Is The Real Estate Bubble Ready To Burst again?
Updated: Aug 16, 2020
Real Estate has been my personal favourite asset class as I grew up in a family which established itself in society because of the real-estate business. People buy real estates for utility purpose or as a safe investment option. Growing up I remember watching this sector going through phases where there was next to negligible demand for housing or piece of land causing the prices to be very low to the phase where the prices of houses skyrocketed before falling and then once again rising to its peak.
Experts were of the opinion that the recession was inevitable in 2017 but, we managed to delay it to the present. Now with all the sectors taking hits, many believe that the housing bubble is ready to burst again.
What is a bubble?
To quote Bill Conerly, "A bubble is a run-up in the price of an asset that is not justified by the fundamental supply and demand factors for the asset." They can occur in any asset class. some of the notable bubbles are 'The tulip mania (1636)', 'The dot com bubble of the '90s' and 'The Housing bubble and credit crisis of 2007'.
In the case of real estate, buyers pay high prices with the expectation to sell for more under a basic assumption that the prices will only keep rising. On the other hand, the sellers of the property or the real estate companies stick to their high prices even when the demand is low causing the prices to inflate.
The problem with Real estate
Real estate is also the most criticised asset class by the stock market coaches, investors and traders. The main reasons for criticism are its ticket size and concerns with liquidity.
Even in good condition, it is a task to buy or sell a property which justifies the liquidity concerns and on other hand with the prices always being higher than the intrinsic value buyers fear to take quick action.
Will your property loose value too?
There are no buyers and the demand for properties has slumped with the main reason being the crash in Dow Jones shortly after the Washington state reported its first Covid-19 death. A short conversation with the real estate broker from Berkshire Hathaway revealed that after the corona outbreak there is a sharp fall in the listing of properties as the sellers are aware that they won't get good prices for their properties.
There is no easy answer to how long it would take to reboot the economy. Few economists believe there will be an elongated “U” shaped recovery after the coronavirus. Many others believe that it would be raid one considering the reopening in South Korea and China.
Real estate as an asset class
A property can be the greatest asset in your portfolio generating regular monthly income or great value appreciation or it can be a liability where it is just a piece of land or even property never appreciating in value or stuck in legal conflicts.
Buying a house is not as same as purchasing an iPhone. The entry point in the housing market can make a huge difference to your net worth. With prices dropping it can be a good opportunity for potential home buyers having job security or stable business.