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Real Estate the false god of appreciation

The temptation has always been to believe that trend persists forever.   This is simply not the case.   Baby boomers have experienced two trends over their lifetimes, declining interest rates since the early 1990s (when they began saving) and ever-rising real estate prices (more or less the same timeframe).   

This 30-trend has become a mantra for the investment class.  However, as the world is now discovering interest rates can rise and have risen, and house prices can fall, and have fallen.  

The drop in the US has been small, with two hiccups, 2008 and the subprime crisis a decade and a half earlier.  The limits of housing as an investment can be seen in several European countries and in Asia.   In Spain, Portugal and Italy, houses can be bought for virtually nothing.   The trend so far in these countries has been limited to the countryside, but in Japan, it is now in Tokyo too house prices have declined dramatically in the city.   We are talking about buying a house in Tokyo's central district for a few thousand dollars -- in 1987 such properties were worth millions.

The big unknown is China -- It is estimated that nearly 25% of the country's GDP is construction-related.   Today, millions of homes are vacant, first because Chinese investors see these as investments and not assets to be used, but more importantly, because the volume of empty apartments is so large as to dwarf the entire stock from the rest of the planet.   Estimates are that there are around 500 million empty apartments in China.

Friday, the Chinese government announced a US$40 billion program to encourage home ownership by reducing down payments for home loans.   The fifty largest construction conglomerates have all filed for bankruptcy, the total owed is in the Trillions (Evergrand and Country Garden accounted for at least US$ 500 billion probably much more).

My point is that in ALL instances of falling real estate prices the same conditions occurred, demographic decline has become evident and is an unstoppable force.  The average age of a Japanese person is 55 years old.   Not only don't 49-year-olds have no more children, they don't buy additional real estate.   

That is why the trend is breaking, real estate in certain conditions can still be an average asset to hold, but it is no longer the sure thing it was 20 years ago.


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