Despite the fact there are many examples of property markets topping out, often looking very similar in graph form, human emotion can very often get the better of investors. Those who make a living from investing in property are able to detach themselves from overexuberance and look at property investments in the cold light of day. They may sell too soon, they may buy too early but they will have a strategy in mind which they keep to. The fact is that you are highly unlikely to ever sell at the top of the market or buy at the bottom.
Everybody is a buyer
One of the most basic signs that a property market may well be topping out is when literally everybody is a buyer. Those who have even the slightest doubt about investing in a certain property market are often drowned out and everything seems to be rosy in the garden. In the final days of a bull market even those who have been cautious for some time will eventually be dragged along by the crowd and this can be the breaking point.
Facts and figures go out of the window
Affordability and yields are very basic and very cold measurements which are often ignored in markets which are suffering from “overexuberance”. Those still looking to buy property in these overvalued markets will find a way to justify paying over the odds. They will point to the wave of money taking over these markets, they will play on the feelgood factor and refuse to accept that the good times may well be coming to an end. This is a prime example of emotions and hearts dictating decisions together with an obsession to follow the crowd.
Outside factors are ignored
One example where outside factors were ignored to the detriment of investors was the Dubai property market in light of the US mortgage crisis in 2008. Even though there were signs that the Dubai property market was overheating just prior to the mortgage crisis, investors refused to believe the good days were over even as the US crisis was moving to a full-blown economic depression. They believed the Dubai market was immune, would not be impacted by overseas events and would continue to rise for some time to come. However, once the big players decided enough was enough and banked their profits the rest began to follow.
The once fluid banks in the region very quickly found funding difficult to find, loans dried up and property developers began to fall like a pack of cards. The rest, as they say, is history.
Who are the future buyers?
When markets become overextended and “expensive” by traditional measures such as rental yields, many investors forget to consider where future buyers will come from. If they are holding property which is trading at a premium to traditional valuation measurements then surely the number of potential buyers must be diminishing the more overstretched the property values become? Those who are successful in property investment always have an exit strategy which is why the vast majority of them will sell before the market turns.
Once the market turns, buyers will disappear, sellers will come out of the woodwork and in many ways it is a race to the bottom. For the sake of just a few percent, in effect “selling too early”, would you want to be holding potentially overvalued property as the market turns and potential buyers disappear?