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A Comprehensive guide for all
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Property Guide»
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How to Avoid Real Estate Scams?
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What real estate decline?
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What the budget means for the Property Business?
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How to invest in a changing real estate market?
WHAT REAL
ESTATE DECLINE?
By Gibran Bham
A lot of hoopla has
been floating around about the "bubble" theory of real estate – and of
chickens coming home to roost – that the Pakistani real estate market is
down & OUT. That is, the theory that the real estate market is going to
burst. In my opinion, the theory has no merit.
This theory is probably based on the fact that the real estate prices shot
up 300-400% in the past five odd years, and the market has entered a period
of stagnation or correction. But has the real estate bubble burst? Is there
a bubble in the first place?
First, understand that there are three basic premises that undermine the
discussion of a real estate bubble:
There is no national real estate market
The real estate market doesn't explode or crash
The market has limited relevancy to the shrewd investor
The real estate "market" is based on local economies
The stock market is based on the national, even the world economy. The real
estate market is based on local, and, in many cases, micro-local economies.
What's happening in Karachi does not directly affect what's happening in
Gwadar.
True, certain factors such as political stability & even interest rates do
affect all the markets. There really is no broad barometer to measure the
entire housing industry in the Pakistan. Average prices, average new homes
sold, and average homes built nationally have little relevance to your
market.
And, within a particular city that is doing well, there may be certain
neighborhoods doing poorly for a variety of reasons, such as over-building
of new homes – take for example Islamabad.
So while statistics, calculations, and economic factors are relevant, so is
common sense: Take a look around and see what's really happening. Talk to
real estate agents, investors, and lenders in your area for a better picture
of what is going on.
Don't look at broad nationwide, statewide, or even city-wide statistics. Be
concerned with the average prices in the particular neighborhoods in which
you buy houses, the average time on the market, and the changes in sales
prices from last year to this year.
Real estate markets do not "crash"
We all remember February 19, 2005. The Karachi Stock Exchange lost 200% of
its value in one day--what investors call a "crash."
There have been times when real estate values have taken 60% hits in certain
cities and in pockets within cities. However, no real estate market dropped
60% in one day, one week, or even one month. In fact, the real estate
"crash" of the early-mid 1990s took several years to bottom out in most
markets.
At its core, the housing market, like the stock market, is all about supply
and demand; when more people want to buy than sell, prices go up, and
vice-versa. However, the stock market is much more whimsical than the real
estate market. People often buy into stocks at the top of the market based
on future potential, not inherent value.
True, people are buying some properties in some markets for top Rupee hoping
it will go even higher, but real estate still has inherent value because you
or someone else can live in it.
If the neighborhood in which you live goes down 10% in value, are you going
to move? Not likely, you'll just be bummed about it. The transaction cost
and headache involved in moving is not worth it for most people. Contrast
the stock market where a zillion investors can sell off in minutes by a
click on their computers.
Supply and demand also work differently in the housing market. Right now,
demand outstrips supply in some hot real estate markets like Islamabad and
Gwadar. But, people are starting to realize that even if they sell for top
dollar, they will have to pay top dollar to stay in the same market, so why
bother?
This phenomenon is causing limited supply and even HIGHER prices. In other
words, the price increases are not necessarily about "irrational" demand,
but rather limited supply. While the old expression, "Trees can't grow in
the sky" is applicable, so is the old adage, "They ain't making any more of
it."
Likewise, if your city has limited space and more influx than out, prices
are likely to stay where they are.
Finally, there's the possibility that the traditional economic theories of
bust and boom are simply flawed and no longer applicable. In other words,
just because things have been going up in the housing market for so long,
doesn't necessarily mean they will drop accordingly.
Economic trends causing the market to remain strong
Overseas Pakistanis: thousands of Overseas Pakistanis are moving back to
Pakistan every year. More demand, means higher prices.
Marriage Trends. People are getting married earlier, younger people are
buying or investing in homes together.
Easy to get a loan: spurred by the State Bank, Commercial Banks are more
willing than ever to finance your home.
The market has limited relevancy to the investor
If you buy and hold for the long term (ten or more years), you aren't likely
to lose. Real estate values generally go up in the long run, with few
exceptions. The same is probably true of the stock market in the long run,
but there's one problem: There's no guarantee any company you invest in will
be in business in fifteen years--not even PSO.
If you buy and flip properties quickly,
the market appreciation or decline is
not all that relevant to your profit.
If the local real estate market is "hot," you can sell a property quickly,
but you can't buy it as cheap. If the local real estate market is weak, you
can steal properties, but you have to account for a longer hold period when
you resell.
It is relevant to know where your market is currently going (up or down),
but don't worry too much about the "bubble" bursting; real estate markets DO
NOT collapse in 3 to 6 months.
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