Thursday, May 22, 2014

Real Estate in an Economic Collapse?‏

Fernando, I bought your book a few years ago and enjoyed reading about your experience.
In an economic collapse, as the currency continues to devalue, I completely understand the concept of inflation/hyperinflation in commodities i.e. the things you need.
But what happens to real estate demand and valuations?

Hey Mike,
The situation is the follwing. You have a country that is economically wrecked. You have rising poverty, unemployment and crime. The picture sure isn’t nice. If we’re talking about a full blown economic collapse where banks shut their doors and everyone is pretty much left on their own then the entire financial system, including real estate, just freezes.
I’m talking about remembering driving by my upper middle class neighborhood and finding a fence that had been painted half way through and then nothing: The house owner would not even buy a can of paint to finish the job until he knew what was going on. This as you can imagine happens on all levels. Suppliers don’t sell merchandise until they have a better idea of how much the currency is going to devaluate, you cant even get a quote for a job because there’s simply not knowing how much supplies are worth any more.
Of course banks freezing accounts isn’t helping either. For a few months until things start moving again there’s simply no activity and this affects the real estate business. Maybe you do have a buyer lined up, but it would not be in your best interest to sell until you knew how much value the collapsed currency is going to lose.
This lack of activity may cause prices to go down some. People that need to sell will do the most natural thing which is drop the price to speed things up but for the most real estate owners will wait and see.
The economy of the country collapsing does bring along a very real loss of value of the real estate markets. Brick and land do devaluate to some extent simply because they are sitting on the country that people have lost faith in but the loss of value isn’t too bad and there’s a natural limit to it.
In the case of Argentina, we saw prices drop anywhere between 10% and 20% up to 40% depending on how good or bad the area was. Of course, location, location, location makes all the difference in the world here as well with the nicer areas keeping their value better. 10% to 20% may seem like a lot, but its not nearly as bad as the 70% loss of value of the currency.
Prices drop up to a point only. Unless there was some serious foul play involved, on average property wont drop beyond 40% or so. An old real estate broker made a good point about how, in average, that’s the point where most investors start making offers, looking to buy cheap so as to sell later. The actual chunk of building and the piece of land it sits on does have some value at the end of the day.
As things start stabilizing, the economy starts heating up again and people start saving up money. They look for safe places to put it and they naturally gravitate towards land and bricks. Real estate has always been safe haven for investors in spite of the bubble, at least for those that invest wisely and don’t overpay. Combined with the lack of trust in banks, the real estate business eventually starts to look better, even after an economic collapse.
Its not only a safe place to put your savings in, its one of the safest investments. No matter how much a currency devaluates or for what other currency it gets replaced, you will still collect rent and you can eventually adjust to inflation.


Greek Caste System said...

Sometimes I think that I am the only one who reads and writes comments on this blog from the Eurozone.
In the Eurozone countries in a crisis the problem is not inflation but DEflation.
More products of higher quality on a lower price are offered to the consumer but few people buy them.
Shampoo bottle was 400 ml, then 500 ml and now I saw a 600 ml bottle for the same price!
Overqualified people are willing to work for a lower salary but nobody hires them.
Officialy the inflation in Greece is -1,7% (deflation).
In such an environment, investing in real estate is really the worst think you can do. Ask ANY Greek on-line about this.
Due to widespread tax evasion, taxes are *deducted* from your real estate property and your car. So you can be obliged to pay a large amount of tax, if you own houses even if you have zero income!
Many people were destroyed due to investing in real estate. On the contrary, the lucky ones were the ones who had their money in a bank account.

Don Williams said...

1) Real estate can be very illiquid and if the LOCAL economy goes down the hole, it can definitely lose money. Compare the value of a house in Detroit, for example, to one in San Francisco.

2) It is not really just a matter of location --it is a matter of what the LOCAL economy will do. And that --in Part-- is based on what the national economy will do.

3) Judging just from personal experience can be misleading. Buenos Aires is a major city and so a part of it will always have great value --just as parts of Argentina will always have great value. However, I am sure there are deserted ghost towns in parts of Argentina --just as there are such within the USA.

4) Compared to high growth areas of the USA, My city has been declining in relative terms for 100 years --yet it has wealth from a great past that has enormous staying power: world class museums and art collections, an international airport, an Ivy League university with a large library, a port giving quick access to other ports on the US eastern seaboard, railroads, oil refineries, major electrical plants, a large river to supply water,etc.