Th Greater Fool Theory in Real Estate Investment

We have seen that the property prices have been moving upward quite significantly over the pass few years. This movement is not supported by the increase in the household income level. Therefore, without the support of this fundamental, how is it possible that the property prices keep on maintaining its upward trend?

One of the possible reason for this is due to the 'Greater Fool Theory'. have you ever heard of the greater fool theory? and how does this theory relates to property investment?

Here's how it works, assuming that I am a fool and I buy a property at a high price. Supposedly, the property price for my property is RM500,000. I am willing to pay such a high price because of the thinking that I will be able to sell it at a higher price. Then, another fool, a greater fool, come and buy the property from me at a price of RM600,000 with the same mind set that the property can be sold at an even higher price thus will be able to make a profit as well. Therefore, it is okay for him to pay the high price. Then another person, an even greater fool, comes in and buy the property at an even higher price and the process continues on over and over again.

Every single participant in the process has the mindset of buying high and hope to sell higher. However, this process will eventually comes to an end and the one who will be getting burn is the last person who holds the property as he will  not be able to sell the property without having to incur a substantial loss.

Property prices can't keep on going upward. Eventually the bubble will burst and this was what we saw during the subprime mortgage crisis. Therefore be caution of the high property prices that you can see nowadays as this may not be supported by the real demand.