Buying and Selling Real Estate a Zero Sum Game
The system of selling real estate is an old one. Its suspected origin derives from a need to play favorites as a consequence of mediating peace between warring factions. First dominated by kingships, “Might Makes Right”. Then nobility used land as a form of bartering negotiating family mergers and selling off parcels to resolve debts engaging in a form of banking placing the buying and selling of land squarely in the public domain. Land ownership as late as the ninetieth century was limited mainly to the ruling class. Even to this day public ownership in some countries is an uncommon practice.
However in other countries land ownership borders on what may be called a fundamental right of each citizen. In such cases it is imperative the real estate industry be well defined. For example, imagine a nation where the economy is growing at an annual rate of 5%. Where the real estate industry becomes 70% of the gross domestic product. Then the real estate part of the economic system fails while housing prices are at an all time high. What some have termed a housing bubble! A bubble defined by no less than a 15% appreciation of residential homes per annum. The country’s economic growth rate then cools off to say 0.5%. If the national currency is tide to real estate through a central banking system the economic recovery could take decades in order to develop another monolithic model to lift the country out of such stagflation.
Take a less severe case where the real estate industry is 13-30% of the gross domestic product depending on whose perspective governs the conversation. When the shock of bottoming out happens imagine 30% of the economy being undervalued. This would create a drag on the availability of money. Eventually it would have a leaching effect on other markets because with horizontal and vertical markets there is always a cause for cascading. Depending on the percent of the economy with cash rich portions the system’s ability to intercede, recovery may be hard to encourage.
The answer is always diversification and constant improvement and innovation. There is a caveat to this narrative. Service based economies should never be monolithic in nature. Even those with highly sought after international products from countries having strong manufacture sectors economies need to be diverse. Lucrative markets by nature will foster competition. On the other hand innovative manufacturability, products with long vertical marketing legs make for a more healthy and sustainable economy.
Why is this? Why is, customer service or customer relations based economies more vulnerable? To some extent the final transaction in real estate between principals is more antithetical to such a system. Under these conditions the focal point of making a product more efficiently and more reliable is not governed by where the lifetime success of the product stands. Real estate however mainly as a result of it origin is more predatory in attitude when interacting with its customer base. Nowhere, is this more obvious when you look at the above charts depicting a decline in prices versus a rise in prices. The slope on the way up is always steeper than on the way down. The chart represents the increase in Oahu residential median sales price from the years 1987 to 2011. The blue line is Single Family Homes and the red line is Condos.
Question: What do you think would happen in a service based economy where real estate costs cycled periodically to 50% increases in cost and 17% declines? Where it started off at 30% of the economy but the economy grew only at a rate of 3% each year? Answer: Soon that 30% would become 70% and the country’s economic growth would one day trend down to 0.5%.