One of the bitcoin maximalists I read (can’t remember which) once called real estate a “shitcoin.” Shitcoin is a term of disparagement for cryptocurrencies other than bitcoin that don’t have its properties of unforgeable Proof of Work, decentralization and uncensorability, i.e., they are mostly scams. Why would real estate — arguably the best store of value we’ve had over the past half century — fall into that bucket? After all real estate will always have a massively important use-case, and it’s inherently scarce. If anything isn’t a “shitcoin,” real estate would be it.
But there are problems with real estate too. For starters, in most jurisdictions you have to pay property taxes. While there are laws regulating how much those can be increased, there’s little doubt those laws could be changed in an emergency. If you don’t agree, consider that western democracies, without so much as a single vote, locked people in their homes due to an “emergency.”
That the government would similarly declare a state of economic emergency during a depression or hyperinflation or “climate change” does not strike me as farfetched. Anyone with more than one home could be forced to pay 10 percent per year on it in property taxes, for example. That is, if the government didn’t just seize it outright and house the increasing armies of homeless during a severe economic downturn there — for the greater good.
(I imagine some of you don’t think that’s a terrible idea — seizing rich people’s second, third and fourth homes and using them as homeless shelters. Let’s leave aside the moral question, and just acknowledge that to the extent you think that’s okay, or even good, it’s *more* likely that solution would be implemented, not less.)
So real estate has seizure risk or, at a minimum, tax risk, which is essentially a partial seizure until the taxes get high enough wherein it amounts to a full one. But that’s not the only negative. There’s also maintenance. You have to trim trees, fix plumbing, re-roof. Owning real estate entails expenses. Now the income you receive from your tenants, should you try to offset those expenses through renting, might more than cover that as well as your mortgage and present property tax payments. But then you must also be in the business of collecting rent, finding and vetting tenants, handling deadbeat or difficult tenants, etc., all of which take time and entail expense.
Okay, that’s fine, but the amount of work, maintenance and property tax so far is more than offset by rental income, especially if you find quality tenants who stay for the long term. It does for now, provided the property tax and maintenance issues stay under control.
But there is another problem — and I suspect this is why the maximalist termed it a “shitcoin”: Real estate has only recently become such a significant store of value due to lack of palatable alternatives. Just as people own S&P 500 index shares or Apple stock, and increasingly art, collectibles and God knows what else to store their wealth, real estate is often purchased not for its real-world utility but because its price always seems to go up over the long haul.
But when we say the price goes up, not only of real estate, but all those other stores of value, what we really mean is it goes up relative to the unit of account we’re using, e.g., the dollar, the euro or the pound. So it’s not that your house is more valuable now than it was 10 years ago relative to a share of Apple stock — it’s actually less — but that everything is more valuable now relative to the universal measuring stick, i.e., the currency.
Another way of saying this is that your house didn’t go up, the dollar just went down. And when you have a currency that depreciates due to inflation — and governments around the world increased the supply of currencies like madmen the last three years — people will naturally look to other places to store value.
You cannot just keep your dollars in a bank for 10 years and watch the purchasing power get cut in half — or worse relative to Apple stock, S&P shares and real estate. So you must put them to work somewhere and buy things in which you would otherwise have no interest. There are some people who enjoy being stock, real estate and collectibles traders, but I suspect most want to tend to the business of their lives while having their savings available in the future. But with a rapidly inflating currency that’s just not possible, and you must spend time, effort and risk in locating returns on your savings, whether you’re inclined or not.
And while unlike stocks or collectibles, real estate has a built-in floor, given its essential use case, how much of the current valuation is based on its utility as a place to live vs being a place to park wealth?
I’d speculate at least half is wealth storage. Not only for billionaires with 10 homes, but even regular people choosing to buy, due to the potential for appreciation, when they would otherwise rent. And whether or not it’s actually half, it’s undoubtedly quite a significant chunk.
Imagine then if there were a safe, inflation-resistant place to store your surplus wealth (like gold 100 years ago — let’s leave aside the costs of verifying, storing and transporting gold) — the wealth-storage aspect of real estate would collapse to near zero, your property would lose whatever portion of its overall value were constituted therein, but your maintenance costs would stay the same, and all the risks of state seizure and deadbeat tenants would remain.
Now you understand why he dubbed it a “shitcoin”, even if he were being a bit hyperbolic. If half the value of your asset is tied to there being insufficiently palatable alternatives, you could get rugged severely should one come along. The bitcoin maximalists already believe it has.