Lowering home prices would result in larger demand for homes

DeepeshSalgia, Director, ShapoorjiPallonji Real Estate, shares an interesting fact regarding the prices and demand for homes. When prices of iPhone drop, its demand increases. The same happens to commodities like jute, aluminium, polyester fibre etc. Lower prices increase the affordability of consumption items and thus expands the market. An exactly opposite response to lower prices is seen on the stock market. In a falling market, most investors believe that they would derive more value by postponing their purchase of equity shares. Equity shares are purchased not for consumption but with the sole purpose of selling them at a higher price in the future. The fall in prices of equity shares generally results in lowered demand for equity shares and one sees lower turnover on stock exchanges. When it comes to demand for homes, the situation gets very complex. Home demand comprises Investment Demand as well as Consumption Demand. Even the Consumption Demand comprises two kinds of buyers - those who see value in postponing their purchase during a falling market AND those who see value in buying in a falling market because falling markets offer largely the number of options. Moreover, when prices of homes fall, home buyers get lower realisation for their old homes. This results in lowering of budgets by home buyers which effectively means lower demand for new homes. Effectively, a lower price means lower demand….!! Due to such intricacies, generating a Demand curve for homes is a complex exercise. Inefficiencies and imperfections associated with real estate only work towards further increasing the complexity involved. Hence, many principles of economics that are used to analyse markets for commodities and various consumer products actually do not apply to real estate. Real estate market does not respond the way microeconomics suggests, therefore, lowering prices does not expand the market, as one would normally expect.