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Will this bubble burst?

As prices have started rising those who are driven by fear will often hide behind the notion this is a bubble and at some point in time the bubble will burst.

This means this is temporary in nature and it will burst in time. This is not an intrinsic and sustainable rise in price.

Prices have risen to unprecedented levels with some spots up in London by 30% to 40% over an annual period.

Let’s not forget there exists an intrinsic need for property in this country, the demand is huge and is not being currently met, not even by the renewed activity in the development of the new homes sector which has surged.

When you look at population trends it becomes clear the supply of housing does not meet the demand, and nor will it do so in the future. The level of new houses being built is no where near what is required. The Barker report commissioned by the government goes into great details into this matter.

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Another way of seeing why prices will always rise fundamentally is money is printed practically from thin air and therefore is infinite, property and land cannot therefore they are finite; long term they will always rise.

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And this is the reality, when the dust settles and whatever has come and gone, prices will always rise. One of my favourite sayings is: buying a dud property is like having a bad haircut, if you wait long enough it will always grow back.

However it is difficult to separate the two, and quantify them, how much of the rise is due to the fundamental lack of property and how much is driven by temporary forces which will disappear in a short period of time. Who can say for sure? And how would you measure this? Many of the established property commentators routinely get the overall rises Wrong.

So does this mean we should buy irrespective of what’s going on in the market? Of course it pays to be aware of what is going on in the market so it can be exploited. If there is a bubble – ride it, don’t shy away, but go in with your eyes open.  _____________________________________________________________________________________________________________________________________

People never celebrate when property prices go up 40% in a year but sure as hell they like to moan when prices drop by 10%. So it pays to know whether the bubble is still rising, almost risen or is about to pop.

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There are locations which will act to insure your investment so on the way down prices will not fall but plateau, thereby provide a buffer for your investment. In areas where people do not need to sell, as they are not cash stopped, prices will not decrease because they will simply decide now is not a good time to sell and therefore there will not be much stock on the market to sell. This lack of activity will serve to affect other businesses such as estate agencies and mortgage brokers so you will hear of them going out of business, but in reality there is simply no desperate rush to sell, and even in this state of the market prices will not decrease but level out, generally those who are looking to sell can afford to wait until the price they want has been met.

This was what happened during the credit crunch, prices remained broadly stagnant in Certain price sectors in central London, but sales activity dropped. 

I do believe this rise which we will experience this coming year has a temporary uplift to it. It is what can be termed as a ‘bubble’. There are ways to exploit this too, the obvious way is to get on whilst it’s rising and get off somewhere near the top. As mentioned people have very short term and biased memories. Behavioural finance teaches us investors weigh loss more heavily than gain. This means if someone gains 10% on their investment they are not so elated but if they lose 10% on their investment it will be disastrous for them and it feels they have lost everything. Similarly when it comes to property people forget how much their investment has risen, but you hear them complain loudly then the same investment goes down even by a fraction of their initial gain.

If you’re nimble and not stagnant you can also exit the property market prior to it coming down again. Property tends to be viewed as a solid long term asset which cannot be exited quickly, this is only partially true. In the right location property can be sold in 48 hours literally. We have sold property in this time period. Putting it in an auction will ensure you have your funds within 28 days of the hammer going down. There is also nothing to say you cannot reduce this period. Many banks often allow only 14 days for completion.

I remember at one event I meet an Indian and a Jew. The Indian had amassed a huge commercial portfolio worth £350m, he was offered £330m, he refused. Big mistake. This was in 2007 pre credit crunch. The same portfolio dropped in value to £150m after the crunch. The Jew was in his 60’s, he had been through three recessions and managed to sell just before each one hit. There are many in the property market who got the timing right and got out spookily just at the right time.

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So one way is to purchase whilst the market i s rising and sell before it goes down. If you do not get the timings right, as there is always a danger you will not get out on time, this potential problem can be neutralised by purchasing in strong locations. This will mean a general fall across the country will only result in a temporary stagnation in prices in strong locations, or at worst you may have only a slight reduction in price.

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There are other ways. Some never purchase for capital gain, so to them the rise and fall of the market price has little relevance; they purchase for yield. There are those who purchase property and turn them into HMOs, their game is to ensure they receive a good slush of money every month and they aim to keep long term. Selling makes no sense to them as they would lose the monthly income. Here a bubble or no bubble has not much impact for them. They would be more concerned about a rise in their finance payments as this would decrease their income, or perhaps a change in social housing policy assuming, they were renting to this sector.

Prices have risen, but we believe we are at the early stages of a sharp growth in prices, where the practice of gazumping will reemerge.

                                                                                                                   

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Beware when purchasing in auctions, this can be used by many traders as a dumping ground. Check who the seller is and do full due diligence prior to bidding.

When purchasing in auction always check the seller has held the property for longer than six months, otherwise you will have difficulty obtaining finance. Many of these properties are being sold by way of auction.

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