Before we even get started we thought we should just say - we don’t know the answer to this. This blog should not be used as a substitute for competent legal, financial and/or other advice from a licensed professional.
That out of the way, let's get started.
We’ve done a lot of reading and there are many different opinions on the topic - each thought equally as valid. No one can know the future.
The questions then are as follows: should you be investing in a property right now? Or should you be marshaling your resources to jump in at the next downturn?
The first thing we have to acknowledge is that house prices are cyclical and follow a boom and bust pattern (at least historically). As demand increases, prices rise with them. At the same time demand increases which drives new development. An increase in available property relieves the pressure of demand which causes the house prices to fall again.
Various geographic, political, and economic issues also affect housing prices.
When people think of the next market crash though, they are often referring to a repeat of the financial crisis in 2008 where the global economy collapsed, largely due to ludicrous lending by banks.
In response to this, house prices plummeted. We think it’s worth pointing out that after the 2008 financial crisis, new regulations were quickly put in place to stop that from recurring, the Dodd Frank Act alone introduced hundreds of new regulations. So, the likelihood of a crash like the 2008 one is reduced - though there are many arguments that refute the effectiveness of these regulations, of course.
Let’s dig a bit deeper into both sides of the argument.
We’ll start with the most obvious positive of all. When a market collapse, the value gets wiped out. What this means in terms of property is that prices fall - they fall dramatically, and they fall fast.
In 2008, “home prices in Phoenix, Las Vegas and San Francisco all fell more than 30% on a year-over-year basis. Miami, Los Angeles and San Diego recorded year-over-year declines of 29%, 28% and 27%, respectively.” - money.cnn.com
The first rule of investing is always to buy low sell high. So, buying at the bottom of a market downturn is the absolute perfect time to purchase.
With house prices being lower it inevitably means that your cash is going to go further. Your $200k might get you 6 properties instead of 4. Plus, because you spent less on each, your mortgages are lower, but your rents can stay higher allowing you to more easily create positive cashflow investments.
On top of this, as the market recovers to post-crash levels you can sell the property and gain impressive capital gains which you can invest in further property. Expanding your portfolio. In this case, more really is more.
Today’s market is hot. After a few years of bullish economic growth, property has made a lot of people a lot of money, and there are a lot of people (yourself and myself included) who are trying to get in on this opportunity.
The strength of the market makes it seem like a sure-fire win. However, because there are so many people trying to make their success in property right now the market is very competitive. It’s a challenge to find great deals that are going to make real money.
After a market collapse, there is more property on the market and fewer investors in the bull pin.
What this means is that for those who are ready, there is simply more opportunity to make profitable deals.
All of these adds up to bigger profits than if you bought an equivalent property at today’s current market value. You will need to invest less to get back more. At least in theory.
However, the lure of big profits isn’t necessarily to say that you can’t get profits from today’s market. And there are plenty of arguments that suggest waiting is going to be detrimental in the long run to your investment portfolio.
It could be years until the next market downturn - or we could naively and optimistically hope for steady economic growth forever, in which case it may never happen.
If you wait all that time, you are missing out on a potentially long period where you could be getting your money to work for you. And instead of steadily getting more cash and asset-rich in preparation for the next market crash, you have just been sitting on money, waiting.
Just because the market it as an all-time high (in many places) doesn’t mean there aren’t deals out there to be found. A number of things can affect a property's value, from local politics to natural disasters and even the seller's own requirements. These deals will be harder to secure and you’ll have to outcompete others with the same idea - but if the alternative is to just sit around on your hands waiting for a market collapse, well...
You are considering property investing, and you have cash that you want to start growing. Well, sitting around waiting is hard when you know you could be making that cash work for you right now.
Maybe sticking it all in property isn’t the right move for you now - maybe you’d be better off investing in medium-risk stocks with a predicted 8% year on year return which will have more liquidity than property investment. But getting your cash to work for you instead of working for your cash is the only way to get to that next financial step.
The property market is tougher right now. This means if you can succeed now, then imagine the success you’ll achieve when the next recession opens up all your investment opportunities! Experience is important and definitely makes a difference.
Plus, "if you’re sitting on the sidelines waiting for the market to tank, you won’t be tuned in to the players who are making deals. In fact, you won’t hear of deals at all. It’s not a matter of deciding to jump in when you feel the timing is right; you have to be playing all along just like everyone else is." - Forbes.com
Both strategies have their advantages - but equally, both have their weaknesses. The longer you wait the less time your money will be working for you. You could miss opportunities in the long run, and these missed opportunities could add up to a small fortune.
However, if you jump in, all guns ablaze and ready to tear the housing industry apart with your brilliant investment strategies only to find that you are stopped in your tracks by overpriced housing and limited opportunity, this could lead your investments, if not outright failing, certainly underachieving.
In addition, if the next market downturn does happen you could be caught in a phase of illiquidity without any cash at hand to take advantage of the weaker market.
The main problem that makes this such a hard question to answer is that nobody knows when to expect a market crash, and when it does happen, how do you tell if it’s hit the bottom?
We have had some good years since 2008 economically and house prices reflect this. Many places, LA, San Fran, New York, to name a few of the obvious ones, are incredibly expensive and appear to have overshot their real value with exuberant buyers driving the prices up. This is one indication that a housing bubble may be ready to pop. But that is speculation based on nothing more than historical patterns.
“Increasing prices does not necessarily cause a housing market crash, as over time housing prices have always risen just like the stock market.” - Mann Publications
There is a perfectly good argument for the possibility that there won’t be a market crash any time soon in this article by Forbes.
“Timing the market is a very tough thing to do”, and if you haven’t got some skin in the game with your finger on the pulse (sorry for the mixed metaphors), then it may be nigh on impossible to both time it right, and get access to the deals which are going to make the big bucks.
Depending on your strategy it is pretty vital to very carefully consider the location. Some cities and suburbs in the US return on average much higher returns than others whilst other places are over-priced and potentially riskier.
To this end, we've done the research and found out for you 5 of the best cities to be looking at investing in right now.
It doesn’t have to come down to do I wait? Or don’t I?
Instead, you should think about investment strategies that will work whether or not house prices fall or rise. But keep some cash aside for the possibility of a housing crash (do both essentially).
Instead of banking on property prices dropping, bank on creating positive cash flow property investments that - as long as the historic trend of property prices rising over time continues, then you are guaranteed to make money if you give your investments long enough.
Many people found themselves losing everything but the shirt from their backs after the last recession. Others weathered the storm and came out the other side stronger for it.
As we stated at the very beginning of this article, we can’t claim to know the answer to this question. All we can do is try and give you as many sides to the argument as possible.
Here is one final thought that we found that seemed interesting:
“How should you move forward if you are sitting on cash to invest? The strategy that yields the highest historical returns is to just invest it all in the market today. For someone who is holding cash because they are fearful about a correction, that is about the scariest answer they can hear. It is also important to note that while that strategy may have the highest return potential, it also has high risk.
"A more balanced strategy would be to dollar-cost average (invest a set amount over a specific number of periods) into the market. This works because if there is a market crash, you are able to invest at least some dollars at lower prices.” - Green Spring Advisors
Thanks for reading and we hope you found this blog interesting! However, do note that as we stated, in the beginning, this article we are not licensed financial or legal professionals and as such nothing on this website should be understood to be financial or legal advice. If you are in need of financial or legal assistance please seek the help of a competent professional.
Please feel free to share your thoughts and comments on the topic in the comments section below.