Why do we always fall into the trap of house price bubbles?

We can see them coming, we know the rise in prices is not healthy but why do we keep falling into the trap of house price bubbles? This is a question which each and every real estate investor in the world will have asked themselves, maybe they would have done things differently, maybe not but why do we always look back after the event?

There is no real estate market in the world which has not experienced a house price bubble in the short, medium and longer term. Indeed house price bubbles are becoming more commonplace as what were historically long trendlines shorten due to the likes of the Internet where information can be exchanged at the touch of a button. Hand on heart, there must be at least two or three real estate market in the world which you could look at now and say, yes, they are on the verge of a house price bubble bursting!

Human nature

Fear and greed dictate the direction of all investment markets around the world whether real estate, stocks and shares, antiques, etc. There is the fear that we are missing out on a property price rise, hence the reason why many people jump in towards the end of the cycle only to have their fingers burned. There is also the greed factor, we may have doubled our money but surely we can squeeze an extra dollar or two in the short term?

Quote from PropertyForum.com : “As we move towards 2015 and a general election in the UK, it seems as though the Labour Party is heading towards a win. While there is still some way to go yet, and the polls will likely narrow, would a change in government impact UK real estate prices?”

If you take a step back and look at the impact of human nature, those who are more cold hearted about their investment strategies are the ones who make the big bucks. As Lord Rothschild said “The reason I am so wealthy is because I always sold too early”. How right he was, those who try and squeeze the last dollar out of their investment are the ones who put themselves at greater risk of being fully invested when the market goes pop. These are also the investors who do not know when to sell on the way down, kidding themselves that markets will steady, move ahead and they will sell at historic levels in the short-term.

Can we eradicate boom and bust?

Governments around the world have been trying to eradicate boom and bust, house price bubbles and other similar occurrences since time began. Indeed Gordon Brown historically promised that the era of “boom and bust was over” and the UK economy would be more stable going forward. Then just a few years later, bang, we had the worldwide mortgage crisis which plunged the worldwide economy into the deepest and longest depression since the 1930s.

The simple fact is that those who hang on for the last dollar of a bull market are the ones who do not appreciate and understand the risk reward ratio. Greed takes over, they never seem to be happy with a substantial profit, always wanting more, and eventually many are caught out and plunged into significant financial distress. Is it really worth squeezing the last dollar out of a bull market, knowing that at any time the market could turn, investors could disappear and prices plunge?