Real Estate has long since been a frustration for me. Growing up, I heard the same thing that everyone else did… You should own your home because if you lose everything, at least you’ll have your home. Paying a mortgage is better than paying rent because it’s pretty much like paying yourself instead of paying someone else. Real estate is a safe investment because everyone needs a place to live.
As I developed my investment skillset, my perspective on real estate began to shift. Not only did I lack any emotional attachment to owning my own home, Now I also had a much clearer understanding for how real estate behaved as an asset within its markets. What I’ve also realized is the unfortunate reality that while your average real estate professional is aware of these dynamics, they don’t entirely understand them, and will only mention them when it helps to close a sale. If a market is overpriced, you’re more likely to hear your realtor tell you that you’ll make your money back eventually, than to wait for prices to come down.
While we’re going to dive into what the real issues around real estate are and how I think they could be solved, I think it’s important to mention that my perspective on real estate has been shaped by growing up in a city which became one of the world’s hottest real estate markets. While I have the funds necessary to own my own home, I do not. It’s frustrating because I’d like to, but my understanding of the dynamics at work prevent me from making that decision. While I’m confident in my patience, paying rent is still far from ideal.
There are several issues with real estate, and I think they all start to come undone quite nicely when we start asking why real estate is so expensive. Consider this, if we didn’t have the option to borrow hundreds of thousands of dollars that would take us decades to pay off, how much would a home cost? What if we could only spend what we had saved up?
The problem with a mortgage is that it inflates purchasing power. If you saved 100K, you can now go spend 500k on a house. Saved 200k, go spend a million. The lenders know how hard it was for you to save that first 20% as well, which is why they’ll give you between 20 and 30 years to pay it off the last 80%. Yes you’ll have a place to live, you’ll spend most of your working life paying it off. Am I the only one who thinks this sounds like financial slavery? If we all simply said no, I won’t take on a debt which will take 20+ years to pay off, we’ve set the terms on what we’re willing to pay. They can only sell at the price at which we’re willing to pay. Unfortunately we haven’t figured that out yet and we’re too used to the upper threshold of what we can afford to pay.
So what is a home worth? Not price but value. Price is what you pay, value is what you get. Well traditionally, there’s 2 parts. First you buy the land, then you build a house on it. We often find land to be expensive, but why? If I were to buy a business that produced widgets, it would have value because I could take those widgets to market and sell them. If I bought a farm, it would have value because I could take the crops to market and sell them. If I owned a plot of land, which did nothing, would it have value? Well it would be worth whatever someone was willing to pay me for it right? If the land carries no inherent value, why would someone pay me for it?
In effect, what we’re really paying for when we buy land is a reduced travel time between home and work. With a limited supply of land within the city center and a seemingly unlimited demand of people who want to live there, the markets set the current price.
The second piece of this puzzle is the cost of building an actual house. Right now, an average house takes about 6 months to because it’s treated like an individual project, and done primarily with manual labour and hand tools. Sounds like the timeline and process for a Rolls Royce.
So this is where I leave you hanging. We’re keen on city centers now, but will that always be the case? And what happens when we can start building houses like we currently build cars? Well that’s not going to happen… is it? The real question is why it hasn’t happened already. Here’s my final thought: When oil prices were low, nobody cared about electric cars. When oil prices were high, electric vehicles became a more realistic alternative. When oil prices peaked, Tesla walked into a market waiting with open arms. High oil prices delivered Tesla.
What will high real estate prices deliver?