I was listening to a R5L discussion on house prices a couple of nights ago and one of panel kept shouting “supply and demand” to back his prediction that house prices are going to crash. Apparently demand has dried up so much that the only way to get the market moving is a classic drop in prices to the point where demand is once again generated.

This got me wondering whether or not the housing market follows classic supply Vs demand curves and my recent experiences lead me to conclude that they don’t.

A factory or other business owner just looks at the bottom line. If they start to make a loss because sales are falling they just drop the price to a level that stimulates demand, if that level is below cost for too long then there isn’t a business and its time to go off an do something else. Conversely, demand rises and start to outstrip supply so prices can be increased, producing healthier profit margins – and encouraging competition to enter and increase supply, reducing prices again. All classic schoolboy economics which should, in theory, apply to house prices. The problem is that in classic economics pricing and other decisions decision are made dispassionately, or rationally as economists are wont to say, whereas people have a deep emotional attachment to their house and what it is worth and they don’t often have to sell to stay in business. This encourages them to react irrationally when it comes to selling.

We are in a position to see this first hand as we have just exchanged contracts on a place in in Dorset. We went to see it again yesterday and discuss some work and other things with the sellers (he’s a builder and doing some alterations before we move in). When we got home we got a lovely email from them saying how pleased they are that their home is going to such a nice couple (/blush). I’ve heard similar stories from other people and whether or not it would lead to someone pulling out of a sale if the didn’t like the purchases is unlikely, it does show the emotional attachment people have to their homes.

The other example is something I’ve seen from a fellow blogger and which I have just done myself, and that is refuse to drop the price below a certain level. When discussing putting our current house on the market with the estate agent I told him that if we don’t sell by a certain date and with a minimum price we’ll take the house off the market and rent it out. We don’t have a mortgage to pay off so that isn’t a driver. Is this rational? No,  but I have an expectation of value and rents are quite high round here so I would be willing to take a longer view, something our widget manufacturer can’t do.

Yes, I know that if the land around me suddenly received planning permission and scores of similar houses came on the market I would never get my asking price, but that’s not going to happen. Hell will freeze over first, this is hallowed green belt and the NIMBYs round here will be in Parliament Square with [pitchforks and hempen rope should that be proposed.