Why Real Estate is not a ‘Real Investment’ anymore ?
Covid and Bitcoin have become huge deal breakers for ‘Real Estate as Investment’
Before 2020, life was simple , you study hard, get a job, move to big city, slog hard at a big company , get married, get your First House as a couple ! may be even buy a bigger second home for “investment purposes” at a ‘developing location’ and then get your children to repeat this grind.
Covid changed this narrative like a meteor that crashed earth 60 million years ago wiping 75% of world’s animal species which ended the reign of dinosaurs.
First covid accelerated digital transformation by atleast 15 years, work from home became new normal for the high earning knowledge workers like yourself. Even though remote-working had few falls / crashes in beginning zoom/meet /teams apps have made remote working the new normal, workers world wide are not raring to go back to office any time soon.
Like a tiger that tasted blood, top talent across the spectrum now want ‘Remote Working’ to be the new norm.
This has enormous implications for Real estate investment for generations to come.
Employees suddenly discovered that they can chill by working-from-home / work from coffe-shop / travel / work from any place in the world and not get stuck in hours of commute paying insane rents on their ‘near-to-office’ homes as long as they have a decent internet connection.
Rentals in Top Metros like San Francisco/ New York / London /Bangalore / Mumbai have crashed, so have the housing costs.
While the covid situation will imporve in coming years , a good % of employees will now be offered permanent WFH has a perk, there is no going back.
Work-from-home / anywhere will be viewed as a top perk for the high-earning knowledge workers going forward.
even snazzy Cred app echoes these sentiments https://cred.club/articles/are-you-ready-to-be-a-homeowner
Bitcoin after 2020
In March 2020, after the US federal goverment announced covid is a real deal as people are dying from it, stock markets have crashed for one day , the Federal reserve intervened and pumped trillions into the markets pumping the markets artificially. This was the last straw that pushed Michael Saylor and many other sophisticated investors into a Hard asset like Bitcoin.
Fast forward 9 months , Elon musk announced that he brought 1.5 Billion of worth of Bitcoin and this pushed Bitcoin into mainstream consciousness brining the market-cap of this 12 year old asset into the incredible Trillion Dollar club .
Let’s understand why Bitcoin has become a darling for the rich.
Bitcoin is world’s first digital monetary network, which has highly similar properties like that of gold. Bitcoin has very limited supply ( ensured by software), divisibility , transportability and easy verifiability for these reasons bitcoin is often called as “Digital Gold”.
Unlike Gold however, Bitcoin as few very very powerful qualities that can make it far more valuable potentially. Bitcoin can be transferred to any person in the earth, any where with a very low cost, nearly instantly without any worry of confiscation or regulation.
Apart from this, the Bitcoin payment network runs in a trust-less decentralised fashion, ie. you don’t need to trust the network of miners to process your transactions unlike the banking network which acts as trusted third-parties to transfer your money reliably.
Scarcity and FOMO
Fear of missing out is a natural human emotion when price of something goes up, we humans are tempted to get in the party ( this is why the price rises of Bitcoin become Hot News items).
In an era of social-media driven hyper-connectivity, FOMO spreads fast.
However, For a traditional asset like Game Stop stock which pumped 4000% from reditt fueled trading activity, FOMO alone can’t do the trick. The CEO of Game Stop cashed-in on this trading frenzy by selling $3 billion worth of new stock.
This is the inevitable fate of non-decentralised assets, which have no hard supply constraints. When FOMO drives the price, new supply will be created to meet the demand which eventually suppresses the price. This logic however applies not only to stocks , but also to real-estate.
News Flash: New Houses can be built !
while the real-estate developers would like us to believe in the ‘land is scarce myth’ in reality its not, it was only partially feasible pre-covid when people were forced to work in CBD areas.
Since bitcoin is a decentralised asset with enforced scarcity, FOMO can really drive prices up, which drives up further FOMO which drives up price further and so on lol.
The core properties of Bitcoin Network like mathematically guranteed scarcity, immutability and permission-less access are not controlled by anyone hence can’t be changed by anyone, even by the most powerful governments. This sort of gives us a long term guarantee in this ever-changing world.
Why is Bitcoin growth a Threat to Real-estate ?
To understand this, we need to a deep-dive into how asset valuations work ( sadly , your real-estate developer would never explain this to you for obvious reasons ).
Enter DCF — Discounted Cash Flow
Using DCF, Any asset with cash-flows like Rents or dividends can be measured easily by taking the value of future cash flows.
Let us take an example of a 3 Bed flat in an Indian metro which costs about 1–1.25 Crore which pays about 25,000 INR as monthly rent.
let us assume this rent will be paid for the next 40–50 years with expenses like one month rent going for maintenance of property, taxes at 30% and so on. Let us also not forget the insane stamp duties and property taxes one need to shell out.
Now let us also assume, Govts in your city don’t grow crazy like the ones in New York which stopped non-rent paying tenant evictions for 15 months now or the ones in Mumbai who froze rent for the last 40 years in 19,000 odd buildings.
Even with these generous assumptions, you are looking at value of 20 Lakhs for this house (If you do DCF at a respectable Interest rate of 9% )
Now one would wonder, why the property is being valued at an insane 5 times from the real value ( 1 crore vs 20 Lakhs ), a financial expert would say that this heavy price is because there is an expectation inherent future Inflation ( as central banks like RBI print atleast 10–15% new money every year , US Federal reserve prints 7–15% every year , devaluing your money continuously ).
This is where things get tricky, If Bitcoin continues its upward journey and the young investors start taking it a serious investment and stop investing in 2nd and 3rd homes etc, any inflation that is created by ‘money printing aka inflation’ will not only increase the prices of rents but will push the prices of Bitcoin. In case of bitcoin much higher ( due to limited supply) which further triggers a price rise and FOMO :)
Compared with Real estate Bitcoin offers lot more benefits
- its future is completely predictable
- it cannot be taxed like that of real estate coz its not physical
- you can easily walk way from bad/ failing states with Bitcoin
- Your bitcoin cannot be seized from you forcibly no matter what
- Black / grey money can be sloshed in Bitcoin with much less governmental overreach.
The rise of Bitcoin and work from home is going to increasingly affect real-estate market never seen before way !
Learn more about Bitcoin and commons questions about it
Learn why Most altcoins are either scams or just lab experiments
