Question, what if you own a permanent shelter and then buy/rent/lease another (or multiple) shelters as an investment. Would you still consider that shorting the housing market?
This would make you 'long' in the housing market, but I fail to understand why people are so eager to buy individual properties as an investment. Individual properties are incredibly risky because the price is tied to so many local factors, what if the area goes bad? What if a bad tenant destroys it or doesn't pay rent for a few months? - for those who believe investing in property is a 'sure thing', why not simply invest in real-estate investment trusts, spreading the risk to thousands of properties around the country (or world), and getting a much less volatile return which is more representative of the 'true' housing market.
The best and worst reason I can think of for why people are attracted to investing in properties is leverage. For the typical person it is the only asset class where banks will lend and allow you to leverage an order of magnitude above investment. You cannot do that in a REIT. However you are right it increases risk and also you put in a lot more work. If you can afford the risk and have time, then great. If not, there are other ways to make money, as you point out.
You can actually gear into a REIT to a similar level. Most REITs have internal gearing, so applying your own gearing, albeit at lower ratios, will produce a similar effect.
You might think you have local knowledge which allows you to purchase and charge a higher than average rent. Also you might be choosing a house that you want to live in down the track as an investment now.
You are correct though that this can carry added risk.
It comes down to competition, information, and control.
When you go for maximum diversity in big markets (like a big REIT), you're competing against a big pool of smart money. There are going to be fewer pricing errors to exploit. You don't have more information than other players, and you don't have any particular control over the management of the investment.
If instead you are an expert in one small market, competing against a smaller pool of other players, you are going to find more pricing errors to exploit. And you are going to achieve much greater control over the investment, so if you happen to think you're an above-average manager (or chooser of managers), you can improve your returns above average.
Diversity isn't everything. It can actually hurt, if it means you're investing in many things you don't understand well, vs a few things you do.
