How banks across the world created the biggest “Real estate bubble” in history ? How to benefit from it?
how you can profit massively from knowing the simple truth.
How a handful of dedicated Bitcoin Holders can bring down the entire Fiat System.
Every middle class family dreams of owning homes and collecting rents from them, not one but as many as possible and that in their mind is their ideal retirement.
Now lets look at real estate from the prism of an Investment.
If you look at typical house in Bangalore which costs about 10 Million INR (1 Crore) , the rest comes to 30K INR per month, assuming one month of annual vacancy and maintenance costs we are looking income of 300k INR after taxes this should be at 220k INR
using DCF model for annual cash-flow of 220k INR with an interest of 8% or so the value of this property should no exceed 3 Million INR.
(This is assuming this property will give out rents for ever, after 20 years rents come down significantly ( counting in inflation) and after 40 years ,a typical house needs massive renovations ).
so why are people valuing this house at 10 Million INR when the real value of the house if 3 million , a 70% mark-up
This is the $100 Trillion dollar question.
“Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn’t.” Mark Twain
The story of how modern economies work is so complicated yet at its core so simple, its a story that reminds us that “Absolute power corrupts absolutely”
Lets start with few simple ideas like interest and inflation.
Inflation is essentially the rise of value of an asset or good over time, as you remember the good old times, when prices of breakfast costed you 10–100 times cheaper depending on the country you live in.
Most of modern day inflation is a direct result of money printed by governments and the money supply created by banks.
Understanding this is at the crux of understanding how bubbles are created in Real estate.
Now lets do the simple math, imagine this
Money is a zero sum game ( in theory , the good sound money is ), lets say there are only two banks in a country, you bank with Bank A and i bank with other bank.
So if your bank gave you 6% interest for last 20 years, my bank should have failed and i should have lost all money, since good money should be scarce, remember. However, for the last 30–40 years, there have been almost zero cases of banks failing and customers losing deposits yet most banks have doled out 6–10% interest rate on a regular basis.
So if no bank is failing and every bank is giving deposits continuously where is the extra money coming from?
The RABBIT HOLE
The real-estate asset class, i.e total value of all real-estate ( residential and commerical) has been growing at 30% annually ( 10% price appreciation plus 20% growth in property numbers) for last 30 years.
This beats simple math: how can real estate grow at 30% when money supply only grows at 2–3%.
Where is the extra much money coming from ?
how come 95% of real estate investments never fail ?
how come only scheduled ( central bank approved ) dole out real-estate loans not your average money lenders on street ?
This again is the $100 Trillion dollar question
The answer is simple, every time a bank goes to the verge of bankruptcy govt steps in and bails them out — Every time.
because in a democracy, the panic of customers losing deposits creates multiple shock waves ( and further shocks spreading to other banks ) which not only questions the faith of people in the banks but also decreases the prospects of re-election.
Fractional Reserve banking
Banks typically only keep 1–5% of deposits with themselves, the rest is lent out so if all of us went to a bank and demanded cash, no bank in the world can serve that request,for this reason , a single bank failure can spread to other bank and quickly the entire system can crash ( in a sound money system this is not possible though )
Politicians have become very cautious about preventing bank crashes, they have doled out extra-ordinary powers to central banks.
Now as result of vast powers given to central bankers, every time a central bank detects a fragile bank, they step in bail out with newly printed money and let another big bank buy it out.
This is created what is called as a moral hazard and every banker in the world is exploiting this to the fullest extent possible.
Follow the money !
The greatest crimes in history are not committed by psychopaths but by those who are incentivized to make money through them.
Bankers make money when the lend the money out, not when they take deposits, so the more they lend out , the more they make.
That is why you see every bank constantly bombard you with ads to take credits cards ,home loans and so on.
So banks have a massive incentive to hand over as many loans as possible. The main check on this reck-less behaviour used to be banks losing their own money and customers money when the loans turned sour.
In a sound money system ( like gold standard ) central banks / govts couldn’t simply bail-out bad-banks by printing new money, they typically have to raise taxes to bail-out bank banks and this is very hard politically as no tax-payers would be willing to bail-out bad bankers.
However all this changed with Fiat money system ( where the value of money is simply controlled by central banks ), since govts / central banks can simply print new money ( and create inflation as result ) to bail out bad banks , they ALWAYS choose this easier path, always .
Bankers know that the big brother ( central banks ) is there to bail-them out should things go bad. This implicit guarantee has created a reck-less loan bonanza to every un-credit worthy individual they come across.
Inflation and more inflation
when banks grant loans to you, it creates inflation as the money supply is increased coz of fractional reserve lending ( this is a slightly difficult concept to get head around )
As banks give out massive loans for real-estate , prices of houses keep going up, when your house price goes up, you feel good about it and go back to your banker to grant you more loans so that you can get another home loan and this creates further inflation and so on.
A responsible bank would put very high credit checks on borrowers as they are the ones to pay for losses should the borrowers go bankrupt, however in the last 30 years bankers have realized that they don’t need to worry about downside as they will always get bailed out.
This is exactly what happened in sub-prime crisis that happened in 2008, bankers gave loans to super risky borrowers, they made billions in giving these loans out in the form of various fees and when the loans started turning sour, they looked for govt bailout.
Even though the treasury refused from bailing out Lehman, they were forced to bail-out other banks as the credit system started freezing.
The real value of your house !
As you have seen already , a typical house in any metro city in world is over-valued by at-least 70% . This only makes sense if you consider REAL ESTATE as Store of value, However REAL estate is not a true STORE of VALUE as supply of real estate is not fixed ( like say GOLD ) , Builders are constantly building new houses in every city and village. So the new supply of real estate is virtually unlimited.
why is that Real estate values across the world never falling even though supply of real estate constantly increasing year-on-year at atleast 20% ?
The answer is simple ,the money supply is increasing at atleast 25%.
Now , do you think govts across the world don’t know that the banks are giving loans at super inflated rates ? No they very well do.
Govts Love inflation too !
Govts love inflation lot more than banks actually.
Lets say you purchase the house for $100,000. in 10 years the value of house is say $200,000, when you sell this property , you have a tax claim on $100,000 capital gains you made ( $200k- $100K) of atleast $30K.
so when assets value increase govts end up making money, for this reason govts actually like general inflation.
The unfortunate reality is, you haven’t made any real return on selling your property as the prices of every thing else like Food , power , travel, a property in a different locality etc have all risen in value.
You are paying taxes on inflated property which you brought through your hard earned money, this is another sneaky way govts make money yet only one in 1000 people understand this.
Here’s another interesting thing, Given the fact that gold prices have risen much faster than value of average real estate in the last 30 years, have you ever wondered why you cannot takeout a loan to purchase Gold ?
why no bank every gives out loans to buy Gold ?
From here on, it gets political , Govts don’t like you hoarding gold as it makes it very very difficult / impossible for govts to tax you when you sell gold as tax-evasion is super easy with gold holdings.
So govt’s don’t let banks to give loans for buying gold ( and will not bail them out in future etc )
Even though the supply of real estate grows by 20% the prices of the real-estate have grown by 10% or so , which means the real money supply is growing in the range of 30% atleast. If banks financed gold purchase whose supply at the best is 2%, the prices of gold would shoot by 100% an year easily.
If price of gold shot up by 100% every year, every other asset would collapse ( like real estate and stocks ) along with all the banks that finance real estate assets.
Given the fact that govts cant tax gold effectively compared to Stocks or real-estate , Govt’s DO NOT LIKE THIS .
Gold is the real enemy of modern Governments
Money is the lifeblood of modern world, we all toil our entire lives earning it. we earn and save it hoping it holds value for long term.
However with fiat currency, this value keeps going down.
For this reason govts hate citizens to keep buying gold, coz gold is a scarce asset and if we all end up in investing in gold , the prices would shoot up to sky which govts dont like much.
With gold as money , govts cant print unlimited amounts of currency which really restricts the amount of control they can have over citizens.
how Govts kill gold ?
Govts have a simply mechanism for keep gold price under check. they know that if price of gold keeps going up 100% a year, no other investment stands a chance, they have developed a set of sneaky ways to keep the price under check.
The most simple and most powerful is asset seizure, if a private individual holds more than 100 kilos of gold, govts simply seize it and sell it for their fiat currency.
So the rich know this hard truth, so they never hoard gold beyond a limit of say 100 kilos, this is why you never see any rich person owning more than 100 kilos or so ever.
The Rise and Rise of Bitcoin !
Bitcoin the cryptocurrency that has been going up like crazy in the last few years, the value of something which nobody gets.
You cant eat bitcoin, you cant watch movies with it, you can hold it, yet the value of this keeps going up.
Bitcoin comes with set-of immutable properties enforced by code, one such property is fixed/ very low supply similar to gold.
For this reason, bitcoin is often called as Digital Gold.
Unlike gold however, Bitcoin can be sent anyone in the world in a click and doesnt need any third parties like banks, by the owner who holds a 60 letter private key , which can be written on a piece of paper and stored safely which no one can even think of !
Unlike gold, bitcoin cross border transfers do not raise any bells or whistles too (and in moment of crisis can be transferred to a confidant in a click).
Apart from this, Bitcoin is nearly impossible to extract in an asset seizure in-case of a government raid.
So even if a person holds 100 million dollars worth of Bitcoin, govts have no way of stealing it and selling it for their fiat currency.
The rich people across the world have finally realized this awesome property of Bitcoin and are getting into Bitcoin in droves which is the real reason for insane price growth in Bitcoin.
How can a handful of dedicated Bitcoiners bring down the Fiat system ?
The essential quality of Good money is nothing but holding value for long time, for this to happen it needs to scarce.
Gold has been the good money for 5000 years because its one of those assets which is scarce ( unlike say Real estate or Stocks ),growing at 1% per year.
The inflation in Bitcoin is about 1% and gets cut down half by 2024.
Fiat money -m1 supply is now growing across the world at 3–5% in developed countries and 5–40% in developing countries.
Now ,lets say there 1% of folks in the world who have become hard-core Bitcoiners and vow to put their savings only in Bitcoin and never sell Bitcoin. Generally speaking these people are employed in high-tech, high-paying jobs
The salaries of people world-wide are growing at say 5–10% and lets assure their savings are also growing at this rate.
Now, the savings of bitcoiners are growing at 5–10% however supply is only growing at 1% , as a result of this , the price is bound to grow.
As the price of Bitcoin, keeps growing up, more and more people get interested and start learning about Bitcoin
As more and more people start learning this real truth about Bitcoin, more and more people become Bitcoin investors.
As more and more people start investing in Bitcoin the price of Bitcoin keeps growing more and more.
and This cycle repeats over and over.
For this to continue unbroken two things to need to happen
- the price trend needs to be positive
- there cannot be any other bitcoin-like asset which is more scarce with more liquidity
In a world , where money is scare (i.e gold standard) and in a world where banks don’t get non-stop bailouts , Bitcoin is actually not very valuable, but we don’t live in that world and that is why Bitcoin is insanely valuable and more and more people are realizing it and benefiting from it !
There is about $100 trillion of assets that are looking for an great store-of-value asset like Bitcoin , so thats where Bitcoin is heading.