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You can almost set your watch by it.
The second half of every real estate cycle – which we are now in – always takes property prices higher than they have ever gone before.
Each real estate boom is bigger than the last and the numbers get crazier.
(This is well documented for over two centuries of economic history by Phil Anderson in his book, The Secret Life of Real Estate and Banking. You can obtain a copy here.)
And with each cycle there is the common question: how and why do people keep paying more for property?
People have already started asking the question again.
Source – Independent
And we still have several years to go before we get to the peak of the cycle.
So, how does one reconcile this? How can one generation of potential buyers be so pessimistic of their ability to buy their own home, and yet property is destined to go higher still?
Seems what’s to happen is fewer and fewer people will be able to buy. So how do land prices increase further if buyers retreat?
I think I’ve found a clue to help you see how this will most likely unfold.
Not in property mind, but via a digital image of a dog!
Sound interesting?
Then read on.
The dog days of the cycle.
I need to set the scene now.
If the cycle repeats, and there has been nothing in the past decade to suggest anything other than a classic repeat, prices are only going to go one way from here: up.
The second half of each cycle is the more speculative half.
During which a collective mania takes hold of everyone and pushes real estate prices up higher than we can scarcely believe.
In hindsight we always wonder how we got there.
How does society take leave of its senses like this?
I expect the same thing to happen again.
The clue to why this keeps happening – and why society fails to learn from prior mistakes – is because there is always something new to pull in investors.
The set-up is already occurring now.
During the last cycle, the application of computing power to the process of making lending decisions enabled banks to develop new systems of securitisation.
Securitisation means these banks would do the initial lending for real estate, but on-sell packages of loans to a broad pool of investors that wanted to earn more interest than was available in the bond market.
This represented a totally new approach to lending – at least on that scale – and brought huge investor interest into the property market.
And we know what happened once the party stopped: the so-called global financial crisis (GFC).
This is how our digital dog comes into all this.
A recent Bloomberg article attempted to explain the crazy “valuations” behind the conversion of the image below into a NFT (non-fungible token).
Source – Coindesk
This is the original image of Shiba-Inu Dogecoin. More popularly known as a meme-coin or Shit-coin.
Now, in June this year this image (separate from the token that bears its name) was converted into a NFT.
It sold for $4m (actually, for 1,696 Ethereum coins, worth just over $4.4m at the time), a staggering sum for the exclusive ownership of the original image of a dog established within the blockchain.
Cue the shocked headlines: who’d pay so much for something when copies of the image were freely available?
Well, if that was a shocker, that same NFT is now worth $225m, just three months later.
I kid you not.
The Bloomberg article explained how this had come to pass:
“Investors were able to boost the price of the doge NFT to a record high for NFT is in such a short time break fractionalising it into nearly 17,000,000,000 tokens named dog with 20% of the supply for sale via a 24-hour auction.”
The NFT was split into 17 billion tradeable coins (each one called a DOG) some of which were made available to be bought and sold on an exchange.
This is what’s meant by fractionalization.
The interest in this, perhaps regarded as a bit of a joke, pushed the price of a coin up to about 1.3 cents. Collectively this values the NFT at $225m, an increase of 5500 per cent.
In the article, the author ‘tried’ to explain this phenomenon by effectively saying we should not try to explain it.
Just as the original value of $4m was completely arbitrary (because the NFT was not valued against any cashflow, the normal basis of a valuation), the value post-fractionalisation was also arbitrary.
Or, in other words, the buyers are arguably all young, heavily into crypto investing and trading, and know the price of everything and the value of nothing.
But I digress.
When people start speculating all they are really concerned about is the price tomorrow being more than the price today.
This is as true of speculation in the stock or real estate markets as it is in cryptocurrencies.
But even so I believe the astronomical gains achieved were down to the new development we are seeing this cycle: fractionalisation.
The process of securely splitting up an asset into fractions for the purposes of buying and selling and speculating.
It is easily achieved via a blockchain which efficiently supports secure record keeping of who owns what.
Hence the business model is like this; take an asset, split it into millions/billions, so that each individual bit is only worth a cent or so, and then make available for purchase a set amount (say 20%).
This forced limit is designed to encourage bidding and push prices higher.
Fundamentals aren’t required, just that there’s enough interest that your purchase today can be flipped at a higher price tomorrow.
There is a roaring trade in digital art works that have been tokenised and fractionalised in exactly this way.
So, I expect that this will continue and get even crazier. Remember, it’s all a bit of fun until the music stops. And when it does, I doubt many people will shed a tear for the person who overpays for a fraction of a digital picture of an animal.
Don’t get caught out when this crashes.
This is where the story is particularly relevant to you.
See, the fractional ownership of assets may well be the medium by which the real estate boom really takes hold.
Imagine a situation where you can buy and sell on an exchange coin that represent a piece of a mansion in Monaco, a penthouse in Sydney or part of a high-rise in Hong Kong. All supported by the blockchain.
This isn’t a thought exercise out on the margins, its gaining popular traction.
This article in Investopedia makes this very point:
“By allowing fractional ownership, blockchain also lowers the barriers to real estate investing. Typically, investments would require significant money upfront in order to acquire property. Alternatively, investors with could also pool their money to acquire bigger ticket properties… In addition, fractional ownership would also help them avoid managing the properties themselves such as maintenance and leasing.
Upkeep alone can add up to significant costs and dealing with tenants may be a troublesome effort. This also affects related activities such as lending where property owners often have to put their properties as collateral for loans in order to get quick access to cash.”
Then consider there are a small but growing number of listed companies which offer such services here in Australia.
Source – DomaCom
Even overpaying by a handful of pence or cents for such tokens would represent an astronomical increase on the value of that real estate when measured against the rental income it might be able to generate.
Recall then the fact no intrinsic determination of value can be arrived at without a source of income which can be capitalised into a price.
NFT’s have no such source of income, but rental properties do.
If that’s the case, then it would push the price of such real estate everywhere higher.
As real estate prices go up, more and more bank credit can be secured against it supporting even higher prices and more investor interest.
Banks may even relax lending requirements because this pool of liquidity reduces the risk to them offloading the property in the event of a borrower defaulting.
If you default, then it’s you against your creditor (the bank that offered you the mortgage).
In the fractionalised model, you default again, but there could be hundreds of other token holders for a property who are solvent.
Interestingly, this is exactly the argument that was used to support securitisation in the last cycle.
In that cycle the financial innovation was to bundle properties up into portfolios for sale to investors. This cycle it may be the opposite: cutting properties into minute pieces for sale to investors.
The effect will still be the same.
A speculative orgy in real estate that pushes prices up higher than we can bring ourselves to predict.
In this world, you need to understand the real estate cycle. And know the timing.
And make sure you’re on the short side of the trade when it all comes crashing down as it will.
You learn the timing through education. This is what the Boom Bust Bulletin will teach you.
By understanding the true nature of the economy, what truly drives it and the history that supports this, you can make those key financial decisions at the right time with confidence.
This real estate cycle is like no other yet. Should fractional ownership of property go fully mainstream, the importance of your timing to buy and sell will become critical.
Let the Boom Bust Bulletin give you that edge and invest with the cycle and not against it.
All this for just $4USD a month! Incredible value.
Prepare yourself now for this digital revolution.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team
P.S – Find us on Twitter under the username @PropertySharem1
P.P.S – Go to our Facebook Page and follow us for right up to date information on the 18.6-year Real Estate Cycle.