Are we in a housing market bubble that is likely to burst?

[Adam Butt]

I have been following real estate for several years now and actively engage with real estate investors globally, both professional institutions and general portfolio managers. The common theme amongst those who buy and hold real estate is that the global real estate market - the U.K. in particular- has topped out and we are likely to see a market correction in the near future. Is this the case and if so, what are the key indicators and likely timeframe?

[Jonathan Twombly]

Originally posted by @Andrew Johnson:

YES! YES! EVERYBODY PANIC!

What's amazing in that the percentage of people panicking (or predicting a crash) doesn't match up with the amount of people selling/liquidating/going to cash/etc. If the crash predictors are so sure they should have sold 80%+ of their real estate.

Why wouldn't you sell today if you're so sure a similarly performing asset won't be available on 12 months at a 30% discount from today's price? The reality is that they don't know when any correction or crash will come. They don't know how far the pullback will go. They don't know what interest rates and capital availability will be post-correction/crash.

Bottom line, do what your analysis (and maybe gut) tell you to do. Everyone is colored by their past experiences. Half of the investors on BP have never experienced interest rates above 6%, not been in a housing recovery, etc.

I'm selling everything, Andrew. 

Of course, I cannot predict when, exactly, the market will correct.  But that is why I am selling.  The opportunity to sell into a feeding frenzy exists now, and I feel confident that the time window of opportunity for that is closing.  

Is it closing fast?  That, I don't know.  But there are some signs that we are in the final innings - softening rents in many major markets where the big money focuses; pipeline of new construction drying up because of land prices/lending in major markets (Tishman-Speyer, one of the biggest developers in the world, laid off its ENTIRE development staff earlier this year.  I know, because one of my friends works there.  They did it because it no longer makes sense for them to develop anything in this cycle.); the Chinese government finally acting on its threat to turn off the spigot of Yuan moving abroad for real estate deals.  And, on top of all of this, this cycle has been going on for a VERY long time now.  Volume of multifamily sales is dropping because there is so little product that has not already been transacted in this cycle.  All of these things add up to it being the beginning of the end, in my mind.

When the big money gets scared of what is happening in the big cities, the economics of other markets won't matter much, in my opinion. The big money will pull back from big cities, making deals there slightly more attractive to the slightly less big money that was chased to smaller markets in this cycle. That money prefers to be in the big markets, and when the opportunity comes, they will go back there. The tide will go out from the smaller markets when it happens. The economics on the ground in smaller markets will be irrelevant when the big banks get skittish. That will present a great opportunity for those of us who know what is going on there.

This cycle has been my first go round as an owner.  (I watched the last one closely from the sidelines as a real estate litigation lawyer.)  One of the obstacles I have had to raising money from investors is that I have never been through a full cycle before.  So, selling now is also strategic for me.  It is an opportunity to create a track record in amber that gets my clients very strong returns, so that I can go out and raise more money next time, without this objection coming up.

Taking everything together, I look at it this way.  It is far more likely that the selling opportunity is going to get WORSE in the next 12-24 months than that it is going to get BETTER.  Is anyone out there willing to go on record as saying that cap rates will be lower than they are now in 24 months time?

Now, let me be clear about one thing.  I am NOT telling other people they should sell.  If you have cash-flowing properties that are doing well, and you intended all along to hold them indefinitely, you should absolutely keep holding.  That's the beauty of cash flowing MFRE - it will continue to cash flow for you no matter what the market is doing in terms of asset prices.

However, if you have dogs in your portfolio, I would say the window for dumping them on someone greedy and unrealistic is closing.