Don’t be afraid to sit on the real estate market sidelines

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Each day seems to bring news of record real estate prices in different markets around the world. Despite the fact that experts continue to talk down the worldwide property market it has gone from strength to strength in many parts of the world. So, if you have money to invest and markets are riding high would you be foolish not to jump aboard the gravy train?

What does your research show?

The bottom line is that your money is being invested, you need to be happy with the investments and you need to believe that the markets are moving ahead. It would be wrong to suggest that many people do not make significant returns chasing “property hotspots” but what happens when this goes wrong?

While history shows us that even the property experts get it wrong, and will sometimes end up following the money, the vast majority of those who make good money in the long term go on their own gut instinct.

It isn’t wrong to stay out of the market

If you believe that a property market in your vicinity is valued way above the “fair value” level then in theory you would be foolish to invest your money. Even though fair value is not always adhered to by the markets it is most certainly something to take into consideration when investing your own funds. If you’re able to buy a property “below fair value” then this makes sense because you can justify the investment in your mind and there is potential for long-term capital gain.

However, if you are chasing the hot money and pay above what you deem to be “fair value”, when do you cut your losses, when do you take a profit, what is your long-term aim?

Overvalued markets always correct themselves

With the exception of a small number of markets, such as New York and London to name but two, the vast majority of seemingly overvalued property markets will eventually correct themselves. Valuations will run to levels which are unsustainable in the short, medium and longer term and eventually the affordability factor will come into play and investors will take profits. Very often these markets offer minimal rental yields compared to the average which is another factor investors need to take into consideration.

Even if you bail out of a market, or refuse to chase the hot money, and miss the top 10% increase in valuations this will seem minimal when the eventual sell-off comes. If these particular markets are dominated by short-term investors at some point they will bail out, take a profit and move on to the next hotspot. Where will this leave investors sucked in towards the higher end of the market rise and left holding assets which are potentially overvalued?

Conclusion

Whether you decide to remain fully invested, or partially invested or decide to sit on the sidelines and wait to see what happens, the decision is yours. While many people do make good returns chasing the hot money it is vital that you have confidence, you understand the markets and you believe you are doing the right thing investing your money. Following other investors like lemmings with a minimal appreciation of the potentially overvalued situation can prove disastrous.

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