The danger of hyperinflation in growing markets
As prices in a property market are rising, certain areas may see spikes in demand which can quickly heat up competition and lead to hyperinflation of prices. To avoid overpaying for their properties, investors should work with an experienced buyer’s agent who has access to insider market knowledge and knows when to back away from a purchase to protect the client’s long term interest.
Any area that experiences sudden heightened demand may become what is known as a ‘property hot spot’. The ensuing hype can cause prices to skyrocket even when the general property fundamentals don’t support the movements in price. When reality catches up and prices correct, the area may see steep value drops or, in the best case scenario, prolonged periods of no growth at all.
When investors see prices move quickly in a particular suburb, they get caught up in the frenzy and experience “fear of missing out”. Many will want to get in to the market, hoping to reap the rewards of short term capital growth. This influx of investors can trigger a bid up in prices. Potential buyers, seeing prices constantly moving upwards, follow the trend and up their offer every time they miss out on a property, eventually causing properties to be sold for more than their actual market worth.
As important as it is to monitor the market, and as valuable as timing your market entry correctly may be, it is sometimes even more important to know when to exit an area. A hyper inflated market can be a great investment if you get in early, however by the time people usually notice the boom, it has already run its race. Those investors buying at the top are destined to feel the negative effects when the bubble eventually does burst.
In many cases a hyper inflated market will have a neighbouring suburb with equally as good long term drivers that hasn’t experienced this price boom and as such is better placed for an investment purchase: the prices will not have exceeded market value and the long term drivers mean the capital growth outlook is positive.
“Invest with your head, not your heart”, our buyer’s agents say. Rather than getting overexcited, take time to crunch the numbers first. That way you can spot when the deal is no longer a good buy. Or alternatively, engage a buyer’s agent who works in your interest to help you avoid buying an asset that is overpriced.
At Momentum Wealth, we actively monitor the market and are always on top of which areas represent good value and which areas are getting too close to saturation. Our research department is often well ahead in identifying opportunities that are not on most investors’ radars yet. Thanks to our research, our buyer’s agents know which deals are worth fighting for and which ones to let go.
If you would like to see an example of this principle of finding great investment areas and backing away when things get overheated, read our Belmont Case Study!
A buyer’s agent is a real estate professional you hire to work in your best interest. Our Momentum Wealth buyer’s agents find the best property deals on the market suited to each client’s individual needs and long term investment goals. They rely on superior market insights from our research department to help them narrow down the best areas for purchase. Most do-it-yourself investors do not have the time, resources, expertise and experience to identify, compare and negotiate opportunities, and in a market that is becoming increasingly competitive, every advantage helps.