Is Real Estate a Good Investment? V

There are many reasons that influence the up and down of one product or service, being it equities, commodities, bus fare you pay, lawyer fee…etc. Though, there are so many reasons that could influence the pricing, the 2 most important reasons are Supply and Demand factor and Human Psychology factor.

In every aspect, Supply and Demand factor plays a very important role. It’s a simple thought. Whenever the supply is tight, you need to pay more in order to get the stuffs you need and vice versa. Through this mechanism, it creates equilibrium of the economy.

Human psychology factor is a must consideration whenever we make any investment. People tend to think rational when he is alone but when they are in a group, the reverse could happen. The logic is simple: When you are alone, you could filter out all the rubbish thoughts and think it rationally. While in a group, your personal critical and rational thought would be influence by a group thought. Human is a social animal. We need an assurance from others to validate our existence. If your thought is not within a group of same league, you will be treated as a weird person, you will be facing peer pressure. At this moment, being RIGHT IN FACT is no longer your ultimate consideration, but being RIGHT IN THE GROUP is the only consideration at this point.As shown in the graph, we notice that the house enjoyed a handsome appreciation starting the new millennium. This is more prominent in Britain and Australia. For example, Australian real estate enjoyed a double digit growth from 2001 until 2004, which recorded an appreciation of 15%, 18%, 18% and 18% for the period. What is this means? This means when you bought a house for the price of $ 100,000 from 1st January 2001, your investment will appreciate to $ 188,948 at the end of 2004. That is almost double your investment within 4 years! Is average Joe on the street enjoyed their wage increment same pace as in real estate market during that period? How about the rental of this real estate growth rate? Is the growth rate in tandem with the appreciation? If the answer is no, will you think such high growth rate can be sustain? Remember Supply and Demand factor?

It’s always a better way to seed a “picture” into the reader’s mind in order for them to understand the conceptual theories and so forth. Let me give you an example, when a new 42 inch High Definition (HD) TV launched, its price tag is $ 20,000. With some reasons, the TV’s price tag becomes higher and higher and soon the price reaches at $ 40,000 within 3 months. The underlying reasons for the appreciation could be any. It could be: The FIFA World Cup soccer season is approaching, people want to enjoy a high quality picture of those matches and rushing for the TV, the supplier is lack of stock because of the World Cup fever…etc. Sooner or later, people might find out that is it worth to “invest” $ 40,000 for those luxurious? If their mind changing a direction, they will dump their “investment” in a secondary market and at the same time, it will cause pricing pressure for the new HDTV. At this time, from the price of $ 40,000, the price could drop to $ 30,000, $ 20,000, $ 10,000 or even $ 2,000? What’s the result? Is it always an insider and intelligent investors who make fortune out of the insanity and stupidity of the average Joe on the street. From Tulip mania in 17th century to Dot-com bubble in the beginning of new millennium, history already show that human being always repeat same mistake. It’s not because human is not smart, it’s just because human weakness on “Greed and Fear”. For the next boom and bust, how do you position yourself?

Any indication for you?