One of the factors you briefly mentioned, price momentum, also tends to contribute to supply scarcity, driving prices up further, which then becomes like a price flywheel.
It works like this. Say I own an investment property that's bringing in rental income in excess of my costs of carrying the mortgage and all other expenses. In effect, I have an infinite capability of keeping that asset.
The market starts heating up, and people want to buy the property from me. Let's hypothesize an unsolicited buyer named Jack offers me a slightkly higher-than-market price in the hope of enticing me to sell.
I look at the market and see that it's drastically out of balance, with less than 1 month's supply, and that prices are projected to increase by 10% over the coming year.
Should I sell now? If I accept Jack's offer, I'd be giving up 10% of expected value in a year, on top of the positive cashflow. My response? Umm, not just "no" but "heck, no!"
Jack then offers me 10% above market value. This essentially brings to fruition the expected 10% value increase right now, making it the new basis for an even greater value to be expected in a year's time. I thus decline.
Jack gets anxious, and offers me 15% above market. All this does is confirm that prices in a year's time will be even higher. I again decline.
This continues until one of several things happens:
- Jack's offers becomes so insanely high that I'd be a fool to not accept. This might be 40% or more above current value.
- Jack's absolutely highest possible offer isn't enough to sway me, and he goes off to try and get someone else to sell, likely with similar results.
Either way, prices are pushed much higher than any rational person would expect, faster than anyone would expect.
This is not unlike what happened with my first house, years ago. I had to pay more than double what the seller had paid just 2 years earlier. In turn, I was able to sell 5 years later it for about double what I paid for it. In short, the house's value increased 4-fold in 7 years, about a 22% annual increase.
