Applying Relativity to Real Estate

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

August 2006

Your humble author admits he is just playing with words here and ¡¥relativity¡¦ in this context has little to do with the Einstein concepts of light, time, and high speed space travel, the last of which makes you stay young (your author remembers having read a scientific article when a kid that said if one were to travel in space near the speed of light toward a certain identified galaxy ¡V it cannot be at the speed of time else you turn into energy without mass ¡V one would have aged 56 years only while Earth would have gone through some 4,000,000 years of Earth time. Amazing, isn¡¦t it? Move over beauty centers!). It refers to a concept of ¡¥relative worth¡¦ between potentially interacting assets (defined as assets generally available for investment acquisition / disposition through generally open markets), real estate ones included. Here we go:

A)    First, asset prices are NOT sacred NOR cast in stone = they can go up or down and sometimes it is intriguing to see asset owners attaching overly sentimental value to what they own and regard any price below his or her stated ones as insult. Business negotiation tactics and pretending aside, there is no need to feel really humiliated just because some potential buyer-bloke tries to low-ball an offer.


B)    Second, asset prices are RELATIVE to one another and are in continuous fluctuations (with the volatility and frequency being another question) = being adjusted up or down to suit market conditions, which in turn reflect the collective judgment and sentiment (or emotion) of market participants, be they sellers or buyers. These collective judgments could sometimes go awry and be way wrong, high or low. This is to say, sometimes the seller pool gets the upper hand and can sell their assets for prices way above what they can command later to the buyer pool, and vice versa when markets are down.

C)    Asset price fluctuations relate and react generally and sometimes ultimately to various economic, social, political, administrative, demographical, legal, financial, infrastructural, cultural, liquidity, or the like influencing factors and perceptions, short or long term guided in part by human nature (fear, greed, vanity etc) = which also interact among themselves, creating consensus perceptions at times, and thus snowballing market conditions at times, up or down. It is important to realize that sometimes the various influencing factors have not really changed (that much), it is just that the market value / price placements on them could change and at times be way off, high or low. For instance, an investment report citing the strong economic fundamentals of a market could very well be true, yet it is just that the investment assets being advocated may already be overpriced relative to the strong fundamentals.

D)    Hence, from a global angle, asset prices, be these stocks / equities, bonds, real estate, direct investments, and so on, collectively form (some visual imagination required here) a dynamic picture of price levels on the move = whether up or down, speedily or slowly, rightly or wrongly (generally proved later on), in tandem or out of step, cohesively or incoherently, and so on. All tend to move toward some ¡¥equilibrium¡¦ level but then again seldom reach it or stay there for long as markets change. It is this constant ¡¥in-equilibrium¡¦ state of being which offers investment gains (or losses) and shrewd investors make good use of it. It is also hypothesized that the in-equilibrium is caused not only by lack of proper market information and data at times, but also insufficient time, skills, and effort to collect, comprehend, and decipher such information and data even if these were openly and affordably available. The theory of ¡¥knowledgeable and willing sellers and buyers¡¦ has its limits.

E)     Back to real estate, one basic method of applying such ¡¥relativity¡¦ is to construct a mathematical model which weighs and collates selected influencing factors in various selected markets / market sectors to their respective real estate price levels = and to see which are the relative ¡¥bargains¡¦ and which are the relative ¡¥non-bargains¡¦. By no means does a bargain imply future price gains and vice versa, yet this offers one more angle to gauge the investment viability and / or probable risk level. In a way, this is similar to the ¡¥market approach¡¦ used in real estate valuations though the model here involves more statistics and calculations.

F)     We have used the above approach in some of our analyses and samples include the following (which can be read from our website here):

1)     Sensitivity Revelations on the Hong Kong Private Residential Market, 1Q 1998 = where we argued that the Hong Kong private residential prices might tumble down much more (by 50% to 70%) than the 25% drop seen then. Eventually the market did go down more and started to recover only when some 66% value was erased. 

2)     Double your Money by Investing in Beijing and Shanghai Real Estate? August 2001 = here we speculated that there was a good probability that prices in these two cities might go up significantly. We were half-right (or half-wrong depending on angle). Shanghai did so but not Beijing. 

3)     Taking a Guess on the Long Term Prospect of Grade A Offices in China, April 2003 = we shared our study on the then office market in the 4 major cities of Beijing. Shanghai, Guangzhou, and Shenzhen. In summary, we thought between Beijing and Shanghai, Shanghai was a better bet, and between Guangzhou and Shenzhen, Guangzhou seemed a better bet. Using published office indexes published by [see table below], it appeared we had betted correctly. 

Office $ Indexes





April 2003





January 2006





% Gain / (Loss)





In summary, given time and observations, the relativity approach can help track market performances and their relation to other markets, whether competing or otherwise, and correlated or otherwise. Along with common sense and business intuitiveness, one may spot the inefficiently priced better bargains at times.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.                   

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