If someone asked you what was the most important element of a property market cycle how would you answer? Is it the economy, the media or is it perhaps something as simple as human emotion? In reality human emotion can create wild swings in investment markets and the property market is not exempt from this. Stock markets, oil markets, gold markets and any other investment market you can think of are all susceptible to an array of different variables but human emotion tends to beat them all.
Pessimism leads to oversold positions
If you think about it, how many times of you seen markets fall to levels which seemed well oversold but investors kept on selling? The media continue to talk the market down, buyers sit on the sidelines and sellers seem desperate to get rid of their property at any price. This type of scenario can very quickly lead to a self-fulfilling prophecy and panic selling.
Clever investors are able to look beyond this short term volatility and maintain a long-term view on the prospects for asset value appreciation. Yes, they may experience short-term bouts of volatility, they may be able to buy lower but if they can buy below the perceived fair value of a property at the time then surely this must be a good buy?
Optimism leads to fear and greed
We’ve all seen investment markets which are pushed to levels which are quite simply unsustainable against historic benchmark measurements. Investors continue to pile money in despite a growing awareness that when the market does turn it will turn very quickly. In reality, human emotions such as fear and greed can drag investors into investing in markets which are obviously overvalued but investors are concerned about missing out.
If we look back to the 1987 stock market crash, the 2008 US mortgage crisis and other prominent investment events over the years, looking back the signs were there but fear and greed were stronger than “common sense” – at the time.
Leaving some headroom
Brexit is perhaps a prime example of volatility and uncertainty in the UK property market. In a worst-case scenario the UK economy will struggle for a decade while in the best case scenario a free trade deal with Europe could lead to a seamless transfer. In reality, the truth will be somewhere in between. However, as the sceptics talk down the UK property market because of Brexit concerns we are starting to see some momentum from sellers. Buyers are moving to the sidelines, watching prices soften and the next move will probably see sellers fighting to undercut each other, placing more downward pressure on prices.
However, if for example you could acquire property with a current fair value in the region of £100,000 for £90,000, in effect you have created headroom for yourself. The fair value of your property could fall by another £10,000 and you would still be at breakeven. So, the moral of the story is to take advantage of pessimism and oversold positions to buy stock below “market value” and sell when the buyers lose touch with reality and prices are overbought. It sounds simple in theory but it is very different in practice!