What does history show us about the real estate market?

The worldwide real estate market is absolutely enormous with massive fund flows moving around the world. While it would be wrong to suggest that there are no core principles on which to value real estate, what does history show us about the performance of worldwide property in the longer term?

Overvalued markets

We only need to look back in history to see the likes of London and New York real estate seemingly always “overvalued” with significant premiums attached to property prices. Even now so-called experts are trying to talk down the London property market, as they have been doing for the last decade, while both domestic and overseas investors continue to invest. The fact is that some markets do attract premium pricing and using traditional investment valuation models they will always look overvalued.

Undervalued markets

On the flip side of the coin history also shows us that many real estate markets around the world always seem to be undervalued but never quite seem to recover. There is a whole host of property markets which offer very attractive rental yields but very little in the way of capital growth. These are the markets which have been pushed as recovery plays while often decades down the line their performance relative to the rest of the market still remains subdued.

The fact is that some areas of the worldwide property market, indeed some areas of the world, have their own additional risk premiums, possibly investment restrictions and are not valued using traditional metrics.

Fluid markets

In between the overvalued and undervalued real estate markets around the world we have those which to a different degree seem to be measured by traditional valuation methods. These are very often the markets which you can trade in the short, medium and longer term especially when there are short-term overvalued and undervalued situations. If you are looking to invest in real estate in the longer term you must appreciate that everything is relative to the general market and this can create potential buy and sell signals.

Long-term indicators

When you strip away all of the fancy strategies, metrics and statistics we basically have a simple supply and demand situation. Some countries, such as the UK for example, have a growing population, a shortage of new builds and ever-growing demand for property. These factors, putting aside short-term economic performance, would indicate that in the longer term there is potential for significant growth in property prices.

As you identify markets which have long-term potential it is then simply a case of investing in those offering undervalued or fair valued situations and effectively ignoring short to medium-term price fluctuations. It is no coincidence that those who have made the best returns in the worldwide real estate market over the years have been able to take long-term views, ignore short-term fluctuations (unless they impact their long-term calculations) and basically have confidence in their own decision making process.

Conclusion

The simple fact is that history gives us an indication of how property prices reacted in certain situations when in reality no two situations are ever exactly the same. If you were to look back at a property price graph today you could likely find a period which would strengthen any investment or disinvestment argument. History shows us what has happened (and useful trends) but with all the best intentions in the world the future is never set in stone. If it was then investing would be easy?


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