Does real estate values always appreciate?

Most people believe that real estate investment is a no-brainer. You can make money with your eyes closed. Anything called real estate will always appreciate in value. All you need to do is simply buy and forget, and you are in business. I often come across folks who argue that real estate investment is the safest form of investing for high returns. Their underlying assumption is that real estate always appreciates in value.

I am not into comparison, as real estate is an important component of your financial portfolio, so does the money market and portfolio assets like stocks, businesses, etc., whatever combination works best for you. I don’t compare the goalkeeper, defenders, midfielder, and attackers. I believe all are important if you want to win well. I don’t think it is wise to ask your goalkeeper to join the attack because you are desperate to score.

Where are the buyers?

Can real estate prices go down? Many are not convinced that the prices of real estate can crash, especially in Lagos. They believe that since Lagos has a small land mass with a growing population, demand will always outstrip supply hence prices will always go up. While the premise is true, actual cash flow is not factored into that equation. Effective demand is when you are ready to pay for an item. If you don’t have the money, or you have the money but are not ready to put it on real estate, you are a window shopper.

If you are not a serious buyer, your demand does not count. Consequently, actual cash flow determines demand. That is simple economics. I was discussing with a doctor friend a few days back and he mentioned the challenges in deploying the latest medical procedures in Nigeria. Using noninvasive surgery as an example, the equipment and consumables are expensive and the procedures are not covered by most HMO plans (which target the masses).

High net-worth individuals with plans that cover such procedures often opt to have it done abroad. The masses that desperately need it cannot afford it. So you have a situation where there is a great need but the demand is very low. If you are a rookie businessman, you will set up the facilities and wait for the rush through the door but it does not materialize because your target market cannot afford it.

It is the same thing with real estate. The need for the property is great, but the number that can afford to pay for one in this cash crunch coupled with our cash-and-carry way of doing things is getting fewer. A chunk of buyers is now on the run from EFCC while some are trying to dump their property before EFCC gets to them. EFCC aside, the cash crunch coupled with the fall in naira has had an adverse effect on the real estate sector resulting in falling prices.

It is now a buyer’s market, a case of he who has the gold makes the rules. When you get offers that are way below your asking price, you can either walk away or take the best offer. When you really need the cash, you negotiate from a position of weakness. A ruthless buyer can smell your desperation and take you to the cleaners.

Markets go through cycles.

This is not the first time property prices are falling. It also happened during the financial meltdown of 2007 – 2009. A lot of properties had weather-beaten ‘For Sale’ signs as buyers were long in coming. It happened before then and will happen again – anytime there is a cash crunch resulting in much fewer buyers than properties up for sale.

Fall in property prices do not attract newspaper headlines or feature in the national network news the way stock market crashes or forex rate fluctuations do, hence many are not aware unless they follow the market. Ignorance of this fact has made any sink their money into real estate without due diligence, certain that they will sell for more than they bought. Real estate does appreciate over time, but so do other investments.

Every investment involves risk. The higher the risk, the greater the reward. The risk is not in the investment itself, but in someone who does not know what he is doing dabbling into it. What makes driving very risky is when someone who does not know how to drive or is drunk takes to the wheel.

The less you know about an investment, the more it is risky for you when you dabble into it. You are the risk. You can minimize that risk by taking time to study and know what you are doing, starting small and gaining experience before you raise the stakes. You can buy property in an area heading nowhere and it lies dormant for years. Ignorance is much more expensive than education. You waste time and resources.

Overall, everything that goes up comes down sometime. That is what markets do. It is the direction of cash flow that determines the movement of prices, not public opinion. If you don’t understand the nature of the market you are entering, you can enter at the wrong time and exit at the wrong time.

Real estate investing is exciting, especially if you learn how to invest other people’s money and make a profit. That skill will not jump on you. You have to learn it, often making mistakes along the way. A risk-free world does not exist. Real estate prices go up and down. It does not swing often like the stock market and generally trends up. Don’t assume that you will always find someone to pay the price you are asking for.

If you are selling from a position of weakness (you really need the money) in a buyer’s market, the buyer can smell it and take you to the cleaners. The folks that told you that real estate always goes up will not be there to bail you out.