Twenty years ago, we could buy an apartment in Prague for barely a third of today’s price. Apartments were so cheap at that time. Why on earth didn’t we buy a few? Today we would be rich…. This is what we often think and discuss.
We did not buy more flats because even twenty years ago they were as expensive as they are today. They were expensive given the salaries at those times and given the then normal price level (how much did butter cost twenty years ago?).
The prices of necessities constantly rise as the value of the Czech crown decreases. Therefore we can´t look at prices twenty years ago with today’s optics. The reason for the increase in prices is more and more money in the economy. This money is created by loans. Governments, businesses and citizens borrow money which causes inflation.
Prices rise at least as fast as inflation only for the essentials, such as butter. Real estate in the right locations also falls into this category of essentials. I discuss the topic of the right location in this article where I also define a bad and a high-risk location. The invested money will always be secured against inflation by real estate in the right location only, in other locations it may not fulfil this purpose.
So we could say: it doesn’t matter when I buy property, as long as it is in the right location. I will always find it expensive and I have to put up with it. So I’ll buy it right now and I won’t wait.
However, there are periods when real estate is cheaper and when it is more expensive and, of course, it pays off to „get on with it“ at the time of cheaper real estate. Real estate is cheaper in an economic recession. It is when people are extremely negative, they don´t want to spend so much money or take out mortgages, and this pushes real estate prices below their natural value. If we go with the crowd, we won’t want to buy either. However, if we are intelligent, we will buy as much real estate as possible because we´ll know that better times will come again. During the recession, the government and the central bank will pump so much money into the economy that inflation will rise with absolute certainty as soon as the economy starts up and the price of our real estate will increase substantially too.
However, people can also be exceedingly positive by analogy, they can overestimate real estate and buy whatever they can lay their hands on and at any price. At that time, it is intelligent to hold back because such euphoria leads only to sobering up, even the sky has its limit and a correction comes from time to time.
I want to close off this article with the following idea. In the long-term, real estate prices have been rising, as a result we might not care when we buy. We can leave the timing to those who like to speculate. However, it is necessary to add that we should be sure of two things when buying. First, that the property is in the right location. Second, that we´ll be able to keep the property (meaning repay) in the long term, even if our private finances start shrinking, which is what usually happens in economic recession. At that time it is quite certain that we would sell the property only at a lower price than we bought it and therefore lose a considerable amount of money.