Should you ride the wave of property market hotspots?

At any one time we can look at the worldwide real estate market and identify many so-called “hotspots” where over buoyant investors have pushed values above and beyond their “fair value”. Many property investors have made significant returns by going with the trend but should you ride the wave of property market hotspots or maintain your focus on the longer term and value properties?

Trading maintains liquidity

There will always be investors who will trade assets over a relatively short timescale and while they may be criticised by some experts, they do help to maintain liquidity in the short term. It is all good and well having a property which has in theory increased in value but if markets are illiquid and you are unable to sell your property then what is it really worth?

While any investment market should be viewed on a long-term basis there is nothing wrong in taking short-term profits where available. The danger comes when investors actively look to trade in the short term because at some point they will “catch a cold” when markets are caught out. We only need to look back to the 2008 US led mortgage crisis which very few people saw on the horizon. How many short-term traders were caught out when property values collapsed?

True value will always come through

The “hare and the tortoise” is a perfect example of the way in which investors should view the property market. It should be seen as a long-term commitment, and while there will be ups and downs, true value will always come through in the end. If you feel uncomfortable chasing a market and buying a particular asset at a price which does not feel right, then why would you continue?

There may be occasions where you miss out on a short-term trade which could have banked you some profit but is it really worth playing on the margins in the short term? Building a portfolio with good rental income, good long-term capital appreciation and offering good value at the time of purchase should not be underestimated. All of the best property investors have a backbone of assets which offer long-term income and long-term capital appreciation. Some may choose to consider short-term trades with a small percentage of their assets but the vast majority of their funds are never put at such risk.

Dubai was a prime example

The Dubai real estate market was relatively innocuous before the turn-of-the-century and then all of a sudden it was the market to be in. The economy was doing well, international businesses were looking towards the region and property investors were fighting amongst themselves to increase their exposure. Even the 2008 US mortgage crisis was initially discounted by exuberant investors who even suggested that Dubai could be immune from the US downturn which eventually led to a worldwide economic slump!

The Dubai market finally collapsed just months after the US mortgage crisis began and while it has recovered in recent years, the market we see today is very different in structure and appearance. Many investors made a fortune trading assets in the run-up to the Dubai crash but how many were left high and dry with assets which had fallen in value? Many investors went bankrupt, unable to dispose of their properties and unable to cover their liabilities.

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