Can anything derail the worldwide real estate sector?

Those who follow the worldwide real estate market will be well aware that while it has been a rocky ride over the last decade or so there is underlying strength in many markets. Some experts have been trying to talk down specific markets time and time again in years gone by only for investors to fly in the face of this criticism and keep on buying. This then prompts the question can anything derail the long-term growth in worldwide real estate valuations?

Uncertainty is the only danger

If you look back at worldwide real estate market cycles you will see that the worst performing periods were very often related to uncertainty at the time. This may be uncertainty with regards to the worldwide economy, interest rates or even potential property taxes. The fact remains that uncertainty is the only real danger to the worldwide real estate sector because without definitive figures and information how do you value assets?

Valuations predominantly come down to two specific elements which are risk and reward otherwise known as the risk/reward ratio. What is the potential return for a specific degree of risk in any one asset or real estate market?

Learning to adapt

As with any investment market it is obvious that whatever is thrown at the worldwide real estate market investors learn to adapt, trends emerge and valuations react accordingly. We may see short-term uncertainty, we may see concern and we may see a reduction in asset values but ultimately once the numbers have been crunched, and the risk/reward ratio calculated, investors can begin to look to the future.

It is also worth noting that in periods of uncertainty there is a “vacuum of information” which is very often filled by either overly negative or overly positive news. This vacuum of information can be relatively dangerous depending upon how investors react. Eventually, during periods of uncertainty, this vacuum of information will ultimately be filled by cold hard facts and we then return to more traditional investment indicators.

Sentiment is also important

Investor sentiment can add a significant amount to the value of property assets or it can lead to oversold situations where there is potential for long-term growth. We see investor sentiment switching on many occasions as much at the bottom of the market as at the top. How often have you seen a very buoyant market succumb to relatively small pockets of selling pressure only for this to grow from a trickle to a wave?

The worldwide media, and now more predominately the Internet, plays a major in massaging and directing short to medium term investor sentiment. We have seen this on numerous occasions when influential investors go public with their thoughts and opinions – although the period of impact has reduced significantly in recent times. In simple terms, there is more than enough information for everybody out there with access to the Internet. Therefore, while influential investors encourage people to sit up and listen, investors will not always follow in the longer term.