The Economics of Real Estate

Summary

This video explores the complexities of real estate as an investment, discussing the economic implications of housing markets on a macro and micro level. It delves into the factors that drive property value, including land appreciation and the role of foreign buyers. The video questions the speculative nature of housing, the risks of over-leveraging, and the impact of inflated housing prices on the wider economy and inflation. It concludes by emphasizing the importance of responsible lending and the need for a balanced approach to real estate investment.

Takeaways

• 🏠 A house is considered both an investment and an expense, often being the largest for individuals in developed countries.
• 📈 The value of land typically appreciates over time, especially in desirable areas with high job demand and income levels, such as San Francisco and Silicon Valley.
• 🌐 The property market can be influenced by foreign purchasers or renters, as seen in places like Aspen, Colorado, Sydney, and London, where high-income earners invest in holiday homes or rentals.
• 🤔 The script questions whether housing has become conflated with speculative assets, similar to poker chips, rather than being viewed as shelter for families.
• 💰 It's important to evaluate if housing is a good investment by considering factors like credentials, history, and potential for future growth, similar to investing in shares.
• 📉 The depreciation of a house's structure can be masked by the appreciation of the land it sits on, which is a key dynamic to consider in real estate investment.
• 🛑 Over-leveraging in the housing market can lead to economic issues, as seen with the 2008 financial crisis, and current concerns about another recession.
• 🏢 Commercial real estate affects the economy by influencing rental costs for businesses, which can lead to cost-push inflation and impact employment.
• 📊 Housing prices are driven by demand, which is influenced by wage levels and borrowing capacity; a disconnect between these can lead to unstable markets.
• 🏘️ Housing is considered an essential service, but high prices and over-leveraging can burden the economy and stifle other industries.
• 💡 The script suggests a balanced view on housing investments, advocating for critical analysis and understanding the risks involved, rather than extreme positions of avoiding or over-investing in real estate.

Q & A

What is the primary purpose of a home according to the video?

The primary purpose of a home, as mentioned in the video, is to serve as a haven of comfort, a place to raise a family, and a prudent investment.

How has the perception of houses changed in the real estate market?

The perception of houses has changed from being viewed as shelter for a growing family to being seen as an asset for speculative investment, with the hope of high returns.

What are the microeconomic factors affecting the property market discussed in the video?

The microeconomic factors discussed include overdevelopment and over-leveraging of households, which can lead to financial instability.

What are the key questions the video suggests we should ask when evaluating the real estate market?

The key questions are: What does a strong property market mean for the wider economy? Are there better investments available? And are we currently over-leveraged?

What is the视频中提到的土地价值升值的主要因素？

视频中提到，土地价值升值的主要因素包括其位置的吸引力，如靠近提供高薪工作的城市中心，以及由此产生的对房地产的需求。

Why might high real estate prices in certain areas not be a fundamental economic concern?

High real estate prices in certain areas might not be a fundamental economic concern as long as income levels in those areas continue to rise, supporting the higher cost of living.

How does the appeal of an area to foreign purchasers or renters influence property values?

The appeal of an area to foreign purchasers or renters can significantly influence property values by increasing demand for properties in that area, especially for holiday homes or seasonal rentals.

What is the difference between land and the structure of a house in terms of investment?

Land is typically the part of a property that appreciates in value, especially in desirable areas, while the structure of a house is a consumer good that depreciates over time, similar to a car.

Why might the video suggest that housing is not always a guaranteed growth investment?

The video suggests that housing is not a guaranteed growth investment because it is subject to market fluctuations, overvaluation, and the depreciation of the structure over time.

What economic issues can arise from over-leveraging in the real estate market?

Over-leveraging in the real estate market can lead to issues such as increased risk of default, financial instability for individuals and the economy, and potential negative impacts on other industries due to the misallocation of resources.

How does the video relate the real estate market to inflation and cost-push inflation?

The video relates the real estate market to inflation by explaining that increasing property prices can lead to higher rents for commercial properties, which businesses may then pass on to consumers, resulting in cost-push inflation.

What is the potential impact of a strong housing market on other industries and the economy as a whole?

A strong housing market can be a burden on the economy by drawing money away from other sectors, increasing debt and leverage, and potentially stifling the growth of industries that contribute to the productive capacity of the nation.

What is the video's stance on the role of banks and lending practices in the real estate market?

The video suggests that banks and lending practices play a significant role in the real estate market, with potentially irresponsible lending contributing to market instability and over-leveraging.

What advice does the video offer for individuals considering real estate as an investment?

The video advises individuals to approach real estate investment with the same critical analysis as they would with stock picking, understanding the risks, and being cautious of over-leveraging.

Outlines

00:00

🏠 The Value of Housing as an Investment

The first paragraph introduces the video's focus on the basics of real estate investment. It discusses the dual nature of a home as both a family haven and a significant financial asset. The script questions whether housing has become too speculative, likening it to poker chips, and suggests that the property market's role in the 2008 financial crisis indicates a need for re-evaluation. It outlines the importance of understanding microeconomic factors and the broader economic implications of a strong property market, including the potential for over-leveraging and the search for better investments.

05:01

📈 The Dynamics of Real Estate Appreciation

This paragraph delves into the factors that contribute to real estate appreciation, emphasizing the value of land in desirable areas and the impact of high-income earners on property prices, as exemplified by San Francisco and Silicon Valley. It also touches on the social implications of rising real estate prices and the influence of foreign buyers on the market. The paragraph concludes by highlighting the limited nature of habitable space and the consequent rise in property prices due to increasing demand and constrained supply.

10:02

🤔 Evaluating Housing as an Investment

The third paragraph provides a nuanced view of housing as an investment, advising viewers to approach it with the same scrutiny as when buying shares. It cautions against overvaluation and suggests that in some areas, owning a home can be more cost-effective than renting. The paragraph also acknowledges the emotional appeal of homeownership, beyond its financial aspects. It further explores the economic nature of housing, distinguishing between the commodity aspect of land and the depreciating value of the structure itself.

15:03

💼 The Economic Implications of the Housing Market

This paragraph examines the wider economic effects of the housing market, particularly the impact of real estate prices on inflation and the challenges faced by businesses due to rising rental costs. It discusses the shift towards online retail and the consequences for physical stores and employment. The script also addresses the issue of over-leveraging in the housing market and the risks associated with speculative real estate investing, especially during economic downturns.

🌐 The Macroeconomic Burden of Housing

The final paragraph argues that while real estate can be a good individual investment, a strong housing market poses a burden on the economy as a whole. It criticizes the focus on land value and the speculative nature of housing, which does not contribute to production or economic growth. The script calls for responsible lending practices and warns against the dangers of leveraging for investment in non-productive assets. It concludes with a call to avoid mistaking leverage for economic genius and to understand the importance of genuine industry in building a strong economy.

Keywords

💡Real Estate

Real estate refers to land along with any improvements or structures on it, such as houses and buildings. In the video, it is discussed as a central investment for families and a significant part of the economy. The script mentions how the property market was central to the 2008 financial downturn and how it's being evaluated in the context of another potential recession.

💡Speculative Investment

Speculative investment involves buying assets with the hope that their value will increase, often based on market trends rather than intrinsic value. The video script talks about how houses are sometimes viewed not just as homes but as assets for making 'wild speculative moves' in hopes of high returns, which can lead to economic instability.

💡Leverage

Leverage in finance refers to using borrowed money to increase the potential return of an investment. The script discusses how real estate investments are often highly leveraged, with investors putting down small deposits and borrowing the rest, which can amplify both gains and losses.

💡Overleveraged

Overleveraged describes a situation where an entity has borrowed too much money relative to its income or assets, increasing the risk of financial distress. The video mentions households being overleveraged, which can lead to economic issues if they are unable to meet their debt obligations.

💡Appreciation

In real estate, appreciation refers to an increase in the value of a property over time. The script explains that land, especially in desirable areas, tends to appreciate in value, which is a key factor in the perceived investment value of real estate.

💡Depreciation

Depreciation is the decrease in the value of an asset over time due to wear and tear or obsolescence. The video script points out that while land may appreciate, the structure of a house (the building itself) can depreciate, which is an important consideration in the overall value of real estate investments.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The script discusses how increasing real estate prices can drive inflation, especially through cost-push mechanisms where businesses pass on higher rental costs to consumers.

💡Commodity

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. The video script notes that some consider housing to be a commodity, like oil or gold, due to its frequent trading in speculative markets, despite the fact that it is primarily the land that is the commodity, not the structure.

💡Consumer Good

A consumer good is a product or service bought by individuals for personal use. The script explains that while land can be considered a commodity, the actual structure of a house is more akin to a consumer good, as it is built from raw materials and depreciates over time.

💡Capital Goods

Capital goods are items used in the production of other goods or services. They are a key component in the process of creating wealth in an economy. The video script contrasts capital goods with housing, noting that while houses can sometimes be considered capital, they do not produce more goods and thus do not contribute to the economy's productive capacity in the same way.

💡Economic Recession

An economic recession is a period of temporary economic decline during which trade and industrial activity are reduced. The script suggests that the real estate market's health is being re-evaluated as we may be on the edge of another major recession, indicating the importance of understanding the market's impact on the economy.

Highlights

A home is considered both the largest investment and expense for most families, making it central to family finances.

Houses have been conflated with assets for speculative investment rather than just shelter, leading to potential market instability.

The property market was central to the 2008 financial downturn, suggesting the need for re-evaluation of real estate practices.

Key questions about the property market's impact on the wider economy and the level of leverage in the housing market are raised.

Housing is valuable on a granular economic level due to the value of land and the structure of the building.

Land appreciation is driven by desirability and job opportunities in the area, as exemplified by San Francisco and Silicon Valley.

The demand for real estate from high-income earners can lead to inflated property prices and social exclusion.

Foreign purchasers and renters can significantly influence property values, as seen in Aspen, Colorado, and other global cities.

Housing is a good investment if approached with the same analysis as purchasing shares and if not overvalued.

Paying off a mortgage can be cheaper than renting, providing a financial advantage even if property prices don't grow.

Housing is an essential service but is not immune to the impacts of over-leveraging and its economic consequences.

Commercial real estate prices and rental increases can drive inflation and affect businesses and consumers.

The shift to online retail has been partly driven by the high costs of physical retail spaces due to real estate prices.

Real estate prices are driven by demand, which is influenced by wages and borrowing capacity.

Lending practices have become more liberal since the 2008 crisis, potentially leading to another market bubble.

Real estate investing is highly leveraged and carries the risk of magnified losses if the market declines.

The use of projected rental income to qualify for loans can lead to over-leveraging and financial instability.

Houses are consumer goods that depreciate over time, unlike the land they sit on, which can appreciate.

A strong housing market can be a burden on the economy by drawing resources away from productive industries.

The economic value of housing lies in its ability to provide shelter, not in producing additional wealth.

Responsible lending and avoiding leverage confusion are crucial for a stable housing market and economy.

Transcripts

[Music]

today you're gonna learn to talk I hope

you get there I'm gonna use this video

to give you the basics in addition any

marketplace any area ah yes the family

home a haven of comfort a great place to

raise a family and on top of everything

a prudent investment a home is in most

developed countries in the world be

centerpiece of the family finances it is

simultaneously the largest investment

and the largest expense of almost any

individual lucky enough to break into

this increasingly unattainable market

but is this all for the best have houses

been conflated with poker chips as

people no longer look at them as shelter

for a growing family but rather as an

asset to make wild speculative moves on

in the hope of equally wild returns the

property market was at the center of the

last financial downturn in 2008 and as

it seems we're on the precipice of

another major recession there's probably

a prudent time to re-evaluate what is

going on in the world of real estate to

do this we are really going to have to

look at a few things on a few levels

from the micro economic factors like an

overdeveloped and over leveraged

household to issues on an economy wide

level which is ultimately going to boil

down to answering a few key questions

what does a strong property market mean

for the wider economy are there better

investments out there and are we over

leveraged right now if we can understand

these factors we will be much better

equipped to deal with the biggest

investment in our lives

now I don't want this to be an argument

for one side or the other I'm not

particularly bullish or bearish on

housing as it stands realistically the

people talking about never buying a

house ever because you'll lose all of

your money are probably just as

irresponsible as the people advocating

for owning 25 properties by the time

you're 25 with zero dollars down by

following these 25 different steps maybe

it's just that the latter are slightly

better at marketing but there is still a

lot to be said for housing as a good

investment

it is just important to understand what

it is that makes housing valuable on a

granular economic level a house is a

function of two things land you know

like the dirt plot of land that it sits

on and the structure the actual building

with the bedrooms and bathrooms and all

of that fun stuff now land is normally

what appreciates in value when you are

looking at real estate markets if the

land is in a desirable area like say a

city center that is home to a lot of

good jobs then the land will appreciate

in value

take for example San Francisco and

Silicon Valley these are cities filled

with tech companies that pay armies of

developers and engineers hundreds of

thousands of dollars a year to develop

the new and exciting technologies of

tomorrow now these tech pros all need to

be housed somewhere so there is a lot of

demand for real estate close to these

offices what's more is that given these

high incomes the people demanding these

homes bring a lot of monetary firepower

to make some serious offers low and

behold you get some pretty serious

prices now on a social level this can

price non-participants in the industry

out of the market in a city they may

have well lived in for all of their

lives and that's probably a bad thing

but there is no fundamental economic

issues here despite constant concerns

about over inflation in these very very

high cost of living areas there actually

isn't anything to be too worried about

so long as income levels of these areas

continue to rise in the same way we

would expect that even small towns in

the USA demand a higher price tag for

their properties and let's say real

estate in sub-saharan Africa it just

comes down to how rich the inhabitants

of the area are the second thing to

consider is the appeal of an area to

foreign purchasers

or renters take a place like Aspen

Colorado it's a nice area but it's not

exactly investment bank or tech startup

central the reason properties here are

worth so much is because people from

outside this area be that another area

in the United States or another country

altogether will pay a lot for a holiday

home or seasonal rentals to come and

enjoy the ski slopes during the winter

the same is true on a larger scale for

entire cities places like Sydney

Vancouver and London have had their

property market significantly influenced

by high-income earners buying properties

from abroad now all of this is what

appreciates the value of the land land

around these areas is ultimately a

limited resource with a constrained

supply there is only so much habitable

space within a 30-mile radius of Silicon

Valley or Manhattan or the village

chairlift at Aspen so as with anything

with growing demand and constrained

supply the price will rise so does

housing make a good investment well yes

so long as you take the same approach to

purchasing a house that you would do in

purchasing shares does it have good

credentials a good history a good path

to future growth and also is it just

overvalued if all of these questions

work out then sure go ahead but just

remember it's an investment like any

other and growth is not guaranteed

beyond this in some areas paying off a

mortgage may actually be cheaper than

just paying rent so even if prices don't

grow at all you still end up ahead and

on top of that it can't be forgotten

that sometimes we just have to stop

being cold-hearted over rational

economists and realize that at the end

of the day people don't always make the

most logical decisions sometimes it's

nice to say my home is my castle and

it's all mine now with that out of the

way let's look at where this investment

gets a little bit weird

a house in an economic sense is just a

good like a car or a bar soap or a

bottle of water it's a thing that we can

buy and sell and get some kind of value

out of but it is kind of hard to define

exactly what type of good it is many

would argue that housing is a commodity

like oil or gold or coffee

it is frequently traded in speculative

markets and at the end of the day it is

something that is a means to an end

for the end-user the big distinction

here is that realistically it's just the

land that is a commodity this thing here

the actual dirt the structure is a

consumer good it is built from raw

materials and it depreciates in value

just like a car would a brand new home

sounds lovely and oftentimes people will

actually consider that both the house

and land will appreciate in value with

the market but the reality is that

houses fall apart and fall out of style

the same way that any other advanced

manufacturing good does the only thing

is that a house often masks this

depreciation with the appreciation of

the land that it sits on if you are in

an area with a land value is equal to or

less than the value of the structure

considerations have to be made over the

appreciation of the land verse the

depreciation of the structure because

this can cause issues very very quickly

which leads us on neatly to what this

means for the wider economy

housing is an essential service for

everyone as far as human needs go

shelter is right up there alongside

water air and food but this inherent

requirement does not mean that markets

are immune from the impacts of over

leveraging and the nasty stuff that

comes with it

real-estate prices from the get-go are

one of the strongest drivers of

inflation to explain why we have to look

just outside the residential market for

a second and look at real estate

inclusive of commercial real estate

commercial real estate is things like

shop fronts office buildings and

warehouse Lots most of these are still

owned by investors and rented out to

business the same way that someone might

rent out a house now if the property

market is going well prices are

increasing so too will the rent on these

commercial properties in most businesses

the primary expense centers are staff

wages and then rent if the business is

seeing a three to four percent increase

in their rental expenses every year

which is probably on the more

conservative side they are going to have

to absorb that as a loss or pass that

expense on to their consumers with more

expensive items this is effectively a

secondhand form of cost-push inflation

where things are getting more expensive

because they are harder to supply not

because there are more people demanding

them and this is generally agreed as the

bad type of inflation or at least the

type of inflation that is harder to

control things like retail shop fronts

are huge employers in most countries but

we have seen a huge shift in the

prevalence of online ordering now

partially this is because of convenience

why would I go outside and interact with

people if I can just stay in my basement

and get everything I need in life

brought to me but partially it's also

because it's just cheaper online

retailers aren't as exposed to the

impacts of rental increases as their

brick-and-mortar counterparts so they

alleviate this kind of expense

the reason this gets particularly bad is

because physical presence retailers

employ far far more people than online

distributors so undercutting these

stores can mean that a lot of low

come owning households suddenly are

unemployed as their business is driven

out of work now a lot of people write

this off as the inevitable march of

technological process but in reality at

least in the short term it has more to

do with the march of real-estate prices

now this kind of effect permeates

throughout all areas of an economy and

applies when real estate is going well

so what happens when this all starts to

turn around well that all has to do with

debt we have explored the debt

predicament we're in now here in 2020 in

our video exploring the economic crash

we are in at the moment and if it could

be the next Great Depression

I don't want to repeat too much of what

was said there but there is something

very very important to understand and

take away from that video real estate

prices are ultimately a function of

demand and demand is in turn a function

of how much people earn and how much

they can borrow now when we looked at

property appreciation in high-income

areas that was okay because the higher

incomes justified the higher property

prices but in most areas in most

developed countries around the world

real estate prices have been rising

while wages have been more or less

stagnant so the missing piece of the

puzzle and what is driving all of this

is that lending has become more liberal

there was a huge cutback on lending in

the wake of the 2008 subprime mortgage

crisis as banks saw firsthand how

irresponsible lending could hurt their

bottom line but since then it has slowly

started to creep back up the issue in

2008 was that mortgages were being

written to individuals with very little

employment prospects bad credit and

unstable personal situations fortunately

that scenario has not really been

repeated that perhaps we will be at the

mercy of another form of ill-advised

lending at the other end of the spectrum

real estate investing even with wealthy

landlords is odd for two reasons the

first is that is a highly leveraged

investment if you put a 10% deposit down

on an investment property and borrow the

other 90% that is a ten to one leverage

position

sure if the property appreciates 10% you

magnify your returns to 100% but if it

goes the other way well you have lost

all of your money almost nobody out

there would realistically recommend to

take a ten to one leverage position on

the share market at the end of the day

housing is just another speculative

investment a lot of landlords have been

caught out even at the start of this

crisis because they went into investing

into real estate with the idea that it

could only ever go up rents would keep

on increasing and they would get rich

but the reality has hit that property is

just another speculative market and you

want returns you have to accept the

risks the second reason this all gets

weird is because you can use the income

from a property to qualify for a loan

for a property that you haven't even

purchased yet most banks around the

world will consider the income that you

will get if you rent out that property

and they we use this in their

decision-making process to see if you

get approved or declined for the loan

that you're after

now this isn't important to people

buying a house to live in but it is

starting to come back to bite the people

that have bought a house to invest in

take a situation like we are in now

rentals have dried up as many people

have lost their jobs and things like

Airbnb don't exist anymore we now also

exist in a market where more investors

than ever a relying on these returns

because they never had enough regular

income to pay off their mortgages so

they are either forced to sell their

house at a down time in the market

further depreciating this over leveraged

asset or alternatively they can just

default on their mortgage which will

cause severe problems in financial

market and eventually ends up in a Bri

possessed home that will be sold at a

down time in the market further

depreciating this over leveraged asset

now many people will turn around and say

well banks lend money to businesses all

the time to fund their ventures based on

projected income why is this so

different here and well it's different

because businesses are rarely this over

leveraged for starters but more

importantly for the wider economy

businesses actually produce something

this thing here the family home with

four bedrooms and three bathrooms is a

really useful tool in providing shelter

but it doesn't actually produce anything

when economists consider investments

they are thinking of capital goods

typically people invest into a company

through shares and that company will use

this funding to build new machines or

buy up new computers and excavators or

whatever these are all capital goods eg

goods that are used to produce more

goods these normally make for pretty

good investments because if you buy a

machine that turns a raw material into a

consumer good you can profit off the

difference in the price between the

input and the output this is the essence

of value-added manufacturing now houses

are sometimes considered capital but

they aren't really the land that they

sit on is well land and the structure

itself is effectively a consumer good if

anything by having expensive housing you

are denying land another factor of

production to genuinely profitable

industries that will add value to goods

to produce a wealthier economy the

foundation of economics is the idea that

we have unlimited wants and only limited

resources in which to fulfill those

one's good economic management is built

around the ultimate desire to expand the

productive capacity of a given nation so

that more resources are made available

to more people shuffling around blocks

of land and prescribing even higher

values to them does not produce anything

of value it is paper wealth at its

purest form in the best scenario it

achieves nothing but realistically it is

going to put consumers into debt over

leverage a nation and drive out real

genuine industry to an area where they

can get this crucial factor of

production for a lower price so is real

estate a good investment on an

individual scale well yes probably so

long as you take the kind of critical

analysis that one might take to pick a

stock and so long as you understand that

this is a highly risky highly leveraged

and undiversified investment you will be

just fine even population growth and the

constant pressure to borrow more

or it might not be a terrible call to at

least make the home that you live in

your own on an economy-wide level though

a strong housing market is a real burden

it sucks money away from people that

could have otherwise spent it on goods

or services or invested it into things

at genuine value and it's smothers

industries that are trying to get a

foothold into the economy the solutions

are complex because oftentimes a

government has to toss up the liability

of an unaffordable housing market with

the alternative been ripping value out

of people's largest investment which is

not likely a move that is going to win

them the next election the real answer

is to make sure that lending is

responsibly managed record low interest

rates mean that more and more people can

borrow more and more money and think

they are savvy investors after selling

it to other people who have borrowed

even more money taking on debt to invest

into something that doesn't produce

anything is almost always a bad idea on

a macroeconomic level will this ever be

properly controlled well it's hard to

say at the end of the day the banks are

their own entities with their own profit

motives and they want to make sure that

they aren't missing out on a good deal

if it comes up the same as individual

speculators but in the meantime all we

can do is avoid confusing leverage with

genius and understand that no great

economy was ever built by shuffling

around piles of dirt hi guys thanks for

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