When trying to position yourself in the most opportune way during a financial crisis, it is wise to try to understand which markets still have more correction to go and which ones which have overdone it to the downside. Picking bottoms and tops before hand is a fruitless task however it is my opinion that certain fundamental data can be used as a good guide to estimate what is fair value, and then what all investors love to hear undervalued (If purchasing of course)
Fair value vs market price
There are two schools of thought about the relation between the market price and fair value in any kind of market, but especially with regard to tradable assets such as property.
The efficient market hypothesis asserts that, in a well organized, reasonably transparent market, the market price is generally equal to or close to the fair value, as investors react quickly to incorporate new information about relative scarcity, utility, or potential returns in their offers.
Behavioural finance asserts that the market price often diverges from fair value because of various, common cognitive biases among buyers or sellers. However, even proponents of behavioral finance generally acknowledge that behavioral anomalies that may cause such a divergence often do so in ways that are unpredictable, chaotic, or otherwise difficult to capture in a sustainably profitable trading strategy, especially when accounting for transaction costs.
It is the void between efficient market hypothesis and the cognitive biases of behavioural finance that one must be constantly investigating when searching for lucrative property investments.
To keep matters as simple as possible we look at a number of factors to help us determine the winners.
Current cost to build per square meter vs cost to acquire per square meter
Then this is compared to historical figures to give a very clear idea of the value of a potential property.
We employ many other proprietary algorithms to our investment analysis and would love to share them all with you, however this is my first post and and I would like to save some gems for a later date.
Alternatively give me a call or drop me an email and I will be happy to discuss further.
