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Real Estate doesn’t always go Up

Self descriptive yet controversial title says it all. Real-Estate is in the news these days for the wrong reasons. Increasing prices are leading to a crisis of affordability.

This is especially affecting Millennials, who are in their prime home buying years. Faced with ever increasing home prices, they are stretching themselves to buy these homes which can cost as much as 1 Million Dollars in some cities like San Francisco, Toronto, HongKong etc.

To add insult to injury the boomers are stoking demand by repeating the phrase ‘Real Estate always go Up’. I think this is pure self-serving dumbwitted propaganda. Higher home prices mean that the houses that Boomers bought are now worth way more, giving them an easier retired life. 

Putting aside the morality of Boomers aside, the phrase is absolutely wrong. In fact it could turn out to be toxic advice for Millenials who are writing off the rest of their working lives for the chance to buy these houses!

Here are a few examples from around the world that show Real Estate doesn’t always go UP!

1 Euro Houses in Italy

In the southern part of Italy in the region of Sicily there are a lot of houses that are listed for sale for 1 Euro (Roughly 1.2 USD). Here is a link if you would want to check it out.

What started as a phenomenon in Sicily has now creeped into the rest of Italy. Some of these houses are located in historic neighbourhoods that are almost a thousand years old! It is almost like owning a piece of history.

These houses have been abandoned by their owners due to various reasons. Demographic trends like emigration, taxation or literally no known heirs to the property.

Of course there is a catch. The municipalities that take-over such abandoned property would want the new owner to renovate the houses as a condition to buy. In some places the buyer is supposed to live in the property for a certain amount of time. 

The reason is simple, if more people live there, then the population will increase leading to increased economic activity and an overall appreciation of Real-Estate in the region.

Akiya – Abandoned houses in Japan

Now let us move on to Japan! According to a 2018 survey 8.5Million out of 62 Million houses are abandoned. That’s a whopping ~15%. This is projected to grow to 30% abandoned houses by 2030 according to Nomura – a prominent Japanese Investment Bank. Imagine a situation where every third house in your neighbourhood is abandoned!

So, can you just move into an abandoned home and declare yourself the owner? The truth is more complicated than that. Similar to how Italian municipalities are incentivizing rejuvenation of dying villages, the Japanese are doing something similar.

Abandoned houses are taken over by the local administration. Depending on the region, there are incentives to people moving in. Conditions like Age, Family size matter in the overall actual cost of buying such a house. 

The Detroit Sale

Moving much closer home – Detroit, MI USA. Below is a listing as of August, 2021. A house that is listed on Zillow for 5000$s. There are several such listings that are even cheaper.

Of course, like in the other two examples there is a catch. These houses are in bad shape, neglected and abandoned. Many of them have liens and back taxes owed to the local governments.

Listing as of Aug, 2021

Take-aways

Based on the examples I think we can draw the conclusion that Real Estate does not always go Up. Sometimes it comes down and even becomes zero and as seen in these examples go negative due to the money owed on them!

It is easy to dismiss these examples as one-offs and can never happen in whatever market that is hot now. 

Detroit was once the city to be! Full of opportunities with the who’s who like the Edisons, Fords etc. It was pretty much like today’s Bay Area. What is left of it in a mere couple of decades is a wasteland of abandoned houses and broken communities.

Demographics, Economy, Climate are all complex systems that are inherently hard to model, forget about predicting. Real Estate is impacted heavily by all three of them. This means that making any sort of prediction is foolish.

At most it is a bet, which means sometimes you win, but it is also possible to lose. Next time someone tells you Real Estate always goes Up, just smile and say , OK BOOMER!