How to have confidence in your property buying decisions, even though the market is always on the precipice of uncertainty

We might like to think that life is certain, but it is not. Neither is the market. History shows us that the market is on the precipice of uncertainty pretty much all the time. That’s because the market is actually a composite of people’s opinions. And opinions can change on a five-cent piece.

Buyers and sellers act out of need, out of want and out of instinct. Their many actions culminate in exchanges of ownership. These exchanges are what society focuses on and records in an attempt to give a sense of certainty to the market.

The opinion-recording mechanism that society uses to try to create an element of certainty is price. Price is a very imperfect unit of measurement when it comes to describing the emotional certainty of a transaction. But it’s the most practical and the only uniformly acceptable measurement we have.

In Melbourne in 2012 there is currently a malaise of uncertainty on price that is besetting many an inexperienced buyer and seller out there. This uncertainty is creating a wide range of emotions for many buyers, even if they don’t realise it.

How do you as a buyer live, deal and feel comfortable with your emotions in a world that is currently headlining uncertainty over certainty right now? How do you as a buyer function within the Melbourne property market without going a little crazy when you use price as a measurement to give you certainty?

To get some comfort when you are uncertain there are two magic pills. They are very different, and either can work for surviving this current market.

One magic pill is ignorance. The other is being properly informed.

Ignorance can work well when buying homes in a booming market like that of the early 2000s. But in the current uncertain market, using ignorance is a bit of a crapshoot. While sometimes it can work, we’ve also seen it hurt a lot more people than it has helped – particularly in the outer areas, in overpriced apartments and in poorly located, poorly laid-out or over-priced inner-Melbourne family homes.

The other magic pill for managing your emotions in the property market is information. Being properly informed can allow you to traverse the current market of uncertainty in a manner involving less pain, both now and in the future.

So back to price, which is where all the pain is right now – how do we lessen the pain of price uncertainty? How do you get comfort in your price selections right now?

Simple: you have to understand what price is and how it works.

In our current market you can only look at price with certainty if you look at it as a mechanism that allows a transaction and almost nothing else.

You need to understand that price characteristics change in a falling market. And those changes bring in a whole new genre of commentary called risk analysis. Risk analysis is about examining your chances of achieving your goals. Risk management is about minimising the possibility of missing out on what you want.

At the moment, if you are feeling uncomfortable about price it is probably because you are uncomfortable with what price actually is and does, and with the associated risks.

But how can you get comfortable with price in this market? Understand what it is and what it isn’t.

Is there such a thing as the right price in 2012?

Here is a practical example: A client comes to us and asks, “Is this a good price for this home?” We respond, “On any specific number we honestly don’t know. We can show you how to try and achieve this price or that price within a range, but whether it is a good price is hard to say right now.”

Let’s say that one weekend there are two bidders on a home. The vendor is feeling bullish. Bidder One is prepared to pay $2.1 million and Bidder Two is prepared to pay $2.05 million . The vendor passes the property in at $2.05 million and says he wants $2.15 million. In the end he gets $2.1 million from Bidder One, who is nervous about Bidder Two.

But the situation could have turned out completely differently if on that weekend Bidder Two had already bought a home and so the property was passed into the sole Bidder One, at $1.8 million. Say the vendor had also been told during the week by his spouse that he must buy another home they had seen two days earlier or she’d file for divorce. Our vendor is now a “motivated’ vendor and has moved from bullish to nervous – so he takes the $1.81 million offered post auction from Bidder One who, seeing no other bidders, is prepared to stick to her guns on that lower price.

Which of these prices was a good price? Well, one price was lower than the other, but that was as a result of a convergence of circumstances and opinions. The lower price in the second situation was simply because Bidder Two was no longer in the game, and the vendor was very motivated to sell. But for Bidder One in the first situation, the higher price was also a good price – because she managed to beat off Bidder Two and come to a deal with a vendor who had high expectations.

Is $2.1 million a bad price – is $1.81 million a good price? Well, we don’t know all the circumstances. Was the home the right home for both parties? What if the $1.8 million buyer has to sell in six months because it’s not right for her and prices had dropped by 15%? What if the $2.1 million buyer is very happy bringing up her family in the house and the street and holds on to it for the next 20 years? Which price then was the right price?

The nature of a weak market like the one we’re in now is that we’re relying on a smaller pool of opinions. There may be two bidders, or just one. There’s no certainty. There are just large variances – that is why a $300,000 variance is a very real possibility.

(In a strong market you’re less likely to see these sorts of variances at a public auction, because with three or more bidders, even if one drops out there is still competition to support the price.)

The point is that at the moment prices can vary big time, and for those looking for comfort we recommend you look to your decision-making processes rather than just price.

The good decisions you can make, as a buyer, are to decide whether the house is the one you want, whether you’re prepared to pay what it takes to buy it, what your alternatives are if you don’t buy, what are reasonable price ranges (even if they are wide), what are your strategies to get the lowest price and what are the risks involved in your actions.

If you are to act, then this process will give you some comfort in the uncertainty of price in this market.