What is real estate speculation?

Real estate speculation is the act of investing in real estate, such as houses, buildings, commercial premises, or land, in the hope of obtaining above-average returns on other investments from its sale or rental at a future time.

The profit obtained from real estate speculation is not due to the investments made by the owner in his property or to the use that is made of it, but to an increase in the prices of urban land.

How does real estate speculation work?

Several factors affect the price of a land or property, such as its location and the infrastructure available. In addition, there is the demographic growth of the region itself, which changes the relationship between supply and demand. This means that the more people interested in living there, the higher the prices will be, as the amount of land and real estate has limited growth.

The owner of a property, in general, has no means to change these conditions alone. However, when speculating on real estate, this owner is betting on appreciation, either through public investments in infrastructure or through the growth of the region promoted by other investors.

As with any risk bet, the property price increase expected by the owner may not occur, leading to losses. This does not necessarily mean that the value of the property has decreased: it is enough that it has had a lower appreciation than other types of investments.

Factors that have an impact on property prices are:

Infrastructure improvements

If the government brings improvements to a previously devalued region, expanding the public transport network or providing basic sanitation, for example, the place becomes more attractive, benefiting the owners there.

Not all of these beneficial owners are speculators, as many lived in the region precisely because they could not buy something in a more valuable place. The speculator is the investor, the one who bought the property or the land who is already thinking of reselling it when prices were higher.

Land shortage

The real estate speculator can also profit by betting on scarcity. This is the case, for example, of those who keep the land empty and unused for a long period in the cities.

When most of the neighboring land has already been occupied, those that remain will be overvalued. In addition to the shortage, this owner will also have benefited from the increase in services, structures and movement of people promoted by the growth in the surrounding area.

Expansion of the city

The price of real estate can also increase due to the expansion of the urban area. In general, the most distant lands with the least infrastructure are those with the lowest price.

The lands that used to be on the outskirts of the city, from the moment this city grows, see their price automatically increase due to a comparative question: now there are even more distant lands, which will occupy the position of the cheapest, raising the price those that are relatively closer to the center, despite the fact that there are no concrete changes in their environment.

Consequences of real estate speculation

Real estate speculation often causes problems for big cities. The main one is the existence of inactive or underutilized land and properties in regions with good infrastructure, awaiting recovery.

With appreciation, the owners of these properties end up making private gains from investments that are public, which can be considered socially unfair.

Furthermore, these areas, houses and apartments have no social use. The result is that cities end up having to expand, leading poorer populations to live farther and farther away, while there are unused properties in more central regions.

The expansion of cities forces the government to invest in bringing infrastructure to new, increasingly distant neighborhoods, which ends up fueling real estate speculation.

Real estate speculation is not a crime  , as it is not possible to prevent someone from investing in property for profit. However, public authorities often take measures to curb this phenomenon. An example is the application of higher taxes for those who own land and properties without social use.

Other urban problems

The concept of property speculation has been widely used in housing debates in large cities. Sometimes, real estate speculation appears as a synonym for price increases or as the sole cause of such increase. However, its meaning, as explained above, is restricted, and real estate speculation is often confused with other urban problems.

An example is  verticalization  , which is the movement in which developers and builders acquire large areas, entire blocks, for example, for the construction of buildings. This demand for land can lead to an increase in prices in the target regions of construction companies and can even benefit speculators who bought properties there waiting for this movement to occur. However, verticalization is not the same as real estate speculation.

The  gentrification  is changing the profile of a certain area of the city, which ultimately attracts local regulars and customers with greater purchasing power. The increase in the neighborhood drives the poor population that used to live there to remote regions of the periphery. Gentrification is related to real estate speculation, because those who invested in a degraded area will benefit if the region begins to attract wealthy residents. However, the two terms are not synonymous.

Speculation is also different from the  housing bubble  . The housing bubble is a continual rise in prices that often feeds on itself: optimistic about the appreciation of real estate, investors may be willing to pay higher and higher values ​​for them, betting that they will make a profit.

However, prices can rise so much that consumers will no longer be able to afford the properties, as the income of the population has not grown at the same rate. When this happens, many of these properties can be stuck in the market and the excess supply can cause a sharp drop in prices: the “burst of the bubble”. Therefore, real estate speculation can benefit from the bubble at first, but suffer losses if it breaks.