The Future of Real Estate – Part 1 (The Problem)

 

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?

 

Fuck the Rules.

Think about the last time you were driving.  How fast were you going?  Was it at or below the posted speed limit?  If you were like me, you were going with the flow of traffic which is usually about 20% over.  Despite a blatant disregard for the law, millions of commuters get to and from work every day without any intervention from law enforcement.  Why?

Natural order supersedes civil law.  People are driven to pursue efficiency and it’s usually achieved through a group effort.  Collectively, we decided that the speed limit was too low and that we could safely operate our vehicles beyond that range.  Since we’ve done it collectively, and have demonstrated its success, law enforcement has conceded this victory and have effectively decided to focus their efforts elsewhere.  I find it curious that the laws have not changed to reflect this, especially considering that cars have become far more agile and much safer since current speed limits were introduced.  Perhaps they’ve assumed that if they increased the limit to what we actually drove, people would simply drive 20% above that and it would be chaos.  Maybe.  Maybe we find that natural balance between speed and risk on our own.

Another perspective, well known by the tinfoil hats, suggests that this is done on purpose as it gives a government direct control over its population anytime it’s deemed to be necessary.  If a cop wanted to pull you over, he could start with the fact that you were probably speeding.  If you were driving the limit while everyone else was speeding, well now he’ll pull you over for acting suspicious.  A well-known lawyer wrote a book about the idea that the average American professional broke several federal laws each day.  This wasn’t because of a lack of morals, ethics, or competency, but because the rules, laws, and regulations were so numerous, broad or vague, that it was nearly impossible to do your job without breaking some set of rules.

While I think government and law enforcement largely recognize the system and understand how to exploit it, I don’t think it was purpose-built nor do I think most governments work with the goal of exploiting their people. If you think about why rules are put in place, it’s usually to retain power or to promote efficiency.  When a king decided that only his bloodline would rule, this helped to protect his power.  When slave owners decided that slaves didn’t have rights, this was to protect their power.  When men decided that women shouldn’t be allowed to vote, it was to protect their power.  While it still does happen, I suspect that it’s becoming increasingly difficult to introduce laws for the purpose of retaining power.  If I’m not mistaken, those types of laws rely on a lack of access to information and the internet seems to have undermined that quite nicely.

What about speeding though?  That law doesn’t do much in the way of consolidating power in any direction does it?  Of course not… I don’t think.  That’s a law designed to promote efficiency.  The idea is that we want to maintain a healthy flow of traffic, with as few accidents and injuries as possible.  Not difficult to understand and most would agree that it’ a sensible solution – so why does almost everyone break that limit?  Well as it happens, we’re capable of finding that equilibrium on our own.  Once upon a time, when cars were heavier and couldn’t stop as fast, back when they weren’t loaded up with airbags, back when there weren’t seatbelts, those speed limits may have represented that equilibrium – but we’ve since evolved.

We actually have our own criteria for setting a speed limit.  We want to get from point A to point B in the least amount of time possible, without causing an accident, and without being pulled over by law enforcement.  As it turns out, we’ve identified that this new equilibrium is usually about 20% over the posted limit, and it’s why so many of us get frustrated when we’re being obstructed with someone who is only going the limit or just below.

So rules are good as long as they’re promoting efficiency then right?  No murdering is a good rule because it decreases our population’s mortality rate, time spent thinking about being murdered, and resources spent not getting murdered.  Net result is more people with more time to think about things besides being murdered – makes sense.  Consider this though, if murder wasn’t against the law, would you?  For those that have, was the law an effective deterrent?  For those who it did deter, would they have done it had they known they wouldn’t get caught?  What I’m getting at is that the law isn’t driving our sense of right and wrong, that’s something you find on the inside.

So we have these internal drivers that help us pursue efficiency and internal drivers that help us understand right from wrong.  I think they overlap and when I’ve refined this idea, it’ll certainly be its own blog post.  Until then, follow me on the assumption that our concept of right and wrong is based on our understanding of efficiency.  It’s why speeding doesn’t feel unethical unless you’re creating a dangerous situation for others.

So back to murder.  It’s a concept which is almost universally understood to be unethical or immoral. Why is that?  Well there’s an emotional perspective, an intellectual perspective, and a societal perspective that most of you will already be familiar with, but here’s my perspective from the side of efficiency.  I don’t think murder is inherently right or wrong.  If you were given a chance to assassinate Hitler prior to the holocaust, would you?  Someone who did would likely be considered a hero.  Someone who refused may even be considered to be immoral by the masses.  But what if you were only given an opportunity to kill him prior to him doing any harm?  What if you were given an opportunity to murder Hitler as an infant? Quite the ethical conundrum.

From the perspective of efficiency though, I don’t think it’s that simple.  The most efficient approach would likely be some level of early stage intervention.  I know I’m probably one of the few to suggest this, but imagine if Hitler’s passion, intelligence, and charisma were better channeled?  Not only would we have avoided a second world war, Hitler was probably capable of making a very positive contribution given the right circumstances.  All that said, in a universe of infinite possibilities, there are bound to be scenarios where murder is the most efficient option.  Where I’m sitting on this currently, is that while murder can be ethical or the most efficient course of action, it rarely ever is.  How many of us have the wisdom necessary to know which lives are worth keeping and which aren’t. How many of us would you think are entirely incapable of making a positive impact on the world when surrounded by the right people?  I think the answer is barely any and I think those are probably the biggest reasons why this exists as a social rule, regardless of law.

Finally, the fun part.  I was trying to come up with a law that was already in place, which embodied efficiency.  I couldn’t.  Then the lightbulb went off.  I suspect efficiency is like an exponential curve, meaning that you can always become more efficient, but in most cases you can never become completely efficient.  Effectively, there’s *always* room for improvement.  The purpose of a rule, is to dictate behaviour.  That rule may dictate how to behave in a highly efficient manner today, but what happens when our behaviour evolves beyond that construct?

The more rules we take away, the more we’re allowed to be ourselves.  The more we’re allowed to be ourselves, the better we can understand our maximum utility and the value of others.  The better we understand each other and ourselves, the better we are at working together towards a common goal.  The better we work together towards a common goal, the more efficient we all become.

Best laws ever ‘put’ in place? Allowing people to govern themselves.  Allowing slaves to be people.  Allowing women to be equal.  When you remove laws and regulations, allowing us to be what we should be, amazing things happen.