Real Estate: Everyone’s an Expert, Until They’re Not

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Seeing an increase in the rate of home ownership is great, but when it is fueled by access to easy credit and ‘experts’ using flawed supply and demand arguments to create FOMO, people will end up losing.

Unpopular opinion: There are plenty of people boasting about over extending themselves to build a real estate portfolio and flipping houses like a penny stock. The truth is, for many people who have capitalized on one of the largest housing bubbles in history, it has been more about luck than skills. But what happens to all that supply if you can’t find a greater fool?

2016

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It was only a few years ago that everything in the media was about the insane rises in house prices across ‘world-class cities’ including Auckland, Sydney and Vancouver. Now we’re seeing the mood change across the media and this is ultimately going to have a huge impact when we realize that there was never a shortfall in supply, but rather a fear of missing out.

2019

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The average asking price for Auckland properties has declined by $48,270 (-5.1%) since March and is down by $91,822 (-9.2%) since February. The figures aren’t particularly relevant, what is important is the change in tone and sentiment, that is what most people will pay attention to when there is a perception that there is no room left for appreciation in house prices.

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As house prices increased year over year, people that owned property or were involved in the industry felt like rock stars, but for the first home buyers hoping to get on the property ladder, it seemed like there was no end in sight. Once prices started to ease, we convinced each other that the reasons for the slow down was due to some of the following:

  • The weather
  • Foreign buyers
  • It’s just a healthy dip
  • People were on holiday
  • Migration wasn’t as strong last month
  • It’ll rise 10x in 10 years
  • The Avengers was screening this weekend

Depending on where you are, they may (or may not be) valid points, but the problem is humans react the same way when prices fall as they do when prices rise. When everyone is buying, the majority will follow.

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When prices are falling, there may be people that feel the need to cash out, which potentially increases the number of choices available on the market, imagine if there was only one house in a neighborhood, you could ask for whatever price you want, but then all of a sudden if ten new houses appear on the market, this may force sellers to think about how they price their homes because buyers now have alternatives.

Those who were looking to flip may suddenly be forced to rent out their properties if they are unable to sell, this may also cause cap rates to drop and force those who are struggling to make repayments to sell. There are plenty of scenarios that might occur and it is anyone’s guess how it will all play out, but there is one conclusion:

Everyone is an expert, until they’re not.

Central bankers are stuck between a rock and a hard place and left with tools that created this asset bubble in the first place. President Trump has recently called for a -1% slash of the Fed’s official interest rate and resume crisis-era bond-buying program to stimulate economic growth. This isn’t just a dip, we have essentially exhausted all measures to prop up this housing bubble and are now faced with the consequences.

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There was a recent podcast featuring Marc Cohodes, who brings up some very valid points, particularly about the real estate market in Vancouver:

“So everyone needs to be patient and when people get desperate enough these places will trade and they will trade down significantly and don’t be in a hurry and be patient, because sellers do have to sell, more urgently than buyers need to buy and it seems like the writing is on the wall and I think it’s going to happen fast and these realtors and brokers tend to be very optimistic, but I think that crew is getting very financially desperate themselves..”

I think they confused a bull market in real estate with brains and a lot of them aren’t that talented but they made fortunes ripping people off with overpriced houses, and now that business is gone, their spending and lifestyle is very different than their income”

You can listen to the podcast here:

Unfortunately the worst is yet to come, that is of course we don’t continue to suppress interest rates, otherwise the debt-binge will continue, but it is clear that we’ve reached a turning point where changes are happening, the market is no longer rising exponentially without taking breathers.

It pays to be patient. While prices are unlikely to plummet to 20 cents on the dollar, the amount of credit growth, the increase in supply and the economic downturn will definitely have an impact on house prices.

Disclaimer: This isn’t financial advice and if you act based on a blog or something you read over the internet then investing probably isn’t for you in the first place. No products, services, investments or strategies are endorsed in this article. All opinions, news, research, tools, prices or other information is provided as general market commentary and communication — not to be taken as investment or financial advice. Any person acting on any information, does so entirely at their own risk.

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