Mispricing in the Property Market and Informational Inefficiencies

Mispricing in the Property Market and Informational Inefficiencies

Introduction

Mispricing refers to the concept when property is valued either as over-valued or under-valued. It refers to the concept when actual prices of investment are manipulated or investment is made in a speculative market (Mallinson & French, 2000). The mispricing in the property market results mainly from informational inefficiencies (Hutchison & Adair, 2008).

This paper discusses the causes of mispricing in the property market and market correction processes. It also discusses the future trends in the investment industry and factors that contribute to risks of properties.

Causes of Mispricing and Market Correction Process

A dramatic increase in demand created the housing bubble, as banks and other institutions lowered lending standards in an attempt to boost revenue. Banks increased lending activity by diversifying risk through secondary market transactions, including the packaging and sale of mortgage-backed securities (MBSs) and other collateralized debt obligations.

The lower the level of investor uncertainty, the greater the inflow of new capital into alternate investment funds will be (Mallinson & French, 2000). Low investor uncertainty also supports market share performance (Dunse et al., 2007). UK economy depends heavily on debt, the tightening of the credit markets caused the recession (Scott & Judge, 2000). Real estate is no different; developers rely on debt to finance their land purchases and housing developments along with investment in equity and hedge funds. As the economy started to decline and disposable income dropped along with employment, the ability of individuals to buy houses severely decreased (IBIS World, 2011b). Since consumers could not purchase homes due to income and tight lending standards, the industry's sales declined substantially. 

Equity funds investment experienced a rapid escalation in assets under management and soaring revenue due to the growth in the S&P 500, low investor uncertainty, steady regulation and a low bond yield environment. This resulted in leading towards informational inefficiencies and people focused on making sums of profits without considering the proportionate risk of investment (Dunse et al., 2007). This factor was especially true for alternative investment vehicles such as hedge funds and private equity funds that make up the largest share of revenue.

However, causes of mispricing that is ultimately linked with informational inefficiency and mispricing are associated with the 2008 global market turmoil, with falling asset prices and frightened investors, brought the industry back to earth with a jolt. The subprime crisis affected the investment in property and equity markets by causing an increase in the cost and difficulty of borrowing, losses from the write-down in the value of structured debt products, a fall in the value of industry, slower UK economic growth and corporate earnings, and a general level of uncertainty from the re-rating of financial market risk (Scott & Judge, 2000). This leaded towards marketing correction of property and real-value of investment wealth (Hutchison & Nanthakumaran, 2000).

The Housing Developers industry is in a mature stage of its life cycle. Typically, an industry is considered in a decline phase of its life cycle when industry ...