Would real estate markets work better without speculators?

There are very few days when you are not able to pick up a newspaper or read a media website criticising speculators for the fluctuations in real estate prices. When real estate markets are flying high it seems that speculators are an easy target but when real estate markets are struggling, does anybody care about speculators left with property on their books?

Without looking into this situation in more detail you might be forgiven for assuming that real estate markets around the world would be a better place without speculators. So-called asset strippers, picking up properties at relatively low values, flipping them to make themselves a turn and then disappearing. What part do they play in the worldwide property market? Do they really have a part to play in the long-term?

Liquidity is key

If all real estate investors were long-term then there would be nowhere near the liquidity we see today in property markets. Liquidity is in effect the number of properties available for sale at any one time because the fewer the properties the more chance that prices are squeezed higher and higher. So, while to many people speculators may be the thorn in the side of investment markets they do offer liquidity which can in many cases keep property prices from actually moving too far too quickly.

Quote from PropertyForum.com : “Ed Miliband attacks UK landlords in publicity stunt“

This is perfectly illustrated if for example there were five properties available for sale in your area and five potential buyers. In theory there would be one property per buyer, assuming these properties fitted in with the buyer’s profile, which would reduce the chances of bidding wars. If there were only two properties and five potential buyers, again assuming that the properties fitted with the buyer’s profile, there is every chance that the price of the two properties would be squeezed higher as buyers sought to secure their favoured property.

Markets in freefall

Many speculators in the real estate industry will look for properties, and indeed overall property markets, which have fallen too far, too quickly and offer relative value going forward. In these markets we will have investors with long-term horizons who may have bought property some time ago and are more than happy to maintain this going forward. Again, this can lead to an issue of liquidity although sometimes when speculators target a specific market they can make sceptical investors think again.

It is human emotion, when things are going well it is all blue skies and the birds are singing but when things are going against us it is all doom and gloom and there is no light at the end of the tunnel. Speculators work on momentum, valuations and facts and figures although they can also play on human emotion and investor trends. How often have we seen speculators entering markets with a relatively short term investment horizon only to bring in longer term investors who all of a sudden “spot the value going forward”?

Conclusion

As we touched on above, when real estate markets are flying high it is speculators who are often accused of pushing prices to unrealistic levels. When real estate markets are in trouble, and prices are falling, nobody seems overly bothered about speculators who may be left with properties they don’t want and substantial financial losses. The simple fact is that speculators improve liquidity in all investment markets and while some may perceive them to have an overdue influence in the short-term, the weight of traditional institutional and private investors would very quickly dilute any excessive influence once the market turns. Short, medium and long-term speculators are an integral part of any investment market.