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Tuesday, February 5, 2008

Real Estate is no Longer a Sure Thing

I think residential real estate booms in most Western Countries are over. Real Estate is going to be experiencing its own kind of implosion.

The fundamental statistic that nobody can change, is that each new generation across the OECD is roughly 60% of the size of the previous generation. The thing that made real estate the investment that you couldn't lose on in the long term simply because there'd be more people out there to move into the buildings or the homes. We've gone into reverse on this.

So places like the coast of Spain will continue to benefit from people who get second homes or decide to move there. The number of Brits who move to Spain to escape the British climate and so forth. You get home buyers that way. Similarily in palces loke the coast of Florida, Mexico and Panama. But on a total basis, what you have is a failure to reproduce (or even replace) the population. So that real estate has moved from being a growth asset over the longer term to one that over the longer term can only go into contraction.

Many people I know plan on selling their home and use the proceeds to fund their retirement. As time marches on and the Baby Boomers retire and try to cash out of their homes we will experience a long term secular decline in real estate.

This is a new theme that has not been considered by most of us.

This is why we must invest in income producing assets today to fund our retirements tomorrow.

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