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Supply and demand dictates that the price of real estate must increase until equilibrium is achieved. Since there is no supply, prices must rise tangentially until no one can afford to buy.
Since no one can afford to purchase real estate and none is for sale, America has become like Britain’s 99-year Hong Kong lease. Major urban centers in America have become vast 30-year interest-only lease holdings. No one actually buys or sells property anymore; they enter into purchase agreements that are de facto leases that expire upon death or “resale” (reassignment?), whichever comes first.
The whole shell game is predicated on interest rates that make selling so highly unattractive that real estate prices are forced to inflate to a present value that reflects the cost of interest-only payments equal to or slightly higher than the expected return on investment for rental properties. Even at these prices, there is no incentive to “sell” because interest rates preclude any alternative investment opportunities, and hence, the supply remains cut off and the price curve goes tangential.
Rents on “traditional” rental properties have remained stagnant only because of the massive increase in supply of the “purchase/30 year-interest-only lease”-type rental properties. In effect, all the millions of properties that used to be “for sale” are now “lease holds,” the for-sale signs not withstanding.
With this increased supply of for-sale/lease-hold rentals, we achieve the disconnected condition apparent in the market whereby rents remain stable while net present values for outright purchases go tangential due to zero supply of this type of property.
This condition will continue indefinitely, ensuring that the real estate “bubble,” such as it is, will continue to inflate. The price curve will continue to go tangential until American interest rates return to a level such that it becomes attractive to no longer hold real estate, but to sell it in return for interest-bearing investment opportunities.
However, rising American interest rates will not occur because the traditional mechanisms to accomplish this rise–a decline in the relative value of the currency or a decrease in the money supply–either have not or cannot occur.
With respect to currency debasement, it is no longer possible to accomplish a decline in the dollar relative to America’s major trading partners because they are all becoming dwarfed by the one that has its currency fixed to the dollar, our new symbiotic parasite China.
As for the money supply, credit expands to accommodate current account growth in the “silk” worm parasite, not the host, and as such it cannot be stopped. To achieve the growth rate demanded by the parasite, new and innovative means of extracting nutrients from the host body in the form of “refis” were devised.
These “refis” have allowed the American consumer to purchase additional goods, and soon services, from the parasite, completing the cycle and ensuring a new round of demands that can be met only by maintaining the tangential rise in the real estate price curve.
So there you have it. A rational for the ever-inflating bubble that defies the Laws of Physics, as well as those of dismal economics, and keeps going up!
John Downing is president of TrainingCity, a San Diego-based training and consulting company that designs and delivers corporate training programs on information technology, telecommunications, project management and leadership.
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