Many believe that real estate is so expensive today because there are too many people and too few properties available (low supply and high demand).
This is probably true, but on the other hand, prices for real estate like land and apartments were also boosted by the hundreds of billions of new money that banks created in the years before the financial crisis in 2008.
Today, only 3% of the money that exists in the world is printed and about 97% is information stored on bank servers, that is, 97% of the money in circulation is digital.
When we request a loan, credit or financing from a bank, the bank simply creates money, adding the information to the servers and lends it to us in the form of credit with interest that can vary depending on the purpose you will give the money.
Suppose you apply for a loan of USD 100,000 from a bank to buy a house with an interest rate of 5% and 15 years to pay off the debt. After calculations this can be converted into 180 payments of 790.79 USD monthly.
That is, after 15 years you will have paid the bank about USD 142,342.85, USD 100,000 plus USD 42,342.85 in interest for borrowing money from the bank.
This way, several banks have been creating money out of nowhere, simply using time in their favor.
And this contributes a lot to the increase in real estate prices and BECAUSE banks have increasingly created money out of nowhere, this resulted in inflation.
Prices have risen consistently over the past few decades worldwide.
In England for example, house prices increased by 4225% between 1971–2011.
In 1950 you could buy property in North London for £1050, which was approximately 2.5 times a teacher’s base salary. Earning £400 a year a teacher could comfortably buy a house and pay off the mortgage in a few years at an interest rate of 2.5% per annum.
Today, a similar house in the same area can cost £1 million, that’s 40 times the annual salary of a local teacher.
Property prices in the UK didn’t just go up, they took off like rockets to the sky!
But why is real estate so expensive all over the world?
The problem is, in a way, these days is a side effect of the covid-19 pandemic, which ended up mixing at least three ingredients that favored demand in the real estate market.
The drop in interest rates used to cushion the impact of the health crisis on the economy made financing cheaper. Lockdowns and travel restrictions favored the accumulation of savings by the upper classes, who were unable to travel or attend bars and restaurants.
Remote work, in turn, has awakened in many people the desire to take care of the house, to live in a larger, more comfortable space, and even far from the chaos of big cities.
Here in the United States, the jump in home values over the past two years has sparked fears that a new housing bubble could be brewing – bringing back the bitter memory of the 2008 financial crisis.
It is a phenomenon that reveals the historic economic inequality that divides societies and that became even more profound after the recession in 2008. While some families who have lost their jobs face evictions, others have managed to consolidate and even improve their economic situation.
Home prices around the world saw an average increase of 7.3% in the first quarter of 2022 compared to the same period a year earlier.
The ranking is led by Turkey (up 32%), followed by New Zealand (22.1%) and Luxembourg (16.6%).
Five Latin American countries included were Peru with a 10% increase, followed by Mexico (6.6%), Brazil (4%), Colombia (3.2%) and Chile (1.7%).
Reason 1: There is a race for space.
An important part of the increase in home values, at least in the richest countries, is related to the search for more space, and this explains why the real estate boom is more concentrated in regions farther from the center in large cities, where there is greater availability of real estate.
In other words, those with high incomes have launched into a search for properties that would allow them to take advantage of the exceptional circumstances that have arisen in these times of pandemic.
Among these unprecedented conditions are the low interest rates on mortgage loans and the massive fiscal stimulus that the governments of developed countries have used to revive the economy.
Added to this is a fundamental change: the possibility of working from home. And professionals who can work from home are precisely those who tend to have a higher income than the rest of the population.
In addition, it is worth remembering that in some markets the demand for housing has increased and, at the same time, the number of available properties has decreased. This combination drove up housing prices even further.
Portugal for example sees the rise in prices with fear. The value of real estate in the country had been growing at least since 2014, especially after the entry into force of the “golden visa” policy, which opened the possibility for foreigners who buy a property in the country to apply for Portuguese nationality.
The dynamics of the pandemic has deepened the rise in prices and has made it difficult for many Portuguese families to have access to buying property in their own home.
In the US, Florida and especially South Florida are examples of the race for space. The state’s livable area lies between the ocean and The Everglades National Park. So yeah, not much land area available for building will result in high prices for the property available and the increased demand from northeasterners and foreigners that always bought property there.
Reason 2: Foreign buyers and investor money influencing local markets
Canadian Prime Minister Justin Trudeau has proposed a two-year ban on some foreigners buying homes. The measure comes as Canada grapples with some of the worst housing affordability issues in the world.
Prices have jumped more than 20%, pushing the average home in Canada to nearly C$ 817,000 canadian dollars ($650,000 U$D; £495,000 british pounds) – more than nine times the Canadian household income.
But industry analysts say it’s not clear a ban on foreign buyers will address the problem.
Data on purchases by foreign buyers in Canada is limited, but research suggests they amount for a small fraction of the market.
In 2016, British Columbia introduced a 15 percent tax on home and condo purchases for foreign buyers. Late last month, Ontario raised its own tax to 20 percent and extended it to cover the entire province.
To make matters worse, some foreign companies have bought whole companies under shell corporations or simply push local real estate agents to buy houses on their behalf in cash. See all the CASH FOR HOUSES signs around town? Many of those companies are agencies supported by foreign money.
In the US we see the same trend, in Raleigh for example, it seems that more rental agencies are getting foreign investment and they are slowly spreading around the US in general to encourage private owners to lease through them, according to a report from the National Association of Realtors. Link below.
Reason 3: Banks are also buying houses
Investment firms and hedge funds buying up homes made headlines last year when the Wall Street Journal reported an investment firm bought an entire community of homes in Texas.
Sunny markets like South Florida are prime hot spots for these firms.
Online real estate brokerage Redfin studied the hottest real estate markets and found in the third quarter of last year investors bought three out of four single-family houses. That is a record 18 percent of the homes that were sold in the United States, up from 12 percent a year earlier.
But in some markets, especially in the relatively affordable areas, their share is far higher. In Charlotte and Atlanta, investors purchased more than 30 percent of the homes sold in the fourth quarter of 2021, according to Redfin. In Jacksonville, Fla., Las Vegas, and Phoenix, they bought just under 30 percent.
This passage from a text from Surviving Tomorrow explains very well, the problem and GIVES THE SOLUTION. It reads:
UK’s largest mortgage lender announced its intention to buy 50,000 houses over the next ten years.
Not lending out 50,000 mortgages — but taking 50,000 houses off the market.
Houses that families could own and store wealth in. Houses that people could own without paying outrageous market rents to an extractive landlord. And other banks are also doing the same:
- Vanguard, State Street, and other financial institutions are swallowing an untold number of houses. Link below.
- Blackrock owns $60 billion in real estate, with means to buy 170,000 houses per year for 20–50% more than you can.
- Blackstone (America’s largest land-lorder), KKR, Carlyle Group, and Warren Buffett are specifically targeting single-family homes.
- Even state-owned corporations (advised by J.P. Morgan Asset Management) and religious denominations are hell-bent on making you a rent-slave for life.
Banks and investors want alternative real estate investments to their retail and commercial properties, which may take a long time to recover from the pandemic, if ever at all.
With remote work looking like it’s here to stay, however, the pandemic and the ripple effects could keep the demand for suburban family homes high.
Investors bought around one in every seven homes in the first quarter of 2022.
How to change this in favor of people that need a place to live?
Unless something changes, there are likely to be serious ramifications of this for years to come because homeownership is the primary vehicle to build wealth, and once purchased the prices don’t go down.
The solution comes from passing policies and rules that are anti-capitalist in nature, and passing changes like that are going to be very difficult in the United States for example, where politics is influenced by the people who have more money.
Politicians will need to accept that capitalism was it’s own worse enemy, and for once, pass laws that support PEOPLE not corporations. That as you know, is very hard to do given the fact that US politics works with “legal bribes” meaning donations by special groups meant to keep in place changes they don’t approve.
The changes need to turn the real estate market in favor of people like me and you:
- Make it unlawful to buy/sell a single family property you do not intend to move into or already live in. There would need to be some language to make sure no one except forcorporate landlords are kept out of the market, but mass home buying will continue until we have laws that protect the housing market from these rent seeking leeches.
- Push for a vacancy tax. In some neighborhoods, houses and apartments are just sitting empty for investors to either sell at a higher price since things are appreciating so quickly.
- Investor corporations should have a higher premium or even be restricted in their activities like only allow a certain amount of transactions in a given area, and possibly local subsidies for people who can show they are actually just individuals looking for a primary residence.
We need to accept that capitalism, while the best system that we have, is not a perfect system, and that it does not magically regulates itself.
You see, everything changes in a corporation. Change is constant. Why can’t capitalism change?