High Vendor Expectation - getting to the bottom of the issue.


Emotional Economics.

Now that we’ve established that the ‘Spring’ selling season has not immediately transformed the housing market from its winter of discontent, and the barrage of ‘Spring has Sprung’ headlines have once again done the rounds and subsequently been exhausted.  We can perhaps start looking at the reality that’s facing a rather sick real estate market which needs a little more than a Paracetamol to recover from recent lows.

It’s easy to come up with excuses to explain the current malaise.  Consumer confidence is a favourite – albeit – overused term.  However, it tends to suggest the market doldrums are nothing more than a brief bout of post winter ‘blues,’ which simply require a short term prescription of ‘Prozac’ to recover.

The sickbed approach to market movements always assumes healing will eventuate sooner or later and based on the well quoted premise of historical cycles, it’s not an altogether foolish assumption.

After all, although we’re consistently told the consumer has a new aversion to debt, it doesn’t stop Australian’s ‘over’ spending in areas where they perceive value – areas such the recent surge in overseas travel for example, and the lending ‘boom’ for new and used vehicles – both of which have been influenced by the strong Aussie dollar and recent tariff cuts.

We’re fickle creatures when it comes to finance and completely subject to our ever changing emotions.  How we gather our perception of confidence or fear in an economy, broadly dictates how we spend or save our dollars - albeit, as the cost of living rises, there are limitations to every budget.

But for the housing market, at the very floor of sickness, lies the fear a far more serious diagnosis could be at play.  It may not be the long awaited Armageddon bubble ‘pop,’ however over the past 2-3 years many vendors have experienced a slow deflating puncture of lost equity as the weakness in home loan data and lower rates of turnover continue.

Even with previous and prospected interest rate drops there’s been little to motivate an uplift of market movement and it’s clearly going to take more than a monetary stimulus to see lasting recovery.

The problem reflects a game of ‘stalemate’ – consumers have a need to purchase real estate, but no desire to spend ‘big’ in an arena of slow deflating equity. Unlike other industries, where price drops can attract a flurry of spending – Australian’s have been somewhat brainwashed by a decade long credit inflated property boom. Consequently, residential real estate is broadly considered a vehicle for investment over and above its basic value as a ‘place of shelter.’

It’s therefore highly debateable whether further drops in median values would motivate purchasers to ‘perceive’ a bargain and get out their credit cards as they would for a local retail sale.  Furthermore, because the selling price is set with a large dose of ‘emotion,’ it’s harder to recognise if a drop in price represents a ‘true’ bargain.

As a general point, the last thing owner occupiers will let drop in times of uncertainty are the mortgage re-payments.  The perception of security home owner’s gain from their principle place of residence is a tonic in turbulent times. Not only this, but the home is an extension of the occupant’s life – a place of precious memories and personal passions which dictate why we often see vendor’s ‘withdraw’ from the market rather than sell for a price they don’t consider ‘worthy.’

The owner occupier market (which forms the largest market in Australia) splits the real estate landscape between the ‘need to sell’ owners and those who’ll only budge if they can get their ‘pre conceived’ price.  This is the price they have formulated based on invested emotions and one that often bears little relation to the dictates of today’s ‘property shoppers.’

Although we’ve seen an uplift in ‘forced’ sales on the vendor’s side – and affordability issues on the purchaser’s side – the vast majority of purchasers and vendors are not willing to meet mid-way (hence low rates of turnover,) - and with nothing on the horizon to suggest Australia’s economy is on the precipice of financial disaster - producing wide spread job losses - or conversely about to flourish into another ‘boom’ of growth, I’m afraid we could be looking at a long period of property market ‘stalemate’ which won’t be broken by the cliché of spring headlines, interest rate cuts, or mortgage lending’ sweeteners.’

Vendor expectation is such a fundamental part of any acquisition process; it deserves a lot more attention than simply stating that vendors currently have ‘unrealistic’ ideals.  “Vendor education” - the commonly used term by realtors who are charged with breaking high ideals in order to achieve a sale - is a fine tuned art which splits those who are experienced in the industry, from those who still have ‘stars in their eyes’ of easily earned commissions.

The barriers dissuading vendors from taking a monetary loss are not clear cut and form a game of behavioural economics.   Broken down you could term it the ‘endowment effect’ - the differentiation between  what a person is willing to accept compared to a what an individual is prepared to pay.

It was the American economist Richard Thaler who first made inroads into our ‘irrational’ emotions and their concurrent effect on economic data - an effect, which often hinders analysts from making predictable assumptions.

He aptly demonstrated how we place a higher value on ‘emotional’ objects we own compared to the price we’d be willing to pay for a replica offered for sale.  In the 1990’s, he demonstrated his theory, with a famous social experiment involving ‘coffee cups.’

A group of students were divided into two. One half were handed mugs whilst the other were given dollars.  The two groups were then asked to separately devise both an asking price and a selling price.

The sellers valued their mugs at $5.25, whilst the buyers were only willing to pay $2.25 -$2.75.  Even though it was assessed that the sellers would not consider paying their own inflated prices should the shoe be on the other foot, they were unwilling to drop the ‘mug’ price below their pre-perceived notion of value.

A different experiment was derived to see if the effect carried over into ‘non’ emotional items – items for which a value has already been ‘pre-determined’.

One set of students were given a ‘token’ and each student ‘assigned’ a mythical sell value. The other half were given money and each assigned a fictitious ‘buy’ value.

In line with rational thinking, when token holders were offered more than the pre-consigned value, they agreed to sell.  Equally, when the buyers were offered a ‘deal’ less than their pre assumed value, they purchased.  It was a perfect example of basic ‘buy/sell’ economics.

The difference between the two experiments comes down to the value we place on ‘property’ and possessions – or in the context of this article – real estate.  We have a tendency to be truly ‘irrational’ about our homes when it comes to placing monitory value on the holding.  An irrationality which has no place in basic economics, yet affects a market which in Australia, is worth an estimated $4 Trillion.

To emphasis the point, I was recently in discussion with a developer who wanted to offer a home owner 2 and a half times the value of their block to induce a sale.  The developer naturally saw the deal as a ‘win win’ for both parties.

The home/land owner would receive a ‘windfall’ enabling them to ‘upgrade’ from their principle place of residence and move no more than a stone’s throw away if desired.

The developer on the other hand would reap the benefit of acquiring a piece of land, which was strategically located to enable his personal commercial endeavours to profit over the long term. For the developer – the inflated price he was offering was a worthy investment.

The developer naturally felt a ‘valuation’ and ‘market appraisal’ of the block would be enough to form the basis for a calculation of appropriate ‘compensation.’  What they hadn’t factored in however, was ‘endowment effect.’

Despite all available evidence proving the home owner would reap over half a million ‘tax free’ profit on top of comparable ‘market value’ if they accepted the developer’s offer – they still considered the figure ‘unworthy’ of the personal emotional commitment they had invested in their ‘home.’

It may seem crazy to those reading, however it’s a very real example of our irrational ‘relationship’ with property.

If a deal such as the one above, can’t achieve success in a highly deflated ‘buyer’s market’ – you can clearly comprehend why Australia’s property market is not moving at a more microscopic level. In other words, forget about analysing a ‘property clock,’ – because it’s simply not ticking!

Whether purchasers have the dollars or not – they’re not likely to profit from the downturn until vendors are forced to change – and with nothing forcing vendor’s to change, we’ve got a long Chess game ahead, before someone knocks over the Queen.

With this in mind, current conditions favour the investor who can hang out for that ‘nugget of gold’ whilst at the same time indentifying the ‘property owners’ who - for personal reasons - have little choice but to reduce expectation.

Home buyers or existing owner occupiers however, face the challenge of finding a suitable ‘home,’ in a sea of advertised listings, few of which tick their ‘ideals’ with a price tag to match.

Keen negotiation skills are the key to shifting the current game of ‘checkmate’ – however, this can’t be achieved without ample ‘on the ground’ due diligence, patience, and legwork. Unless a buyer is prepared to leave their emotions at the ‘front door’ prior to entering into negotiation, they may find the current well termed ‘buyer’s market’ frustratingly difficult to advantage from.


Catherine Cashmore


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About Catherine

Catherine Cashmore


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Catherine Cashmore has been working in the Australian real estate market for over 14 years. As a buyer advocate, she has assisted hundreds of Australian home buyers and investors to secure quality real estate for the best possible price. Originally from the UK, and having lived in the US, Catherine is a seasoned traveller who has extensive experience across a range of international real estate markets for those interested in property investment overseas.. 

As President of Australia's oldest economics organisation, Prosper Australia, Catherine is a regular and highly respected media commentator and often called upon to give guest lectures to university students (including RMIT and Sydney University) on how tax policy affects real estate, the design of cities and the economy.

She is editor of Port Philip Publishing’s 'Cycles, Trends, & Forecasts' – a publication that teaches real estate investors about the land cycle and its effects on the economy. She is author of ‘Speculative Vacancies’, the only study in the world that analyses long term vacant housing based on water usage data (Melbourne focused). As such Catherine has an in depth knowledge of the Australian real estate market, few can rival.

You can contact Catherine directly on 0458 143 089 or at cc@cashmoreco.com.au



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