The definition of an efficient market is one in which all the relevant information is available to all its participants at the same time. This, in turn, allows prices to respond immediately to new, available information.
The stock market has become so efficient that if you can’t process information in a fraction of second, you’ll end up on the losing side of the trade.
The real estate market has long been an inefficient market. Its inefficiencies have negative ramifications for the public good. When markets are inefficient, the winners and losers are more pronounced. Those who understand an inefficient market can make big money at the expense of the naive.
As information technology is making real estate more transparent, the market is becoming more efficient. But transparency is only the catalyst for an efficient property market. There are six parts to an efficient real estate market:
- Quality listings
- Professional agents
- Pricing mechanism
- Data management
- Market analytics
- Public confidence
Second, quality listings tell the market the available stock of homes that can be bought or rented. As such, false listings distort the market.
Professional agents serve the market by advising consumers on how to navigate the market. It is the agent’s fiduciary responsibility to advise and act in the best interest of the client and adhere to the highest ethical standards.
The purpose of the pricing mechanism is to help market participants establish a trading price for the home. For example, SRX Property’s X-Value™ is a computer-determined valuation of each home in Singapore. Market participants may transact at a different price from the X-Value, but there will need to be a rationale, based on facts, for doing so.
Today, every market must have a data management system. The purpose of this system is to collect raw data from the thousands of people interacting in the market each day, process that data into meaningful information, and deliver that information to the market’s participants. Smart phones and tablets make it easier to deliver information. Software applications make it possible for market participants to interact with the information and add value.
The software applications allow analysts and other professionals to analyze the market. The real estate market is complex, with thousands of interactions taking place each day. Data management makes the market visible but someone must interpret it. Analytical software helps professionals interpret the market so that homes can be priced, deals can be struck, and policy-makers can set policy that will, in turn, introduce new information and conditions that must be factored into the functioning of the market.
Finally, public confidence makes the market a valid, safe place to transact property. Without it, there is no market.
The Singapore real estate market has a long way to go before it is as efficient as the SGX and other stock markets, but it is tracking in the right direction. This is a win for all market participants.