Who will drive the Real Estate Recovery sooner – End User or Investor? Maslow’s theory of Motivation may have clues
No Pandemic or Recession is permanent. History has enough evidence to prove Recovery. But the question is Why, When and Who will drive the Real Estate Recovery process. Few concepts from Maslow’s Theory of Motivation have the clues for Real Estate Recovery.
Like Oxygen is for a human being, Money is for economic activity. Freely flowing Oxygen and Money will bring about Harmony to human beings and Prosperity for the economy.
The present situation has chocked the money flow in nearly 184 countries as their economies are under lockdown.
None of the earlier pandemics was as widely spread as Corona is, thanks to the globalised economies.
In specific to the Real Estate Sector, the following questions are being widely discussed across several platforms:
- Will property prices fall? If yes, by how much.
- Will the number of transactions fall? If yes, by how much?
- How much time will it take before transactions start increasing?
- When will the prices start moving upwards?
- What will happen to a massive inventory of about 7.4 Lakh units?
Though these appear to differ between each other, the underlying factor influencing each of the questions is “DEMAND”. While Demand drives every economy, as per Maslow, Demand gets driven, amongst many other factors, predominantly by Needs& Desires of Individuals.
At times of such high levels of Uncertainty, Who can probably drive the Recovery? When and how can the Recovery begin?
A broad level understanding of the fundamental forces which drive the Demand for a property can help us answer the above questions.
Maslow’s Theory of Motivation in Real Estate Transactions:
As per Maslow’s Theory, the Property purchase is a part of “Self Esteem” Need which arises after an Individual fulfills most or all of his physiological, Safety, and Love Needs.
On a more in-depth review of the purchasing behavior of Individuals, we can realize that there exists a precise classification of the act into five stages depending on the Need / Desire parameters. Individuals tend to follow this Pyramid of Need Hierarchy which eventually manifests itself as Demand for different types of properties.
“When buying a property, every individual attempts to satisfy a strong intrinsic underlying Need / Desire.”
While this is a highly generalized representation of the hierarchy, a detailed article will be published soon.
Model Developed by Evalo Automation Research Foundation
Gratitude Need – The first property.
Buyers in this category have almost fulfilled their Physiological, Safety, and Love needs and are beginning to realize the Self Esteem Needs. These buyers generally choose to buy a property in his/her native town as a token of Gratitude to his/her Parents. Typically in the age bracket of 28-35 yrs. They have very high emotional and sentimental attachment towards that property.
Financial Prudence Need –The Work Place Property.
Buyers in this category are those who generally have a family home for their parents or loved ones. They are away from their home town for work or business and consider paying EMI + Capital appreciation as a financially prudent option than paying rent. Buyers range between 30-40 yrs of age, and they have sentimental attachment towards this property.
Relative Esteem Need cum Desire –Aesthetic Property.
Buyers of this category have crossed the previous two stages and now desire to showcase their successful journey to their long-time Friends & Relatives. This is usually showcased through the property with bigger space, higher configuration, Aesthetic interiors, Artistic fixtures, and Branded fittings, superior Wall Paper or Paints, etc. Their age of this buyer typically ranges between 35-45 years.
Exquisite Esteem Desire –Exquisite / Signature Property.
Buyers of such properties are Individuals who have realised their Intellectual potential and its corresponding value. He/she begins to establish a direct correlation between his persona and his lifestyle would desire the Neighbourhood, residence, office, furniture, flooring, etc., and virtually everything to be a reflection of their exquisite qualities. Their Age generally ranges between 40-48 and Materialistic attachment exists over the property.
Wealth Acceleration Desire – Investor.
These comprise of Affluent Wealthy Individuals.
With all their Needs and Desires fulfilled, they now consider Real Estate Property as yet another investment tool similar to Stocks / Bonds or Commodities.
Aged > 45 years of age, they have Financial Attachment over the property.
All Individuals move upwards in the above “Need” hierarchy until, any of the basic needs viz physiological or safety or love needs is breached.
The shift in Need equilibrium during Recession
The US Bureau of Labour Statistics had published an article “Beyond the Numbers” in which “Steve Reed & Malik Crawford” had analyzed the End User Spends between 2007-2013 during Real Estate Boom, Recession, and its Recovery phases.
Spends on Food
- Spends on Food and in specific Home food had increased considerably during the Recession.
- Consumers spent lesser Money on Outside Foods. However, the same returned to original trends once the Recovery began.
Spends on Automobiles
- As expected, the Sale of new vehicles declined by almost 35% during Recession and eventually recovered.
- The Sale of Used Car rose 15% during the Recession but eventually fell by 20% during Recovery.
Owners’ equivalent rent is the rent for a property estimated by it’s the owner. This metric is high during the Boom phase and falls during the Recession.
- In the above table, Rents have increased during the Recession, indicating that Renting was considered to be a better option than buying a property.
- The Owners’ equivalent rent has fallen during the Recession and has continued to fall even during the recovery stage. This is because the Recession understudy is related to the Real Estate Price bubble and hence the impact could be much more severe than the other sectors.
Recession driven Demand shift and its resultant spend shift are clearly evident from the above charts.
The above article was published during 2013-14. Subsequently, the US real estate market recovered in 2014, and new Building Permit issuance witnessed upward movement. Property prices also started moving upwards, as indicated in the below Chart.
Real Estate during Recession
During the Recession, a sense of Insecurity creeps in forcing individuals to give up all their higher (esteem) needs/desires and stay focused on Basic needs and in specific the Safety Needs.
“Real estate, being a part of Esteem needs of an individual, is bound to get severely impacted. “
Most individuals, especially those in the lower three layers of the pyramid viz 1. First time Buyer, 2. Work Place Buyer and 3. Aesthetic buyers will be focused on securing their job, managing finances, and health than think of buying a property. However, The Forth layer comprising of Exquisite buyers, though not fearful or uncertain, would still prefer to wait and watch.
The 5th Layer viz The Investor generally finds an opportunity during recessionary trends. He is characterized by high levels of liquid assets, having the patience to wait for returns, and above all, he is willing to take risks for higher returns. He has the capability, willingness, Knowledge, Patience to Wait for returns, take risks, and above all the MOTIVATION to multiply his wealth.
“Recession offers the best Opportunity to Investors for Wealth Creation.”
Real Estate Opportunities during the Recession:
During any Recession, the economy, the individuals, and the stock market are all in a state of shock, and unfortunately, not all can withstand the shock. It is not uncommon to witness several companies/stocks shutting down owing to their inability to withstand the Recessionary Shock.
Unlike Stocks or Bonds or any other commodity, the Real Estate Sector is inbuilt with a strong resistance to price fall. In other words, the Property Prices do not fall beyond a particular level. The same was also observed by Mr. Guy Tcheau & Dr. Norman Miller, in their research titled “Antifragility Investments in a World of Fat-Tailed Risk”.
They observe Quote “Real estate provides a non-trivial anchor to the downside which is largely overlooked in traditional financial models. Whereas the upside is technically unlimited, the downside has a floor.” Unquote.
When the prices start falling, the property market automatically freezes. Many surveys have indicated that as many as 90% of Sellers choose to retain their properties instead of selling at a discounted price. This, in the short run will impact supply significantly.
“This supply contraction, after a while, will gradually make Buyers raise their offer, and there begins the reversal of a trend.
Real Estate Prices contraction has a limit.”
This phenomenon was evident even during the worst of Real Estate Recession between 2008-13.
Stock markets, on the other hand, offers very little to no protection in the downside. A stock can crumble to even zero depending on the Company’s impact from Recession.
Secondly, Mr. Guy Tcheau & Dr. Norman Miller, present empirical evidence to establish the Risk-adjusted Returns from Private Equity in Real Estate Sector is far higher than Bonds and Securities.
From the above, it is evident the Real Estate sector emerges as a better investment option for the “Investors” as it offers higher returns even during the Recession and also provide Price fall insulation along with Real and Tangible asset cushioning.
In specific to India, the industry has over the last three years, witnessing Demand slump, Lack of Capital Flows, Liquidity crisis all of which is symbolized by Piling Stocks, Falling new launches, and increasing defaults in Construction Sector funding.
Before any Investor starts investing with a desire for Wealth creation, he will want reassurance from the Government. Many Govts, across the globe have rolled out recessionary stimulus packages which lays the ideal platform for investors to start operating from.
Government as Enabler:
The Government has to play the most critical role of “Enabler”. Its policies must not only attract Investors but also pep up the demand from end-users.
To understand the impact, we can consider the tax stimulus, which was introduced in the UK during the Price Bubble recession. The UK property prices were on a free fall during the whole of 2008. Transactions shrunk by nearly 60% and prices fell by more than 20%. The UK government, as a part of the Stimulus program, waived Property Registration Transaction Tax for 15 months starting Sept 2008 on all properties with the value of GBP 125,000 to GBP 175000. This small waiver turned around this.
Source: The Surprising Power of tax stimulus to the Housing Market, Micheal Best (Columbia) and Henrik Kleven (Princeton)
The Green trend line is indicating the differential increase in the count of Stimulus driven property transactions in the UK viz a viz the others. The Stimulus has had a magical impact on the transaction.
Government, as an enabler of both Investment and Demand, can:
- Roll out Tax reforms to encourage new Investment – GST, CGT, and Lock-in period relaxation. This can be time-bound and property value-based. This will encourage Investors to divert their investments to this sector. After all the Real Estate Sector is one of the largest domains for the unskilled labor force in India.
- Waive Stamp duty & Registration Charges on properties less than INR 50 Lakhs. Almost 50% of the unsold stock lies in the Affordable Segment.
- Health security: Individuals are in a state of Uncertainty. Unless an Individual feels secure, he/she will not be willing to invest their savings in Self Esteem needs. The reassurance for free movement must be brought in the minds of individuals.
- Job security: This has a broader and severe impact on the Property Demand Function. The fear of job loss or salary cuts is looming large in the minds of the people. While only about 20k are impacted, the whole of 1.3 billion people are in a state of severe economic shock. The Government must encourage different sectors through their Associations to retain employees and to reassure them of jobs after the industry opens up.
No Recession is permanent. With the stock market losing its sheen, Real Estate emerges as the safest alternate investment opportunity coupled with the highest ROI. Those individuals who are at the “Investor” Stage of the Property Motivation matrix have the most required Oxygen for economy viz Money.
“Supported by incentives from Government, the “Investor” class will kick start the Recovery phase with new investments in the Real Estate assets. “
The first sign of Real Estate Recovery will emerge after 3-4 months of Govt announcing the Real Estate stimulus package. This will be evidenced by the increasing number of Registrations owing to fresh investments from Investors.
The Revival of the Real estate sector will be evidenced by increase Flat purchases from the newly launched projects.
While the Recovery can begin with new Investment, the revival of the sector can happen only when Demand picks up.
“For Demand to pick up, Security Needs of bottom three categories of home buyers viz First time buyer, Work Place Buyer, and Aesthetic Buyer have to be restored by the Govt.”
Needless to say that the Developers MUST proactively reduce prices of unsold stock to enable demand acceleration.
Valuation Research Foundation
Statements on this blog reflect the author’s personal opinion. They do not represent the views or policies of evalo or any other organisations with whom the author may be associated with. The author has expressed his opinion emanating from his research on the subject topic. The author advises and suggests the readers conduct adequate research and convince themselves on any decisions or actions basis this blog. The author does not accept any liability or responsibility for the actions taken by the readers of this blog based on the information contained therein.
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