Does Real Estate Always Appreciate In Value?

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 between the goal keeper, defenders, midfielder and attackers. I believe all are important, if you want to win well. But I don’t think it is wise to ask your goalkeeper to join the attack because you are desperate to score.

Can real estate prices go down? Many are not convinced that 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. I was discussing with a doctor friend a few days back and he mentioned the challenges they have in deploying latest medical procedures in Nigeria. Using non-invasive surgery as an example, the equipment and consumables are expensive and the procedures are not covered by most HMO plans (targeting the masses). The high net worth individuals that have plans that cover such procedure often opt to have it done abroad. That 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 be tempted to respond to the need and build facilities but have no one to patronise you because they cannot afford it.

It is the same thing with real estate. The need for 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 are 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.

There are a lot of properties in the market with fewer buyers that can pay for it, so prices naturally come down if the sellers really want to sell. If you have a ‘For Sale’ sign on your property that is more than six months old, the buyer will sense that you are having a challenge selling it and will bid low even if he has the money.

This is not the first time property prices are falling. It happened during the financial meltdown of 2007 – 2009. A lot of properties had weather beaten ‘For Sale’ signs as buyers were few. If you go back in time, it has happened several times. Fall in property prices does not attract news headlines like stock market crashes, hence many are not aware unless they are close to the market. Ignorance of this fact has made many to sink their money into real estate as a sure banker of value, without proper planning. Real estate appreciates over time, so does the stock market etc.

Every investment has a risk factor. The money market is risk-free in that your return is guaranteed. There is a risk involved – that the person promising you the return will still be in business when it is time to redeem it. Default is not common; hence this class of investment is considered virtually risk-free.

Everything that goes up comes down sometime. Rather than run away from risk, we are better off learning to manage it. Driving to work is risky, but we have learned to manage and live with that risk. One method that has worked for me is to drive safe, put on my seat belt, manage my speed and give way to others even when I have the right of way. When a tricycle or commercial bus driver says thank you, you know that you have really given way. It is the same with investing, flying, boating, you name it. When you get the hang of it, you can go where you want to go. Education is key. Rather than run with other’s perceptions, know the subject yourself through study, continuous learning and interacting with those already doing it rather than listen to the nay sayers.

Real estate investing is exciting, especially if you learn how to invest with other people’s money and make 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.


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