WHY MY REAL ESTATE IS IS CRASHING?

According the Knight Frank's global house price Index there are been some major shakeups in the worldwide real estate market.



Short answer is that the pendulum never hits the mark



Don Campbell (author of real estate investing in Canada) recently had a good analogy about real estate. Prices swing from high and low and very rarely stay in the middle (where prices fairly reflect values). Momentum always develops as the market changes because real estate is an inherently inefficient investment.

What I mean by that, very rarely does capital flow into real estate in a manner that actually reflects the value (creating HUGE REAL ESTATE BUBBLES or Overactive selling). While one could say that about every investment, real estate is particularly vulnerable to inefficiency for 3 reasons

1. One could never have perfect information about what a particular value a buyer and seller hold for a property and once they do their deal...the information on price is not readily available. As a result, investors may overestimate or underestimate the value (it's always going to go up...so if I put an offer over-list I’m ok or its going to crash and I’m going to lose everything....sell for whatever we can get)

2. Supply is very limited and usually only comes in the market in chunks because of the lag in construction and planning. Developers can never actually always stay on top of demand because demand changes a lot quicker than they could stop construction and planning (wouldn't it be funny if we had hedge funds buying up all the real estate in a particular neighborhood when prices are low and then start blowing them up to raise values?...um perhaps not)

3. Lenders and financial markets (especially outside of Canada) don't usually give the right amount of capital to lead to a stable market (i.e. Lend too much cheaply or lend too little very expensively. The flow of money, combined with the fact most collateral for loans are based on land, if land prices suddenly drop the flow of capital drastically slows down...leading to credit crisis that we see now.


In short: Monitor all fundamentals to determine what direction the market will be 2 years in the future.