing rapidly goes from being a sound investment to a disaster.

Interesting.

Given the amount of posts on here historically about pressure from family to buy. I wonder when we will see posts on complaints from the family about 'buying at the top of the market'

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>In the US, Spain and UK we are seeing very large price drops. Once these start it is impossible to revive the market in the short term. Anticipated losses seem huge and any purchaser is seen as a "mug".

So when the bears eventually buy, we'll be seen as mugs then as well, plus we were mugs on the way up for not buying or selling to early.

I'm looking forward to being a happy mug with no mortgage then.

VMR.

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So when the bears eventually buy, we'll be seen as mugs then as well, plus we were mugs on the way up for not buying or selling to early.

hear hear. 2012 (give or take), here we come...

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  • 395 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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