Is it worth investing in real estate even before the downturn?

Are we waiting for a price decline in the real estate market? Are we in a "bubble"? Should we buy investment properties or shares in them even when we expect a downturn? Many our investors are looking for answers to these questions in our country as well. And since this topic directly concerns us, we bring an explanation of the most common ones.

Is buying an investment property now a good way to protect savings from depreciation?

Yeah. Buying investment properties makes sense even before a downturn if you plan to hold them long enough.

Many expect prices to fall. But no one knows exactly when it will happen. It is also true that the development of house prices is cyclical. This means that a fall is followed by a rise, and a rise is followed by a fall again. Eventually, however, the price will each time rise higher than where it left off in the previous period of growth.

So in case of a decline, just wait for the next phase of growth.

At the same time, if the property is generating cashflow, you will make a profit even when the overall value of the property is falling. However, you won't feel this unless you sell. It's different if the owner can't afford to wait to sell and has to sell during an unfavorable period.

Why buy property even before the downturn? Isn't it better to wait until prices are better?

For several reasons. One is the aforementioned cashflow generated during ownership. The other is the fact that you cannot predict the exact time of reversal. That is, when the decline will occur and, conversely, when the growth will occur.

So a person who decides to wait can wait a year or two and the prices keep going up. In the meantime, he misses out on the profit he could have made and cuts into his savings inflation, now above average.

Several media have been talking about a real estate bubble for months. Isn't it only a matter of time before prices fall?

Yes, there will probably be a decline. The historical data suggests so. But the key question is when. And we can all only assume the answer.

It is also shown from historical data that the time spent in the market is more important than the time one enters the market ("Time in the market beats timing the market.").

So with today's inflation, is it worth buying property despite high prices?

It is not certain whether a bubble has actually been created in the real estate market. Many different circumstances have contributed to the rise in prices, ranging from the price of materials, increased inflation and the still unsatisfied demand for housing. More on this below. The price level directly reflects changes in supply and demand; after a sharp rise, for example, there may be a correction, but we cannot speak with certainty about a bubble.

But yes, we believe it pays to invest in real estate even in times when a downturn is expected. If an investor can afford to wait it out without being forced to sell their share or property.

That is why we definitely recommend investing only the amount that you can do without even in case of a crisis, i.e., in folk-speak, "if something goes wrong, you won't be short of money". 🙂

We also strongly advise against "leveraged" shopping at such times. For example, a mortgage at this time also means increased risk. Your income may fall while your mortgage payment remains the same, often rising. This can put you in a situation where you are unable to make the repayments and are therefore forced to sell on unfavourable terms when the property is worth less than you bought it for.

However, if you can afford to wait out this period, it is again historically proven that the price will rise again. This data is also available, for example, on the NBS website, where you can find a chart of house price trends (above).

What is causing this price rise and imbalance in supply and demand? Could the rising population curve be to blame for such a high shortage of housing supply?

There are several reasons for the rise in property prices. One is the fact that it takes time to build a property and therefore when demand increases it is not immediately possible to increase supply. Another may be speculators who have bought and are waiting to sell at maximum possible prices. Also the aforementioned inflation and low interest rates, hence cheap mortgages.

Higher inflation rates will cause people to look for ways to protect their finances from its impact. Many will turn to real estate as a way to protect themselves from the loss caused by inflation.

This effect will be further enhanced by cheap mortgages, as even for a "non-investor" it seems easy to get a property, whether for housing or with investment intent. And rising demand thus pushes the price up.

Another reason may be that mortgage prices have started to rise and people are therefore "rushing" to take out a mortgage and buy "while there is still time", i.e. before interest rates rise even higher. Here, Slovaks often compare themselves with, for example Czechs and Americans. That is, countries where interest rates are already significantly higher than here.

This effect is often caused by the so-called "fear of missing out" (from the English "fear of missing out")when a person is motivated by the fear of missing an opportunity.

As another factor, it is certainly worth mentioning that real estate investment is becoming more and more familiar and accessible to the "ordinary" person, so many more of us can buy an investment stake. This again increases the demand and therefore, secondarily, the price.

So how to behave at this time?

Every investment carries a certain amount of risk. An experienced investor will consider the current state of the market, the economy, and most importantly, his or her financial situation before making a decision. Those of us who are looking for long-term appreciation, or at least income protection, can find it in real estate today.

Conversely, people on the margins of a difficult economic situation should focus primarily on building up a sufficient financial reserve in case of complications. It is still the case that one should only invest an amount whose loss or temporary unavailability will not significantly jeopardise one's economic situation.