What is real estate price war?
The phrase “price war” is used to indicate a state of intense competitive rivalry accompanied by a slew of price reductions. Here one competitor reduces price and the others are forced to lower and match their rates. If one of them reduces, again they enter a new round of price reductions. This scenario is highly beneficial for the consumer who is able to take advantage of the lower rates. Often the companies involved are not affected favorably, as this reduces their profit margins and sometimes even threaten their survival, especially the smaller ones. The larger companies are better equipped to absorb such lean periods.
In the real estate sector, there was a high demand leading to high pricing for the last two decades. Countries like Ireland and Spain, where the property bubbles crashed causing a cascade of detrimental economic effects are facing steep fall in the realty sector. Globally too, the real estate market is presently going through a phase where demand is very sluggish. The lack of demand can be attributed to a global economic recession and the lack of liquidity in the market. Fall in prices of stocks in the share market also affects the availability of funds, and thus, we have fewer buyers.
The situation can be best described if you take the example of Shanghai. Real estate developers here are under pressure to engage in price wars to generate sales for a large number of residential projects that would be ready. All the developers here are facing a very tough scenario and price reduction turns out to be the only and most effective way to deal with the sluggishness in the market. Developers who slashed home rates by about 20% were able to attract more buyers and could increase their sales. :
Thus, price wars can be summarized as measures business houses use to survive in adverse conditions. What has caused the price war in real estate sector?
- 1.Unrealistic spiraling prices of property
- 2.Lack of demand
- 3.Lack of funds or unavailability of funds
- 4.Increasing debt in the financial sector
The price wars, however, present the buyers with a great opportunity to get good discounts. Nevertheless, this scenario is usually not used by buyers who are looking for homes. Many buyers are not comfortable with making long-term investments in a volatile or sluggish market. The property investors usually buy at these times and sell them when the buyers come back to the market.
In the real estate sector, the price and the condition of the property are the two factors that determine its price. Hence, compared to other markets, slashing of prices is one of the important survival measures in this sector. The reality sector is one that has consistently seen an uptrend so use the price wars to get a good bargain and a long- term investment opportunity.
Real estate price war typically starts when buyers are in “hibernation.” When the realtors forecast that there is not going to be enough buyers in near future, they adopt price reduction as a short-term method to attract buyers. If all goes well, this price reduction is good. Otherwise, it will simply result in another war!
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