Is real estate an investment or a gamble?
The current real estate gamble might be seen as buy now or play the odds as to whether real estate will become more affordable next year. The Melbourne Cup and the Lottoland Lottery this week inspired this blog as gambling and investing are Australian passions.
This playing the odds is a constant in real estate. Many people consider the odds when buying and selling and they are the primary elements of gambling. Others argue real estate is an investment and a commodity. Buying a home is subject to wild fluctuations that are impossible to predict so it appears there are both elements present.
Investing is when money is allocated or committed to an asset, like real estate or stocks, with the expectation of generating an income or profit. The anticipation of a return either income or capital gain is the core premise of investing. Risk and return are expectations where low risk generally means lower returns and higher risk is usually accompanied by higher returns.
The line between home ownership and buying property for return is arguably where the lines got blurry. Once upon a time we needed shelter as a refuge from the elements and to be part of the community. We now see property as a multifaceted commodity that can be utilised in a myriad of ways. As incomes are limited property investment is seen as an extra cash stream.
The major difference between investing and gambling is that when you gamble you own nothing, but when you invest, you begin to own an asset – if you are borrowing. This difference suggests that the more you invest or gamble the more experience you have potentially allowing for more careful and calculated risks. For those that are novices or dreamers or that don’t do their due diligence the more, the investment resembles a gamble.
Gambling can be defined as staking something on a possibility. Also known as betting or wagering, people risk money on an event that has an uncertain outcome and heavily involves chance. In fact, when people gamble, they actively don’t bet on events that they perceive won’t deliver.
No one considered Covid 19 a real estate investing opportunity. Indeed, economists predicted during Covid that the real estate market could crash resulting in up to 40% falls. Many people accepted that because of the environment of inactivity and uncertainty. We were all left amazed that not only did the real estate market not crash there was a huge boom following Covid 19. What were the chances that a pandemic that gripped the entire world would be a catalyst for pent-up demand? Economists and even the Reserve Bank almost resembled bookies that informed punters of their chances.
Currently, buyers are complaining that the Reserve Bank stated interest rates were not going to rise till 2024 and many heeded that advice. Some of those buyers are faced with mortgage repayments they did not prepare for. However, many seasoned investors knew this prediction was problematic as the world was raising their rates and 2024 seemed very unrealistic.
The bottom line
Many people have waited for a better time to buy or sell and have either lost or had a huge windfall. Moreover, there is always an element of gambling in investing because you don’t have all the variables and you never will. However, there are ways to make better decisions. Right now, some buyers are taking a chance on the market falling by a predicted 20% by 2023. It would be more sensible to look at the evidence and not gamble on that happening.