A 10-min read that will blow your mind
When did you last feel like a mortgage slave?
You get up, get to work, and get paid only to lose a huge chunk of your paycheck to your Mortgage.
If you said yes, welcome to the party, 80% of the middle class feels this way. Real estate is increasingly unaffordable and the only way to get on this ladder is to take on massive debt early so you can end your career with a house in your pocket.
The funny thing is house prices are going up everywhere, in the US, in the UK, in India, in Metros, in Suburbs, in Towns, and in Villages even though new houses are being built constantly.
So, the million dollar question is why?
Now let’s step back a bit and Let’s go back to basics.
Let’s imagine a small fictitious country called ‘ the Tinytia’.
In Tinytia, as the name suggests the country is tiny so there are only 100 families and 100 homes.
Now Govt prints $100 and gives $1 to each family ( sort of like monopoly money )
Now the families will spend this money and also earn money through their services and since everyone needs a roof, they decide to buy these homes as well.
Let’s say each family spends $0.5 on their homes and spends the rest on the economy ( food, transportation etc )
So the price of each home in this tiny country is $0.5 ( sounds so cheap, lol)
For House prices to go up in an economy, there are 3 main ways ( there are a few other factors but we will ignore them for sake of this discussion)
Residents decide to spend more on housing ( by cutting spending on others ) or houses are being destroyed ( natural or man-made causes ) or more dollars enter the economy somehow.
People spending more on housing is impractical over the long term. It’s safe to assume houses are not being destroyed on an epic scale every year ( like 10% of the entire housing market), so the more feasible option is more dollars are entering the economy through money printing by govt.
Now, What happens when 10% more dollars are printed ( by the govt ), prices go up — prices of food, cars, gas and also houses.
The flip side is Unless more dollars are released into the market, prices don’t go up magically over a long period -that’s just the basic law of supply and demand. So the unfortunate reality is even though house prices go up most of it is simply due to ‘money printing’ by your govt.
The funny thing about real estate investing is this: everyone feels like a winner ( unlike the stock market where many lose ) if you hold on long enough i.e hence everyone invests in real estate without thinking much.
Think about it, prices of houses and land all around you keep going up if you check back 10 years 20 years or 30 years.
You can buy an absolute wreck of a property and if you can wait for 20 years i bet you would get your money back
Since when it comes to real estate investing, everyone feels like a winner, most of the world’s wealth is concentrated in ‘Real estate’ ( almost 70% of it ).
The issues is: Real estate is illiquid, immovable, and tightly controlled by the whims and fancies of politicians
What about the Chinese?
It is well known that the Chinese are investing big in the Housing markets in US, UK, Canada and Australia and are blamed for the prices going up.
The reality is it’s technically not possible for the Chinese to push prices of the entire real estate market, you see if there are fixed supply of dollars, even if the Chinese invest trillions of dollars in real estate, they first need to buy dollars and hence prices of houses can’t go up in dollars. ( the value of the dollar goes up relative to the Chinese Yuan if the supply of the dollar is constant).
Again the only real explanation for the housing crisis is ‘Govt printing more dollars’.
Now you don’t have to break your head on this, you can simply check the federal reserve M1 supply. As you can see they are printing constantly.
So what’s the Big Problem here?
The problem is when Govt prints more money, prices go up aka inflation.
well, technically you are not better off over the long term as the prices of everything is going up as well so you are barely breaking even.
The unfortunate reality is over the long term ( 20–30 year time frame), Real estate prices will not beat inflation as Investing in real estate comes with stamp duties, property taxes etc
The superpower of compounding
you might be thinking, hey so what if Govt prints 10–15% new currency every year, Big deal!
The issue is this printing goes non-stop every year like clockwork, some years they print less, and some years lot more.
At 12% annual growth in money supply means doubling every 5 years.
In 30 years , total currency will be 2 * 2 * 2 *2 *2 *2 = 64 times
If you look around the world, there are many countries where milk and meat have gone up 64 times in the last 30 years, but in those same countries, I bet the average house wouldn’t have gone up by 64 times.
In 30 years, most houses become unlivable and need major repair works a lot of times, cities start developing in different directions and your average home will rarely keep up with REAL inflation.
you are better off investing in a long-term store-of-value kind of investment like Gold per se.
Gold is actually great, gold has a long history of holding value ( 1000s of years ) its scarce, indestructible, portable, and it doesn’t weather ( Roman coins still look shiny after a simple wash)
Gold can only be produced at an annual rate of 1–2% annually compared to 10–15% money printing being done by govts.
So simply holding Gold for the long term technically should increase its price by 12–13% per year ( which is an incredible return over a 20–30 year time period).
Unfortunately, gold has one serious flaw that forbids the rich and upper middle class from investing in Gold and is resulting in lacklustre price growth in Gold.
The word is Confiscation
Govts across the world confiscate Gold whenever they feel like the economy is not doing well and their currency is under threat. Gold is physical so hoarding a lot of it is impractical if govt goons decide to get hold of it.
The US did in 1933, The UK in 1947, Poland in 1919, and Australia in 1959.
Practically every country on earth seized its citizen’s gold for one reason or another.
The middle class and the upper middle class ( the Rich escape taxes and have access to exclusive deals anyway ) need a long-term store-of-value type of investment like gold but unconfiscatable in an event of a currency crisis by their governments. Something digital that people can hold without the prying eyes of the ‘Govt’.
Something that can be teleported to another country in an event of a crisis that doesn’t ring alarms during border checks.
well, Bitcoin comes to mind.
Bitcoin is digital, unconfiscatable by anyone, self-regulated by the power of blockchain and poised to become the Global reserve currency in the future
It’s time you learned about Bitcoin for the sake of your kids