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Hidden psychology of property pricing

04 Jul 2013

Sellers naturally want the best price they can get for their property and often ask unrealistic prices in the hope that they will get as close to the mark as possible - but they may be doing themselves a grave injustice. 

Overpriced properties make other similar homes seem like excellent value and can actually help estate agents sell another property.

Andreas Wassenaar, Principal of Seeff Dolphin Coast and Chairman of Seeff  KZN, has been involved in marketing and selling high-end residential real estate for almost 20 years and has some  insight into the psychology of pricing and perception of value. 

Wassenaar says Priceless The Myth of Fair Value is the title of a fascinating book by William Poundstone, in which he investigates the hidden psychology of value. The back sleeve of the book reads: “People used to download music for free – then Steve Jobs convinced them to pay for it. How? By charging 99 cents. Prada and other luxury stores stock a few obscenely expensive items – just to make the rest of their inventory seem like a bargain. Why do text messages cost money, while emails are free? Why do jars of peanut butter keep getting smaller in order to keep the price the same? The answer is simple: prices are a collective hallucination.” 

The author takes you on a detailed journey of research into behavioural decision theory. It is a place where psychology and economics interact and he demonstrates how pricing of everything and anything directly affects the relative value we ascribe to it. The thesis of this research is that we really do not ever understand the absolute pricing of anything – real estate included – but only the relative price of goods, a service or product (or home) relative to other comparables. 

The idea of ‘anchoring’ our perception of value is explained by the author, where quoted prices become the relative benchmark and discounting from these benchmarks then begins to create a relative perception of value in our own minds. The book has two chapters on real estate and an interesting question to ask your real estate agent (assuming he or she is impeccably honest) is what would you price my home at, if it was your own?  What is realistic pricing in any given market? It is always relative to other similar properties, and if the property is truly unique (which is almost never the case), then the comparison is what the next best use of that money would be to the buyer. 

What Poundstone investigates in his book is to what extent our perception of value can be manipulated by the quoted prices we are confronted with. Despite us all thinking we are too smart to be tricked into believing a certain product has value at a prescribed price, all you have to do is watch a Verimark commercial to see these pricing psychology techniques at work, where pricing comparatives are quoted over and over and small additions are added to the product to make it seem so much bigger an offer than it actually is - and just when you thought they would put an end to the agony of enduring the sales pitch, you hear the words, ‘and that is not all…!’. 

So does it work? Retail consultants would confirm that it does. This then begs the question as to what extent can the same method be used in pricing and selling real estate? Having had the experience of two decades worth of actively marketing and selling high-end residential property, Wassenaar  believes that the anchoring technique described by Poundstone does in fact work: the value we ascribe to a property is influenced by its list price and by the pricing of comparables. 

Two measures of pricing realism, for residential properties, are (1) the average time on the market; and (2) the percentage of properties sold at less than their asking price. For the four quarters up until the first quarter of 2013, the average estimated time that homes for sale spent on the market, as measured by FNB, for the lower and middle income segments, was 13.6 weeks and 14.5 weeks respectively. 

The upper income and high net worth segments recorded 17.8 weeks and 19.6 weeks respectively. The percentage of properties sold at less than their asking price, across these four categories, were lower income – 80.3 percent, middle income – 86.5 percent, upper income – 91.3 percent, and high net worth – 83.5 percent. These figures indicate rampant over-pricing or a low level of price realism, which is more pronounced at the higher price end of the spectrum. 

If prices are a collective hallucination, what matters is not the absolute price of anything but only the relative price and the pricing of anything directly affects the value we associate with it. 

Overpriced properties make other similar properties seem like excellent value and therefore help estate agents to actually sell the other property. Properties that have been significantly discounted relative to their original asking price also create a sense of value at the revised pricing, which often results in a sale.   

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