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Playing Real Estate Bubbles

Posted by admin on October 31, 2007 in Real Estate

Welcome to real estate Wednesday. This week’s post is about surviving a bubble real estate market. Canadian and United States real estate is like the Charles Dickens quote right now: “it was the best of times, it was the worse of times.” Having said that, there continue to be pockets in the United States were real estate continues to be quite hot.  In certain regions of Canada, there continue to be predictions that they are in a bubble real estate economy (Vancouver comes to mind immediately). I have heard two people employ the following strategies lately to survive the bubble and come out on top. Its actually quite simple if you think about it since it follows the same principles as prudent stock investing. Unfortunately, the strategy only works if you have a home:

1. If you think you are in a bubble, two things tend to happen: (1) your home is worth a lot more than you think its worth; and (2) developers are rushing into the market and creating a huge supply of a certain type of housing- typically condos since they are easy to build (this was the U.S. about 2 years ago).
2. Sell your home. It doesn’t matter if you think you are at the top of the bubble or not. The key is that in any bubble assets are over-valued and purchasers have a distorted perception of risk (people believe “its not like the last time…”) so you will end up ahead regardless.
3. Park your profit in something safe and which can be made liquid quickly (i.e. GIC) and rent a type of housing in which supply is increasing more than demand. In Toronto that’s a 500 -650 square foot condo (obviously, the problem with this strategy is that its easier if you have no kids or they are still quite young). Supply drives down the rent which allows you to keep as much money as possible. In an ideal situation, your rent should be less than your previous mortgage payment.
4. Wait for the bubble to pop.
5. Re-enter market at lower valuations and with a large down-payment.

Results seem to be quite impressive. Anyone try this?