Throughout history many fortunes have been made and lost
in real estate. Luck has of course played a part in these outcomes, but the main reason for changing fortunes is the decisions that were made, whether good or bad. Often the bad decisions were made because of the misunderstanding
of some basic elements needed to choose real estate wisely.
For example, returning
from a business trip not too
long ago I got into a conversation with the
driver of a car that I had
arranged to meet me at the airport and take me home. This gentleman was
in his late 60s and in a very jovial mood because it turns
out, he had just sold his
house in the outskirts of London. Thus, he was
now ready to retire and was excited about the prospect
of moving to the southwest
of England where he planned to buy a cottage to enjoy his retirement. But as it turns out, that wasn’t the only reason that
made him happy.
He crowed about how well he had
done on his “investment”. Apparently, he bought the house in 1964 for £3,100, and was
now quite delighted by the £212,000 selling
price it had achieved.
When I arrived
home, I decided to see just how well he really did
and grabbed my calculator. I recognised that £3,100 was a lot of
money in terms of 1964 purchasing
power, and was curious what £3,100 would presently buy in real terms after adjusting
for inflation. So using gold as the base for my calculations, I determined that the cost of his house in 1964 was 248 ounces, which at the £985 per ounce
exchange rate prevailing when
he sold his house were worth £244,000.
In other words,
he if bought gold in 1964 and simply held on to it, he would have had £32,000 more purchasing power than he did in
1964. Thus, in real terms
his house was worth £32,000, or 31.5 ounces
of gold less than what he paid
So despite being
delighted by how well he had done,
all things considered, he did not make
a very good “investment”.
In fact, his investment lost money, and I am not even considering
here the amount of money he spent for maintenance, upkeep, taxes and other running
expenses. But here is another important point he missed completely.
He was not making
an investment by buying his house. He was buying shelter. That is the principal use of any
home, and it is what he enjoyed
for nearly five decades.
And the shelter his house
still provides is the reason that he was
able to sell his house to
I think this
example shows how misguided
mainstream thinking has become. The ever-inflating fiat
currencies used worldwide have terribly distorted what should be a
simple, straightforward decision
making process and means for thereafter evaluating your decision, like whether to buy a house for the shelter it provides.
The economies of many
countries today have been devastated
by real estate speculation.
Easy money policies of
central planners encouraged
bank lending that created an artificial boom, much of which was the result of real estate speculation. These excesses that distort and make more difficult the decision-making process inevitably need to be unwound
as banks and borrowers reduce their leverage to bring their balance sheets back to
normal levels, a process which has been underway now for a few years. To better understand this process, I always recommend using gold to assist in your decision making process.