How To Predict the Real Estate Market and Identify Asset Bubbles?
Housing prices can go up under two main scenarios:
1. One is when the fundamental economy of a given location has undergone a change. This means that there is somehow a better standard of living or more employment available in that area making it imperative for more people to stay there.
2. Or else, there could be a speculative bubble wherein investors buy at a high price today to be able to sell at an even higher price tomorrow.
The question arises as to how one can predict the markets ? How can one differentiate the realistic price rise from the bubbles ? In this article, we will make an attempt to explain some of the metrics that can allow the investors to do so.
Interest rates have been the common factor in every boom and bust scenario that we have witnessed in the property market. Whether or not they are the direct cause is a question of debate. However, they are definitely amongst one of the causes.
All the property market booms, be it in Japan, United States, China or India, have been perpetuated in an atmosphere of low interest rates. This is because low interest rates lead to excess money supply and a scenario wherein the buyers are suddenly flush with excess cash and queuing up to buy homes.
As an investor, one should therefore stay away from any markets where the rise in property prices seems to be fuelled by a dropping interest rate. This is because, in most scenarios, this is likely to be a property bubble.
Another important metric that real estate investors can gauge to judge whether or not a market is in a bubble state is the housing inventory. Housing inventory indicates the amount of unsold homes that the developers have in a given market.
In the usual market scenario, the housing inventory in a market remains stable. This is because developers have a rough idea of the number of homes that buyers will purchase in a given period and will therefore create houses that can fulfill that demand without leading to excess supply. However, when a bull market is approaching, there is suddenly a shortage in housing inventory. This means that there will be no homes available in the market! On the other hand, during a bear market, there is a sudden increase in the housing inventory. Therefore, there are multiple homes available in the market. However, very few buyers are willing to purchase them.
Thus, keeping an eye on the housing inventory number can tell an investor, what stage of the business cycle is the market currently in?