Introduction
Property investing is quite popular. Banks enjoy giving credit to investors who wish to take their money in that sector. The most popular and renowned rich people deal in real estate. Is this the allure or is there another hidden factor? My thinking is that what makes people feel attracted to real estate or property investments is the success associated with the big boys in that sector.
On the other hand, it might not be that popular if people took time to look into the real world of property investing. This part of the world has many disappointments and phenomenal losses. It is a world so uncertain and unpredictable.
Property investors should look into all the stakeholders in this market before making the huge decision to invest in it. This paper critically analyzes property market in light of risks in it. It draws a conclusion on the question if it is still popular and why.
Arguments Against
Investing in property is still popular despite the harsh manner in which the investors may be treated by the market. One of the reasons why I still think it is popular is the amount of money involved. Property business has the largest amounts of money and investors from many countries around the world feel the thrill to chase that money.
In United States, where the observers calculated the amount in 2008, observers estimate that close to 60% of the amount of money in the economy was in the housing and property sector. This is an indication of what is actually happening in the other parts of the world despite the lack of stats1.
In financial terms, investing in property is a risky affair. The amount of debt and uncertainty involved is too much. This is considering the fact that properties are quite expensive. The amount of debt that banks have to extend to pull off one property deal is too much. Uncertainty comes when it becomes apparent that one cannot individually predict most of the dynamics that surround the property business.
This includes the nature of population growth and its effect on market. In the United States, the fear is that it is hard to predict the future of the property market in light of the burgeoning population. This makes and creates an insatiable market for the property owners and developers especially considering a perfect American family need a house, a car and a job. However, it also raises the issue of land, which is a fixed resource.
This means that they think of better way s to round that issue. Hence, the developers build tall houses like Burj Khalifa, which raises the nature of risk2. In fact, many economists and observers in economy circles concur that after a phenomenally tall building is put up an economic slump follows3.
The riskiness associated with property continues to make this sector less thrilling foe investors. It is very attractive in economic booms. During this time, lenders (read banks) extend credit quite easily. The terms for getting a loan get even more relaxed. However, when an economic slump happens, like in the 2008 American housing crises, banks run away from lenders.
These institutions tighten their lending measures and get stricter in following up loans. Since property is quite expensive, most borrowers on normal occasion borrow as much as 100% of the property value. Therefore, when the prices of the commodities fall they face insurmountable levels of debts and institutions unwilling to bail them. The only resort is to sell the property at very low prices to cover part of the debt.
This cycle is not predictable. However, history has shown that in crisis situations banks run away from investors. The most unwelcome thing is that an investor never knows when these situations strike. 4
Is it true that an investor can independently price houses or property? Largely, the answer to this question is no. the price of a house is dependent upon the house next door. This volatility of market prices is a deterrent to entry in that market. Property investing is not convenient for short-term investors. This is because property in largely long term. Additionally, the capital outlay is just phenomenal.
These locks out many investors who may wish to enter into the markets. The nature of the market is also quite rigid. It is for example rather impossible to push up prices of properties by acquiring a certain amount of company shares at a premium. This trick is popular in other forms of investment.
It lacks applicability in property circles. Entrants in this property business depend on banks to extend the required amount of money. As it stands now, this matrix is in favor of banks since they almost control the business. This is because they benefit in case of any eventuality: financial crisis or liquidity pressure.
How safe is the property itself in the long term? Many observers argue that the property is forever unsafe. The other factors can easily be mitigated but the safety of the property is not a guarantee.
Because of the scarcity of the most important resource in property investments, land, most buildings in major towns and cities are built upwards. This increases the level of likelihood in causing damage. Insuring the property is an expensive affair in the long term.
It is even more volatile in countries vulnerable for earthquakes and natural disasters like tsunami. It is also subject to terrorism. The latest case of terrorist target is the world trade center in the United States. The point is that tall and magnificent buildings become terrorists’ targets in as much as it is not directly connected to their interests.
Conclusion
Property investment is an alluring business. The amount of money that changes hands is quite phenomenal. However, this form of investment is constantly becoming an unsafe affair. Many factors combine to make it look profitable. I would call it a game of chances. If an investor does not play his or her cards well, the amount of risk involved is unmentionable.
It is only less risky and poplar with extremely rich people. These people do not feel the shocks that are associated with this business. The fact that it is rather unpredictable is also a contributor to the awful nature of this business.
Hence, this nature of investment is only popular because of the amounts of money that change hands. It is not because of the comfort ability of the business. In the near future, it will be an even more expensive affair. Many factors are combining to make this a reality.
Bibliography
Bien, M, Property Investing All-in-One for Dummies, Prentice Hall, New York, 2007.
Hoesli, M, & B Macgregor, Property Investment: Principles and Practice of Portfolio Management, Wiley and sons, New York, 2000.
Palmer, A, A Special Report on Property: Bricks and Slaughter, The Economist, 2011. Web.
Zutshi, S, Property Magic 2010: How to Buy Property Using Other People’s Time, Money and Experience, Wiley, London, 2010.
Footnotes
- Bien, M, Property Investing All-in-One for Dummies, Prentice Hall, New York, 2007.
- Zutshi, S, Property Magic 2010: How to Buy Property Using Other People’s Time, Money and Experience, Wiley, London, 2010.
- Palmer, A, A Special Report On Property: Bricks And Slaughter, The Economist, 2011.
- Hoesli, M, & B Macgregor, Property Investment: Principles and Practice of Portfolio Management, Wiley and sons, New York, 2000.