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Atricle Dump - The Bubble-Rooter
All business managers have been warned against operating in an environment of crisis management. To be a more effective manager and leader, you’ll want to know that there are prevalent beliefs about crisis management that need to be understood and discounted. To allow us to examine beliefs that have been assumed for many years, I’ve described these prevailing ideas as the myths of crisis management in the text that follows.Management in the modern organization, of necessity, requires managers that are fleet-of-feet and able to manage ever-changing conditions. When the term “crisis management” was coined forty years ago, organizations were still rather staid and unchanging entities. Consequently, it was deemed an unfavorable sign if an organization of that time was regularly in a state of crisis, or, change. And, the management of that organization was viewed as needing to exert more influence to obtain control of events at the firm. Crisis Management Myth #1, therefore, is that experiencing frequent change in organizations, (or “crises”) is a bad thing. On the contrary, an organization in today’s business climate that is not in a constant state of fluctuation, change, and growth will not be able to survive. Organizations that understand the nature of change and its usefulness are those that do well. These organizations know that: 1) change is inevitable, as nothing is certain, except change itself; 2) imminent changes that are faced with cou
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones
Plastic fundraising cards are proving to be very effective with many different types of businesses and organizations. These wallet-sized wonders are being created as a tool to raise money for charitable organizations, in addition to the flexibility of producing cards for gift, loyalty and membership marketing purposes.Plastic fundraising cards usually include a variety of discounts that are accepted through the participation of local, regional and national merchants in your target marketing area. A typical plastic fundraising card could retail for $10 and offer unlimited usage of special offers. In addition, special one-time or limited time offers can be provided by the merchant through the card. This type of offer frequently covers half the purchase price of the product or service.Some of the more popular retailer promotions that have been launched include free drinks with fast food orders, discounts on sandwiches, money saving offers on video rentals, haircut discounts and more.The results produced through the use of plastic fundraising cards can be impressive. It is not unusual for individual sellers to achieve five to ten sales.Leading plastic card manufacturers can customize these cards for further impact. Your school's name and logo can be placed on the card. In addition, any design you choose can be printed on the front and back side of the card. The business or organization's name and message is effectively branded and r
While I am grateful to this individual for taking the time to send his otherwise lengthy message privately, I thought I’d present my response also to the public at large, in hopes to shed some light on this subject matter. Following, therefore, is a FAQ on bubbles formulated in accordance with the points and concerns raised in the e-mail. I have, furthermore, notified this person that this Article represents my response and have invited him to come and read it in this forum.
So here we go.
Q. What is a real estate bubble?
An economic bubble is a particular market condition, wherein prices of commodities or assets increase to levels so high as to no longer reflect the utility of usage of the commodities or assets being exchanged. The main cause of an economic bubble is speculation. Speculation is one of the many forces that act on capital at any given time. In theoretical Economics, speculation is defined as ‘the acquisition of financial or capital assets made solely to quickly profit from fluctuations in their prices, or of goods or commodities with no real intent to consume or otherwise use them for production’.
Contrast this with investment, which is defined as ‘the acquisition and use of financial or capital assets with a view to generate income, or of goods and commodities for the purposes of consumption or production’.
Clearly, pursuant to the foregoing definitions, the real domains of speculators are the stocks, bonds, treasuries, futures and debentures markets, cumulatively referred to as the Stock Exchange. Many ‘investors’ in the Stock Exchange actually speculate, since they bet on a quick gain dependent upon the volatility shifts of the market they operate into, and since they do not intend to consume the products they buy. A purchaser of one-hundred shares of IBM does not intend to actually go work for IBM, nor does he necessarily intend to start consuming outputs produced by IBM. He merely intends to buy IBM shares at a lower price and resell them with a mark-up.
Speculators do operate in the real estate markets, but to a far lesser extent, mainly because real estate typically moves in slow, very slow motion – even when real estate markets are ’fast’. The fluctuations in prices that occur in the Stock Exchange in a few hours typically take days, or even weeks, to happen in real estate. Additionally, fluctuations expressed as a percentage change of their nominal market value are far greater and substantial in the Stock Exchange than in real estate. For instance, it is not unusual for stocks to gain or lose 30-, 40- or 50-percent of their value in the round of a week, sometimes even in a single day, but no such dramatic variations exist in real estate. One never hears of a rancher abutting a golf course that on Monday morning is offered for sale for $500,000, and which by Friday afternoon has been reduced down to $250,000. Because of this, speculators tend to shy away from real estate markets.
The few speculators that do operate in real estate are those who engage in the ’flipping’ of real property assets. Many investors think of themselves as masters of flipping, but truth of the matter is that they do not flip at all. They resell for profit. True flipping, in real estate, consists in the purchase and selling of an interest in land without paying for it with one’s own money. Thus, a speculator flips real estate buy putting in an offer to purchase an asset, and then ‘flips’ the same asset (which the speculator does not own as of yet) to a second purchaser for a higher price, who will complete the transaction on the same day as the speculator’s original transaction. The speculator will then take the money from the second purchaser, retain his profit margin, and transfer the balance to the Seller. The speculator, in other words, will pay the Seller with the money of the second purchaser, not with his own money. This is a practice known in the United States and some Canadian Provinces as ‘double escrow’.
Needless to say, all those who purchase fixer-ups, refurbish, remodel and then resell them, and think of themselves as great speculators, are not speculators at all. They are also no masters of flipping. They are just merely ordinary investors, with a super ego.
Here is the classic comparative economic breakdown, by category, of market participants operating in both the Stock Exchange and Real Estate:
Speculators
Investors (short term)
Investors (long term)
I have seen some sources last year pegging the percentage of real estate speculators to double the one of the forgoing table, and am further aware of some economists and market analysts who cite a 15 percent figure. But even if, by hypothesis, speculators represented a 20 percent of real estate market participants, 4/5 of all participants would still be made up of regular short and long-term investors. Therefore, as the primary cause of economic bubbles (speculation) is almost entirely absent from real estate, or has otherwise minimal or reduced impact, it is ludicrous to speak of ‘real estate bubbles’.
Thus my position.
Q. Still, prices are tumbling down. If it’s not a bubble, what is it?
Price deflation. Plain, ordinary, old-fashioned, lemon-flavoured price deflation.
Deflation is a decrease in the general pricing levels of assets or goods, which occurs when the equilibrium between supply and demand is altered, resulting in a higher or lower purchasing power of money within the market (in the present case, the purchasing power is higher since prices are coming down).
There are two, and only two variables capable of altering the equilibrium of supply and demand: 1) a tightening or expansion of the money stock which, in turn, alters the cost of borrowing, i.e. a shift in interest rates, or 2) an increase in inventory supplies. Alfred Marshall (1842 – 1924) was the first to attempt to explain price behaviour within the context of the equilibrium between supply and demand in competitive markets. Marshall discovered that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behaviour in function of shifts in pricing.
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones c
The Web is flooded with million images. Try Google image search and know what I mean. You are tempted to grab the best images and use it for your website. And of course you can do it. Just right-click and save these images. They look so great on your websites. But as you can guess you can not do it or you can but on your own risk. A joke about Gettyimages - “they have three employees and two hundred lawyers” shows what you can expect – a big lawsuit against you or a nasty email with a request to delete the images you love so much from you website immediately.Why? Images are commodity on the Web. A right image at a right place and at a right time can bring thousands people to your websites. Thousands- millions users and pageviews; this is exactly what most (if not all) website’s owners are dreaming about.The beauty of the Web is that you have a choice. There are images on the web that cost a fortune and you should pay, there are images that cost much less and there are free images. Rights-Managed Images: Images you purchase for a specific purpose at a specific price (think renting the photo or paying to borrow the image). The price of the picture is usually determined by how you want to use the picture (on the web, in print, etc.). The plus side to using a rights-managed photo is that you will most likely NOT see anyone else using the same photo (or model) promoting another product. The downside is of course the price; rights
Clearly, pursuant to the foregoing definitions, the real domains of speculators are the stocks, bonds, treasuries, futures and debentures markets, cumulatively referred to as the Stock Exchange. Many ‘investors’ in the Stock Exchange actually speculate, since they bet on a quick gain dependent upon the volatility shifts of the market they operate into, and since they do not intend to consume the products they buy. A purchaser of one-hundred shares of IBM does not intend to actually go work for IBM, nor does he necessarily intend to start consuming outputs produced by IBM. He merely intends to buy IBM shares at a lower price and resell them with a mark-up.
Speculators do operate in the real estate markets, but to a far lesser extent, mainly because real estate typically moves in slow, very slow motion – even when real estate markets are ’fast’. The fluctuations in prices that occur in the Stock Exchange in a few hours typically take days, or even weeks, to happen in real estate. Additionally, fluctuations expressed as a percentage change of their nominal market value are far greater and substantial in the Stock Exchange than in real estate. For instance, it is not unusual for stocks to gain or lose 30-, 40- or 50-percent of their value in the round of a week, sometimes even in a single day, but no such dramatic variations exist in real estate. One never hears of a rancher abutting a golf course that on Monday morning is offered for sale for $500,000, and which by Friday afternoon has been reduced down to $250,000. Because of this, speculators tend to shy away from real estate markets.
The few speculators that do operate in real estate are those who engage in the ’flipping’ of real property assets. Many investors think of themselves as masters of flipping, but truth of the matter is that they do not flip at all. They resell for profit. True flipping, in real estate, consists in the purchase and selling of an interest in land without paying for it with one’s own money. Thus, a speculator flips real estate buy putting in an offer to purchase an asset, and then ‘flips’ the same asset (which the speculator does not own as of yet) to a second purchaser for a higher price, who will complete the transaction on the same day as the speculator’s original transaction. The speculator will then take the money from the second purchaser, retain his profit margin, and transfer the balance to the Seller. The speculator, in other words, will pay the Seller with the money of the second purchaser, not with his own money. This is a practice known in the United States and some Canadian Provinces as ‘double escrow’.
Needless to say, all those who purchase fixer-ups, refurbish, remodel and then resell them, and think of themselves as great speculators, are not speculators at all. They are also no masters of flipping. They are just merely ordinary investors, with a super ego.
Here is the classic comparative economic breakdown, by category, of market participants operating in both the Stock Exchange and Real Estate:
Speculators
Investors (short term)
Investors (long term)
I have seen some sources last year pegging the percentage of real estate speculators to double the one of the forgoing table, and am further aware of some economists and market analysts who cite a 15 percent figure. But even if, by hypothesis, speculators represented a 20 percent of real estate market participants, 4/5 of all participants would still be made up of regular short and long-term investors. Therefore, as the primary cause of economic bubbles (speculation) is almost entirely absent from real estate, or has otherwise minimal or reduced impact, it is ludicrous to speak of ‘real estate bubbles’.
Thus my position.
Q. Still, prices are tumbling down. If it’s not a bubble, what is it?
Price deflation. Plain, ordinary, old-fashioned, lemon-flavoured price deflation.
Deflation is a decrease in the general pricing levels of assets or goods, which occurs when the equilibrium between supply and demand is altered, resulting in a higher or lower purchasing power of money within the market (in the present case, the purchasing power is higher since prices are coming down).
There are two, and only two variables capable of altering the equilibrium of supply and demand: 1) a tightening or expansion of the money stock which, in turn, alters the cost of borrowing, i.e. a shift in interest rates, or 2) an increase in inventory supplies. Alfred Marshall (1842 – 1924) was the first to attempt to explain price behaviour within the context of the equilibrium between supply and demand in competitive markets. Marshall discovered that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behaviour in function of shifts in pricing.
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones
Quick question... do you publish 'Articles' on a regular basis?I'm talking like on a weekly or bi-weekly basis.If so, then your in for a real treat.If you haven't heard, RSS(Real Simple Syndication) is taking the Internet by storm because of its many Benefits, especially for someone(you) who provides fresh 'Quality' content on a regular basis.Not only does RSS GUARANTEE 100% delivery to whoever opt's in to your feed(s), it can also 'Syndicate' your content across the Internet in an instant to thousands of websites and portals delivering an avalanche of FREE targeted traffic to your website(s) at NO Cost to you what so ever.WoW! Was that a mouthful or what? It gets better, so hold on.We all know that without Traffic to our website(s) we have no business.We also know that the Internet is starving for fresh content on a Daily basis to feed its evergrowing appetite for information.The upside to this IS if your someone(you) who publishes articles as one of your means of online promotion for your website(s) then your in for a real ride.As you well know Article Directories are one of the primary places article publishers(like yourself) go to submit their articles.Why?Simply because this is where website owners go to find fresh related content to publish in their newsletters or on their websites on a daily to weekly basis to feed their audiences need for Information.And with time al
Needless to say, all those who purchase fixer-ups, refurbish, remodel and then resell them, and think of themselves as great speculators, are not speculators at all. They are also no masters of flipping. They are just merely ordinary investors, with a super ego.
Here is the classic comparative economic breakdown, by category, of market participants operating in both the Stock Exchange and Real Estate:
Speculators
Investors (short term)
Investors (long term)
I have seen some sources last year pegging the percentage of real estate speculators to double the one of the forgoing table, and am further aware of some economists and market analysts who cite a 15 percent figure. But even if, by hypothesis, speculators represented a 20 percent of real estate market participants, 4/5 of all participants would still be made up of regular short and long-term investors. Therefore, as the primary cause of economic bubbles (speculation) is almost entirely absent from real estate, or has otherwise minimal or reduced impact, it is ludicrous to speak of ‘real estate bubbles’.
Thus my position.
Q. Still, prices are tumbling down. If it’s not a bubble, what is it?
Price deflation. Plain, ordinary, old-fashioned, lemon-flavoured price deflation.
Deflation is a decrease in the general pricing levels of assets or goods, which occurs when the equilibrium between supply and demand is altered, resulting in a higher or lower purchasing power of money within the market (in the present case, the purchasing power is higher since prices are coming down).
There are two, and only two variables capable of altering the equilibrium of supply and demand: 1) a tightening or expansion of the money stock which, in turn, alters the cost of borrowing, i.e. a shift in interest rates, or 2) an increase in inventory supplies. Alfred Marshall (1842 – 1924) was the first to attempt to explain price behaviour within the context of the equilibrium between supply and demand in competitive markets. Marshall discovered that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behaviour in function of shifts in pricing.
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones
Have you ever noticed that some business owners continually complain about how bad their industry is?Or how bad their customers are?Or how bad their suppliers are, or how bad their staff is?Yet in the same industry and in the same area there’s’ probably a switched on business owner that is absolutely creaming it.I find this all the time.Switched on business owners have the same conditions yet they just seem to be able to make it work.Why can they make it work?And how can you do the same?I have found that the best business owners focus on their business. And they focus on the things that they can control.If there’s something happening around them, or in their industry that they can’t control – they don’t let it get to them.They just adapt their business so that they can survive and prosper.So what are they doing?They are controlling their business.Let me explain.The media tends to talk about a handful of successful business people and the word ‘ruthless’ is often used.For some business owners, they truly are ruthless. That’s their way.I am not ruthless. And I don’t promote being ruthless.However I am fussy and if I don’t like something I won’t do it, I won’t tolerate it and I’ll move to change it. Immediately.You see I have found that very successful business owners have a low tolerance to pain.Where as mediocre business owners
Thus my position.
Q. Still, prices are tumbling down. If it’s not a bubble, what is it?
Price deflation. Plain, ordinary, old-fashioned, lemon-flavoured price deflation.
Deflation is a decrease in the general pricing levels of assets or goods, which occurs when the equilibrium between supply and demand is altered, resulting in a higher or lower purchasing power of money within the market (in the present case, the purchasing power is higher since prices are coming down).
There are two, and only two variables capable of altering the equilibrium of supply and demand: 1) a tightening or expansion of the money stock which, in turn, alters the cost of borrowing, i.e. a shift in interest rates, or 2) an increase in inventory supplies. Alfred Marshall (1842 – 1924) was the first to attempt to explain price behaviour within the context of the equilibrium between supply and demand in competitive markets. Marshall discovered that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behaviour in function of shifts in pricing.
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones
If you have ever been asked by your wife, husband, child or friend to have someone else as an authorised signatory to you, i.e. a supplemental signatory, on your credit card account you no doubt gave this some serious thought. If you agreed to the request, the following are some reason why you should have a credit card in your own name and they have a credit card in their own name.Credit HistoryPossibly the main reason why you should have a credit card in your own name is the effect it has on your credit history.In short, you have had to manage your financial affairs very astutely in order to gain a sufficient credit worthiness to apply for, and be approved, a credit card. Conversely, any supplemental signatory to you on your credit card doesn’t have to do anything – as the card is relying on your credit history to determine the risk of the third person. This may sound a little harsh, but if you think about it you are the one who is responsible for repaying the card, so why shouldn’t they rely on your ability to repay rather than some third person who has no obligation to repay them if there is an outstanding debt?Now, you may well be thinking: “That’s not a problem, I’ll control their spending.” And, you may even be able to manage that feat. But, here’s another reason why you should have a credit card in your name and they should have a credit card in their name. Throughout the time that they are supplemental signat
The propensity to invest in real estate is partly dictated by the expectations of future profitability and by the present perception of market risk. The table above shows that a good 40 percent of real estate market participants is composed of speculators and short-term investors. These folks are in the market solely to increase their level of wealth, in the short and very short run. When the perception of market risk on the part of 40 percent of market participants increases sharply - which is exactly what has been happening these past few months - capital will exit more and more from the sphere of real estate and will find its way elsewhere (typically the stock market). There occurs, in other words, a shift in volatility risk.
The turnover in real estate markets drops when the pool of buyers ready, willing and able to consume real estate products abates. This, in turn, discourages consumer spending on real estate products, demand lowers and markets cool off.
Q. Bubble, deflation ... call it any which way you want, the result is all the same for me.
But not for me.
The difference consists in the repercussions and effects that bubble bursts and deflation have on market wealth, defined as the combination of materials, labour, land, services and technology in such a way as to capture a profit (Adam Smith). The aftershocks of a bubble that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. The greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones collapsed 22.6 percent in value in a single day! It took nine years for Wall Street to lure investors back.
The burst was so powerful that even today, nineteen years after the fact, there are people out there still hurting. Lives were changed forever, companies were wiped out, families were ripped and broken apart and a few people committed suicide. And not only in the United States, but all over the world. Markets fell 41.8 percent in Australia, 22.5 percent in Canada, 45.8 percent in Hong Kong, and the 26.4 percent in the United Kingdom.
Now, that’s a bubble burst!
With deflation, on the other hand, wealth can be recovered. It is still there, though it cannot be tapped.
Finally, a few words about the soundness of real estate as a wealth-generating vehicle, even during times of deflation. Homes have appreciated consistently to the tune of 7.5 percent per year over the past thirty years, notwithstanding the numerous ups and downs the industry has been going through. Unfortunately, 40 percent of Americans and 35 percent of Canadians are renters and that is too bad, since the fastest way to riches is buying real estate, as opposed to buying just about anything else, including stocks and bonds. The average Canadian renter has a net worth (assets minus liabilities) of CAD $6,000. The average Canadian homeowner has a net worth of CAD $225,000 (source: Canadian Real Estate Association). Figures in the States are comparatively similar.
One of the best wealth-generating source is mortgages. Even the so-deprecated ARMs are good, since they are used to buy homes and build up value. We do everything with our homes in addition, of course, to live and sleep inside them: we use them as collateral for personal lines of credit, we use them to increase our net worth, we use them to establish our hierarchy within society, we use them to improve our own self-esteem and, last but not least, we also use them as the parachute of last resort to save us from dire financial straits. Ownership of our homes is everything to us.
My concluding remark is that a slow-down in real estate has actually a positive influence on the economy by allowing salaries and wages to catch up and thus to regenerate the pool of buyers, especially first-time Buyers, entitled to take their first steps into the world of real estate. The ratio between wages and real estate market values is too skewed to values. Whereas market values in metropolitan areas have appreciated an average of fifteen percent per year for the past five years - or a total of seventy-five percent, salaries have increased an average four percent per annum – or twenty percent total. There is, therefore, a fifty-five percent gap, which accounts for the problem buyers are facing today when it comes to go to the bank and qualifying for a loan.
Thank you for the e-mail.
Luigi Frascati
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