This may seem a rather strange question but it does make sense, why don’t investors simply sell all of their property assets when markets peak and buy back when they begin to recover after a downturn. If markets were to swing 20% from their peak to their trough and you had for example £1 million invested then effectively you could buy back in and save £200,000. Sound simple?
Hindsight is a wonderful thing
With the element of hindsight, graphs and data we can all look back now and think, hmm, that was the turning point of a particular market cycle. It all looks so easy, so straightforward but in the heat of battle it is not as easy as that. Aside from the fact you will never buy at the bottom and sell at the top of any property market cycle we have to take into account human emotion.
When property markets are rising the majority of the experts continue to pump positive news into the investment arena often pushing demand higher and higher. For those with assets showing a good return greed can come into play and the fear of missing out on an extra pound or two. We may look at simple valuation methods and the markets look overvalued but at the time, with buyers still ploughing money in, it can be difficult to let go.
Falling property markets are very difficult to predict and often described as “catching a falling knife” with a suggestion that you will get cut at some point. In reality perhaps the best way to buy into a falling market is to invest a percentage of your funds at certain points. Maybe look to buy in stages on the way down and even if the markets recover, and you are not fully invested, you will at least have some exposure which you can build on knowing the market has turned. If you flip the coin, selling into a rising market may also make sense in the longer term.
There is an array of growing costs associated with buying and selling property which can make relatively short term trades difficult to justify. While transaction costs will vary from country to country, if you were to use just 5% transaction costs as an example when buying and selling that equates to 10%. So if you are looking to take a profit at the top of the market, and buy back in lower down, the price would need to fall by 10% just to break even on your sale price.
In a perfect world all investors would sell their property assets at the top of the market and buy them back lower down. However, we also need to take into account rental income which many property assets create and how useful these are for investors financing debt. The last thing you want to do is chip away at your investment capital which is why a lot of investors have a “core backbone” of assets. That is not to say that these assets would not be sold (and possibly bought back) in the future but the benefits of a sale and reinvestment need to be compared against income the properties provide.
It would take a very brave person to sell everything at what they perceived to be the top of the market and buy back at what they saw as the low of the market. Some people can do it but reinvesting after cashing in all of your property assets is not as easy as it sounds.