There are out there essentially three places where you can stack up your hard-earned money: the stock market, real estate and under your mattress. If you decide to put the money under your mattress, beware: it will fruit no interest and, hence, it won't grow over time. In fact, it will devaluate. Competition between Stock Market and Real Estate as the top source of investment returns has been going on since the mid 1960's. Typically the Stock Market was seen as the place to invest and Real Estate as the place ... well, to live in. But since the mid 1990's the old axiom has changed more and more every year, and today it is entirely revolutionized. The purchase, holding, renting and reselling of real estate assets - especially residential real estate - is now the investment of choice for the majority of investors. Money is pouring in as a direct and proximate consequence of low interest rates, which favor mortgaging over deposits and low-risk asset holdings over high-risk speculative stocks. Demand for residential real estate throughout all urban areas in North America - and to a lesser extent Europe - has gone through the roof. This affects especially condominiums and townhomes located well inside urban cores, but it extends to single-family assets into suburbia just as well. Real estate has become the psychological equivalent of gold, historically considered a tangible, safe store of value. Tangibility of assets is, in fact, one of the primary psychological reasons of this financial revolution. Given the choice between the purchase of a piece of paper representing the share into a far-away company over which the Investor has no control, and the purchase of four walls and a ceiling that the Buyer can see, touch and paint, the vast majority of consumers today are not going to hesitate for one second : they'll take the latter. But there is also a very important practical reason: availability of financing. Scandals have scoured both Stock Market and Real Estate circles, but whereas scandals in Real Estate typically have affected one or a few Sellers and one or a few Buyers, scandals in the Stock Market have affected millions of Investors. Lenders, as a result, have become somewhat leery to lend for the purchase of stocks and bonds and are much more comfortable with real estate market values. Banks lend on appraised values, and it is far more likely for an appraiser of a residential condo to determine its true market value with a high degree of accuracy than it is for a stock analyst to evaluate the books of a corporation with the same degree of accuracy. Afterall, it can be said that House A and House B have sold for a certain price in a certain neighborhood so that it is reasonable to expect that House C will sell for a similar or equivalent price in the same neighborhhod. But it is more complicated to apply the same reasoning to Corporation A, B and C because variables are too great: location, number of employees, performance, market sector, technology, politics, taxes and all the rest. Therefore, a financial institution will lend money to a qualified Real Estate Buyer more readily than to a qualified Stock Market Investor. The type of Buyer has also changed. With the advent of the internet and all other technological advances, Buyers today are more knowledgeable than ever before. As such, they want to see through things thoroughly and, once again, it is easier and preferable for them to determine by themselves whether they like a piece of real estate than it is to believe to a Stock Broker or analyst. More than ever they want sound advice and hot tips, and there is no question that those they can get from either a good Real Estate Agent or a good Stock Broker. But what the Stock Broker cannot offer is a tour of the company. A Real Estate Agent, on the other hand, will show them the house. And, finally, population growth, density and age are other important factors in today's prevalence of Real Estate over the Stock Market. For instance, here in the Greater Vancouver region population is expected to grow 58 percent to 3.3 million people in the next 25 years according to the Urban Futures Institute. That's 1.2 million more people than are here now. The Institute reports that the Baby Boom generation now makes up about one-third of the population. Their aging will result in a surge in the over-55 population of 146 percent by 2030, and that many baby-boomers today are beginning to look towards their retirement years and golden age as a period of calm, enjoyment and relaxion - free of the continuous buy-and-sell hustle typical of stock exchanges everywhere. They are more and more beginning to question Donald Trump's make-it-or-break-it philosophy for a more solid and long-lasting approach to the management of their own personal wealth and finances. Luigi Frascati luigi@dccnet.com www.luigifrascati.com Real Estate Chronicle |
