The Biggest Problem With Speculative Property Investment

There is a two-pronged approach to buying residential property. While one is a safe, time-tested bet, the other is what you may refer to as pure speculation and a risk-laden process even at the best of times.

Misconception about “what a good location is” fuels speculative investment

The speculative one is based on a common misconception about what a good property location is. Let me assert for the umpteenth time that even I consider location as a pivotal factor of property purchase but the question, “what is a good property location?” is one that I look to answer only in my own way. Let me now come back to the speculative means of investing in real estate. Every once in a while the economy of a nation shifts and we get a new fad or fashion in.

Lack of diverse factors of growth

Let us take the mining sector, for example. When the mining boom appeared, all the locations where it occurred saw a congruent rise in its real estate. The speculators jumped into the fray, believing that it was an eternal trend and would always continue. Now that the mining boom is over, areas that were solely reliant on it are reeling under economic pressure.

Because there weren’t diverse factors of growth, it took its toll on the economy in general and real estate in particular. Investors are failing to cover for even their mortgages in these locations and we are talking about those properties which were expected to help them retire as millionaires.

The property lesson we learned

So what did we learn with what happened to the mining boom? It is that the location of a booming economic sector leads to ferocious real estate speculation and when it dies, the economy–and the real estate–of that area dies with it–because there is no other industry to support it. So this speculative model is too risky for my comfort.

If you are planning to buy cheap in these areas and sell high, you might just make it if you sell your property real quick, but if you hold your property long in anticipation of higher capital growth, the boom (the mining boom for example) may fizzle out and the price of your property might plateau or hit the worst trough. In my opinion, that’s simply poor speculation strategy!

And the safe property bet now….

As for the safe property investment bet, my advice is to take a closer look at the owner-occupier activity in locations with reasonable developable land. Why owner-occupiers? Because unlike investors who are prone to speculation, owner-occupiers never run after a fad and look instead for sound economic fundamentals while making their property investment. So my definition of a good property location is one which makes the owner-occupiers interested. I will talk at length about them in one of my future articles.