It’s Called “The Market”

Kim du Toit
May 7, 2008
12:00 PM CDT

I note with interest how the BritPress is in a panic over the continuing softening of the housing market in the UK:

Homes worth more than £1 million have been the biggest casualties of the country’s crumbling property market, estate agents warned today.

Since September, the average price of Britain’s most expensive homes has fallen between 10 and 15 per cent, according to Hamptons. By comparison, average homes, which typically sell for £200,000, have dropped over the same period, but only by about three per cent. The firm said a typical home which sold for £960,000 in the autumn would now fetch as little as £820,000, its average sales price.

Of course, being Brits, they’re not too concerned, as it’s mostly houses belonging to “the rich” which are being affected.

People everywhere (and not just Brits) need to be aware that property, while a mostly good long-term investment, is not immune from occasional market hiccups. If you buy property expecting its value to appreciate every year, you’d better be in a stable market—one which shows consistent, not spectacular growth—and not in a market which is highly susceptible to upswings and downturns.

It helps if you have a good appreciation for what I call the “absolute value” of a piece of property. I recall reading about a couple who had bought a modest condo in central Boston for $850,000 in 1985 (during a boom), saw it grow to about $950,000 the next year—and plummet to $270,000 after the stock market crash of 1987.

Oops.

The problem, of course, was that the luckless couple were convinced by the realtor that a one-bedroom one-bath unit of 1,500sq ft was a good investment at $850K, whereas only three years before it had sold for about $180K. They had no idea of the absolute value of the property, which, at the time they bought it, was about $250K.

Caveat emptor. The higher the climb, the greater the potential drop.

People always seem to forget that, lured by dollar signs and by the fact that some investments do grow quickly—but only a very few. Then, when they lose everything, they want “assistance” or some such nonsense. And it is nonsense. If you want to invest, you need to know the risks. And if you don’t know or understand the risks, or don’t take the time to learn them, then you’re vulnerable, not to mention too stupid to be investing.

I have to admit: I don’t mind offering a helping hand in times of misfortune. But I draw the line at subsidizing stupidity.