Is Real Estate able to continue booming?

Over the past couple of years, the most popular investment discussions always centers on real estate. Here in Alberta, Real Estate has been everyone's best investment. Instead of talking about the weather, everyone is talking about how much money they have made in their homes. The numbers are staggering – 40% growth last year, 50% growth the year before and over the past 5 years, property values have doubled and in some cases tripled. With numbers like these, it's no wonder why we call this the real estate boom.

It's times like these that remind me of a book called Markets Mobs and Mayhem: A Modern Look at the Madness of Crowds by Robert Menschel. Menschel sites a number of examples of booms and busts in history fueled by what he calls mob thinking.

The tech boom

Most recently, back in the late nineties, the NASDAQ was flying high and dot com millionaires were a dime a dozen. The economy appeared to be riding an endless high where stock prices kept rising. In hindsight, we saw that the tech boom was just another example of a well-documented social phenomenon called group hysteria.

The stock markets are full of examples of bubbles and busts. Today with more access to information, more exposure to media and the desire to be rich, we are more at risk than ever before for bubble mania. Keeping a level head has never been harder.

Stock markets will forever move through cycles of ups and downs fueled by either greed or fear. At the top of these cycles, the market moves through a period once termed ‘Irrational Exuberance' which is a time when people believe prices will continue to rise and rise and if you don't get in, you will be left behind in the dust. Does this sound like some of the thoughts that have passed through your head on real estate?

The real estate boom

During the period of irrational exuberance, new money continues to come pouring in from new places and new sources driving prices to new highs. There is no attention to traditional valuation methods and common sense is thrown out the window.

In the real estate world, most revenue investments do not cashflow, which is a signal that investors are buying with emotion purely on speculation. Menschel calls this speculation ‘stupid money'. Stupid money is money that is made without hard work. The pursuit of stupid money is what will eventually lead to failure because common sense and logic do not exist. Today, you do not have to do anything at all to make money on real estate.

Bubbles show their own unique characteristics but they all have a common pattern. In other words, every bubble market is different and every bubble market is exactly alike. Momentum builds, people start to buy and the frenzy sets in. The stampede continues until the top is reached and panic sets in and everyone starts running for the door.

My two cents.

I don't have a crystal ball and I don't know when this real estate boom is going to end and quite frankly, I hope it continues. What I do recognize is how similar the discussions are to the never-ending booms and busts of the stock markets. Real Estate is not immune to these same cycles and they too will hit periods of irrational exuberance when stupid money rules the roost. Rest assured that the day of reckoning will come and the four most expensive words will be ‘This Time It's Different.”

I believe the survivors are the ones who are able to see through the hysteria and the emotions to find a place of common sense and comfort. I believe those who are over leveraged and continue to speculate in an already frothy market will be the ones at the greatest financial risk.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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