004 Buying into a Bubble?!

Past performance is not a guarantee of future results...

This boilerplate disclaimer is standard wording for just about any financial investment, but when it comes to buying a home, as sensible as this pithy phrase may be, it is often disregarded.  Home buyers tend to be driven by the idea that because prices went up last year, they must go up next year.  Their belief in future price rises is often driven by watching past performance of the market, and buying is motivated by a belief in anticipated future price appreciation.  Same goes for speculators who, seeing a steady upward trajectory in house prices, assume that this is also a guarantee of future increases in value.

To be sure, there are some fundamental factors that drive price increases, but without being specific about what caused last year’s price rises, how can the buyer be so sure that that prices will go up next year also?  Or the year after, or the year after that?  or, indeed, that prices won’t go down?