Friday, April 1, 2011

Houses and Understanding

At the end of a bull cycle in any asset, there is usually a huge run-up in the price of that asset.

I talked a few days ago of the reasons why gold and silver are not yet in a bubble and are not even near the huge (parabolic and manic) run-up in prices near the end of a bull run (mania phase).

But houses are a different story.

As you can see by the above graph, house prices in New Zealand may very well be at the ‘Return to Normal’ phase. If so prices may be ready for a large fall.

In the mid naughties (2004-2007), many Mum and Dad investors believed the hype in the ‘media attention’ stage and threw their hard earned (and future earnings through borrowings) into property. The media and property analysts said prices will always go up. This was a sure bet for your retirement security.

An article in “The Economist” magazine stated the New Zealand house prices are still 20% overvalued. That’s around $90,000 on the median house. They are also becoming unaffordable to the extreme. With inflation rising, incomes stagnant and jobs disappearing, prices are set for a fall.

In New Zealand the housing market is stuck. Sellers and investors, who do not want to lose badly, are holding on to their quoted selling prices. However, fewer people are buying. They are hoping that prices will drop. Stale mate.

The term ‘never invest in something you don’t understand’ comes to mind. Just jumping onto an investment to make money without looking at fundamentals is highly risky. Look at the long term trends and what is happening around that asset class. The internet can provide a huge source of ‘contrary’ information that can help you.

Understanding what you are investing in is key. Don’t be drawn in by spruikers and their captivating talk. Do your homework and never rush in.

See you on Monday!

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