April 19, 2023

Timing is everything, but the message is still the same.

The real estate market's stalemate can be resolved through a process of price discovery, similar to that in financial markets, as conditions improve and buyers become braver and sellers less greedy.

The only real difference between financial markets and real estate, is liquidity.

When buying property at any level, both buyer and seller want to feel like they’ve done well, most importantly, through the price they pay/achieve

Q1 of this year experienced a year-on-year fall of around 30% in terms of number of properties sold in PCL, the significance of which is highlighted by 2022 posting the highest number of completions since 2006, all very understandable given the prevailing state of the banking sector, rising inflation and a confused stock market, which has caused activity to taper by some margin.

When this kind of directional change or ease of momentum is seen within financial markets, you would not be wrong to consider ‘bear’ territory.

Let’s first consider the definition of a market – ‘a place where buyers and sellers can meet to facilitate the exchange or transaction of goods and services’, and markets are driven by simple supply and demand, based on several factors.

Right now, it seems that the gap (or problem) exists between the number of buyers that are willing to buy, and sellers that are willing to sell. In trading terms this is similar to ‘market depth’. It seems unlikely that there is an issue with depth, more the stubborn disparity between ‘bid-ask spread’, seen in real estate as the difference between the buy and sell price.

So how does this correct?

Going back to my financial market analogies, to correct the difference between the buy and the sell price, the market needs to go through a process know as ‘price discovery’, which helps to reestablish the price of an asset. As buyers and sellers adjust their prices, the bid/ask (buy & sell) narrows until the transaction takes place at an agreed price. In some instances, market makers or other intermediaries’ step in to buy or sell at a price that aids such narrowing, which can help to increase liquidity and facilitate normal trading conditions of the security.

What does that have to do with real estate?

The only real difference between financial markets and real estate is liquidity. Unlike liquid markets, (FX, equities, commodities), real estate markets have a much slower trend and cyclical nature, which on the one hand offers more time and information on which to base trading decisions, but also risks of too much time to over think.

Right now, the ‘stalemate’ exists between buy and sell prices, but what we can see is that the problems up to now, which have most impacted the trading environment, have turned.

In the last six months, key stock markets have rallied upwards of 10%, inflation is showing significant signs of cooling leading to calmer decision making from Central Banks, and most importantly, the Vix index (measure of fear and stress) is down 40%+.

Going back to market makers, and where they intervene to help markets along, the same exists in real estate. As conditions improve slowly but surely, buyers will become braver and sellers less greedy, not to mention the international contingent that PCL relies so heavily upon who may soon see that ‘the waiting game’ may not pay, as GBP quietly grows stronger by the day.

The UK saw the wettest March since 1981, but now the sun has shown its face, will the property market see the usual uptick in activity as is often the case at this time of year? The house view is that there are plenty of reasons to be brave, especially for our friends across the pond.

Market in numbers: PCL property purchase at £5,000,000

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