Investment: Real estate – The paper wealth takeover

The most generic investment advice applicable to our modern times of outrageous monetary policy and downright fiscal irresponsibility throughout the developed world is this: own real assets (and steer clear of the wide array of paper wealth discussed in the previous post). You will struggle to get anything more real than real estate. Unfortunately, however, real estate is not quite as real as it used to be…

Indeed, real estate has been at the center of a lot of financial madness over the past decade or so since it became corrupted by the our rapidly expanding paper wealth economy. This has lead to many housing bubbles building and popping all over the world, causing massive economic disruptions, malinvestments and unethical wealth transfers.

The primary reason for this tragic takeover of the most real asset class by the mad growth of paper wealth is the ease with which homes can be financed. Since a big home has grown to almost be considered as a fundamental human right in developed nations and because the home itself provides very effective collateral, home loans tend to be very cheap and very easy to attain. And yes, this property of real estate makes it especially susceptible to the tidal wave of fake paper wealth that has been sweeping the world in recent years.

For example, the ease with which home loans can be attained makes it very easy to use leverage (discussed in the previous post) especially in this time of ridiculously low interest rates. Such a situation simply makes it far too attractive to speculate and gives millions of people the possibility of gaining massive unearned riches at the expense of others (such as the real estate leverage scheme advocated in the video above). Speculative bubbles and all the ills they bring are a natural result of this kind of situation.

As we will discuss under the next personal finance topic, borrowing, a loan can only be ethically taken when it is used to directly increase the efficiency of production or decrease the rate of consumption of real goods and services. Speculating on real estate through the use of leverage or buying a massively oversized house just because the loan is currently so cheap at artificially low interest rates therefore qualifies as highly unethical borrowing and is responsible for much of the massive debt problem in the developed world today.

Finally, consider that a home bought on 90% financing is most certainly not yours. As soon as some unforeseen circumstance (job loss, interest rate hike etc.) makes you unable to service the debt, the home is taken away from you and you lose everything. A home bought on credit therefore does not qualify as a real asset investment because it can so easily be confiscated by our paper wealth economy. 

So, please stay away from real estate speculation and excessive mortgage debt. These things definitely don’t qualify as real estate investments. Real real estate investment will be discussed in the next post.

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