The fundamental problem in Real Estate

We all want to have a roof over our head. Owning a home is a primal desire. It gives a sense of stability to those seeking it, an anchor in the choppy waters of life. A place where you can go back to. The most tangible asset you can have.

For most Australians renting just does not cut it after a certain point in time. Renting is inherently uncertain depending on the landlords whims, you can never make a rental your home.

Owning a house is the great Australian dream. Your home is your castle where you can pull up the drawbridge against an uncertain world.

Same is true in most other parts of the world. Buying property becomes a rite of passage.

But this desire to own your home rather than rent can often come in the way of having the best what life can offer.

Buying property is one of the most expensive purchases someone can make in their entire life. You end up having to borrow almost 80–90% (or even more at times) of its value just to come up with the required amounts of money. And then you are saddled with a 30 year mortgage which ties you down for the bulk of your adult life.

You become more conservative and let money making investment opportunities go by as you have a mortgage to take care of. You stick to a job you do not love, one which sucks the life out of you, because you have a mortgage to consider.

This indirectly leads to an economic loss as most people end up not realizing their full potential in life.

Real estate continues to distort economic outcomes in more ways.

When the market is rising (Melbourne, Sydney for the last few years) it sucks in money that could be productively deployed in setting up businesses that create real value. Instead of becoming entrepreneurs who create new solutions that make our life easier and making money in the process we become fixated with property prices.

Warren Buffet once said, there are 2 types of investments. One in which you calculate its present value by summing up future cash flows and the second in which you buy something and hope and pray that someone buys it from you for more.

Housing in Australia has become a game of pass the parcel. The music will keep going on until it stops. But while it plays it sucks in capital that can be deployed in a more sustainable, productive manner elsewhere.

And when it stops it is worse.

In the 2008 housing prices in US crashed. A lot of people suddenly found that their mortgages were more than what their houses were worth. As the economy slowed, jobs were lost. But people could not move to other places to get another job as they could neither find new rentals to take their place or sell their houses as they would have had to pay the difference between what the house was worth and what they owed against it.

A lot of them just walked by handing in the keys to the bank.

And the housing prices cratered even further as delinquencies rose leading to a self fulfilling cycle.

The inherent lumpiness of Real estate is a problem. In both good times and bad. We need a solution that can make property liquid. Fractionalization and Tokenization if done correctly can become a big part of the solution.

At EstateBaron.com and Konkrete.io we are focused on solving this issue. More to follow.