Real estate, a term commonly used to describe land and property, is approached subjectively as an investment item rather than objectively as a consumer good. The mental orientation of individuals changes when they view real estate as an investment item instead of a shelter. When individuals perceive real estate as an investment item, how they process price information changes. Instead of using reasoning circuits to maximize utility and bargain-hunt for the best price, individuals default to pre-rational mood circuits. The pre-rational mood circuits lead individuals to purchase property in the hopes of selling it at a higher price to others in the future.
When most market participants view houses as shelters, prices remain stable. However, prices fluctuate greatly when many market participants view houses as investments. This fluctuation occurs because investors are not solely interested in the property's use value but also in its exchange value, which drives the price of real estate up or down.
It is essential to recognize that while shelters fall under the economic realm, real estate falls under the financial and socioeconomic realm. The socioeconomic realm encompasses real estate investment's social and cultural aspects, such as the community's perception of the property value. The financial realm includes the monetary aspects of real estate investment, such as the purchase price, loan interest rates, and property taxes.
Therefore, understanding individuals' different mental orientations when approaching real estate is essential in predicting how prices will behave. It is crucial to recognize that the real estate market is intimately intertwined with the financial and socioeconomic realms. As such, changes in these realms can significantly impact real estate prices.
Source: The Socionomic Theory Of Finance
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