# Why don't property bulls welcome a correction?



## room305 (8 Jul 2006)

This has puzzled me for quite some time now. If you genuinely believe in the fundamentals of a certain asset, then surely a market correction represents a buying opportunity?

For example, I believe strongly in the fundamentals of gold and some other commodities. Occasionally a speculative bubble will emerge in such commodities, the price will shoot up beyond a fair price reflecting fundamentals. After a period, the bubble collapses and the price drops. As is the nature of markets, the price correction tends to be too severe and it falls below the fair value for the commodity. This presents a fantastic opportunity to purchase said commodity at a discount to its fair price.

Why then do property bulls, who maintain that property is not overvalued, not welcome a correction? Although a 50% drop in current market price means a drop in the worth of their existing property portfolios it also presents them with a chance to snap up some undervalued property. When market prices return to a fair reflection of their worth, based on all those fundamentals we keep hearing about (sound economy, immigration, future appreciation etc.), they'll be coming out well ahead.

Instead, the response is positively hostile. Much talk of "it'll never happen here" or "prices will continue to climb etc.". What I haven't heard anyone say is: "well, I think houses are fairly priced based on sound fundamentals, if there is any kind of a correction I will consider it a huge buying opportunity."

Just thought it was curious. Perhaps even the property bulls don't believe their own hype?


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## Howitzer (8 Jul 2006)

Illiquid asset with high transaction costs.


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## bearishbull (8 Jul 2006)

their finance for existing properties may exceed value and raising more finance will be very difficult if not impossible. Also if prices fall renting may be problematic.Cash flow may be a problem if rents fall and debt must still be financed.


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## miju (8 Jul 2006)

suppose you could consider me a bear room305 and i'm planning on buying AFTER the freefall in prices start and then begins to level out , so go figure LOL


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## room305 (9 Jul 2006)

bearishbull said:
			
		

> their finance for existing properties may exceed value and raising more finance will be very difficult if not impossible. Also if prices fall renting may be problematic.Cash flow may be a problem if rents fall and debt must still be financed.


 
I always thought that rents would rise in a crash? As the general public see no value in property and a large number of people start renting.

In the UK, during the 80's crash, many large houses were subdivided for rental purposes.


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## room305 (9 Jul 2006)

miju said:
			
		

> suppose you could consider me a bear room305 and i'm planning on buying AFTER the freefall in prices start and then begins to level out , so go figure LOL


 
 

How will you call the bottom though? It could be many years away.


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## miju (9 Jul 2006)

room305 said:
			
		

> How will you call the bottom though? It could be many years away.



well i know where i want to live , so if i keep an eye on properties in that area once they stop falling and start to rise slightly i'll buy , i dont mind waiting for properties to rise a little first as i'm still saving a truck load compared to the current greedy / crazy prices


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## Eurofan (9 Jul 2006)

The problem is it's as difficult to time the bottom of the market as it is the top. Sentiment drives the market as much as economic reality (look at todays highs).

Since the curve is far from linear a 'slight rise' in the market could easily be a temporary in a curve that could continue downwards for many years yet.

If/when the crash occurs you can be sure there will be many false dawns when all and sundry declare the bottom has been hit and it's ok to get back on board. As prices slowly continue to drift downwards sentiment becomes ingrained that you can't believe the bottom has been hit.


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## ubiquitous (10 Jul 2006)

History has shown that banks drastically tighten their lending policies in downturns. If you are borrowing to finance your purchase, you might find you cannot afford a property today that you could have afforded yesterday, even if its price has fallen in the meantime.


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