We know the real estate market moves in cycles, but what causes the market to go up and down? Humans are a sophisticated animal with a range of emotions that drive our decision making away from certain things or towards other things, as below.
In a seller’s market, sellers are driven by the hope of achieving a high sale price and buyers are driven by fear of missing out if they don’t get in now. In a buyer’s market, buyers are driven by the greed of buying at a perceived low price, and sellers are driven by the fear of ‘sell now or the price may be even lower in another six or twelve months’.
Fear and greed are relatively strong emotions and people tend to make less rational decisions when they feel emotionally overwhelmed. As a result, at the top of the market people pay too much and the market gets over-bought. Conversely, at the bottom, the market gets over-sold. But there is always an equilibrium price, or long term average price as below.
To read more about how the market cycle and the property clock, click here.