Why are properties different to ipads?

A couple of weeks ago a friend of mine showed me his new ipad. It was an impressive gadget and after checking out their eyewatering sales estimates I couldn´t help but take my hat off to Steve Jobs for anticipating demand ahead of the curve for yet another blockbuster device.
 
As happened with the ipod and the iphone, other companies are now rushing to launch rival devices, which will soon drive down prices and widen their appeal way beyond gadget enthusiasts like my friend above.
 
In theory that´s how a market works - price goes down and demand goes up. If Macys put an advert in the newspaper saying they´ll have 50% discounts on all stock the following weekend, there´ll be hoardes of people queuing outside the door on Saturday morning.  If my favourite restaurant suddenly doubles the price of everything on its menu, I´ll start looking for somewhere else to unwind on a Friday evening.

Real estate isn´t at all like that though. It and many other financial assets move to a different rhythm. If property prices are increasing, more people will want to buy them, not less.  There are few things that can cause people to rush to their check books as much as seeing a friend getting rich and wanting a piece of the action for themselves.

Over the past 3 years we´ve seen how the flipside is equally true. Unlike a department store, most people will not rush to buy a technology stock that just fell 30% overnight, and most people don´t rush to buy a property when the market is falling either.

Breaking away from the herd

If you take a step back and look at what´s been happening to the property market, you might figure that lots of people would take advantage of these booms and panics by selling when prices were high and demand frothy and buying when prices were low and demand flat.

Some people do exactly that, but not enough. The force of the herd mentality which encourages euphoria during price rises and panic during falls can be overwhelming. Warren Buffett has plenty of folksy quotes to illustrate how he made his fortune by doing what he felt was rational, which was usually the opposite of what most people were actually doing at the time.

Property shouldn´t really be treated differently to other products though. We should buy property when prices are low. If people want to buy it from us when prices are higher, then we should sell it to them. Then you repeat the cycle and buy more when the prices fall again. 

Ironically enough, it´s the people who can treat property the same way they would treat an ipod who stand the best chance of making money out of it. 

A huge transfer of wealth

In the late 1990s, enormous wealth was being transferred from venerable pension funds to Silicon Valley kids in their early twenties setting up overvalued dotcoms. I was a 20 something in San Francisco at the time and even at that tender age I couldn´t believe what was happening in front of my eyes.

Similarly in the late 2000s, an ever bigger amount of wealth is being transferred from those who overpaid massively for real estate to those who are willing to underpay massively for real estate. Funnily enough, a lot of the money lost was from the same venerable pension funds repeating their mistakes from a decade earlier!

The last two years have pretty decent for Torcana as we´ve been sourcing a lot of high quality distressed property. Our job was to put it in front of cash buyers who are keen to take it off the hands of those who paid top dollar for them when prices were irrationally high. 

We target areas that are going to recover fast when the tide turns. They are places within a 15 minute commute to the city centre, where professionals buy and rent, where they send their kids to great nearby schools and in neighbourhoods that are safe and clean with lots of parks and shopping areas.

Makes sense to buy these kinds of properties right?

Regards

Colin