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    Real Estate Fundamentals and Cycles

    Real Estate Expressed In Real Money Or Gold

    • Real Estate in the USA
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Belgium, France, Netherlands

With Real Estate Bubbles deflating in the USA, the UK, Spain and most countries in the World, it is now also happening in Belgium. (remember Real Estate is a one way leveraged investment)

Example of forces which will push Real Estate prices down:

  • Existing or new Capital Gain tax.
  • Second residence tax
  • Existing or new Wealth tax
  • Rising interest rates (the higher the interest rates, the more expensive a montgage and monthly payments
  • Reluctance of Banks to grant Mortgages
  • Selling pressure as generation passes away and Inheritance taxes need to be paid on the overvalued properties and as a result we shall see more and more forced sales
  • The growing unemployment and job insecurity
  • The complex and more stringent legal rules: isolation, heating norms,...
  • The higher maintenance costs and the legal inablity to adjust rental income
  • Immigration will become harder and many will return to their home countries (ex. Turkey where the economy is doing better)
  • The bubble and prices at a level unseen since 1740

Posted September 10, 2010

Not easy to explain WHY the Belgian Real Estate bubble will burst and for the (potential) real estate owner extremely hard to understand WHY the price of Belgian real estate can and will fall by at least 60%.

The Belgian real estate cycle is lagging on the American cycle by about 2 to 3 years because of the social system and the local taxation system.

The origin of any real estate bubble is fractional reserve banking, the creation of fiat money out of thin air and the misallocation of these funds.  Misallocation we have as soon as supply is not regulated by an increase in demand but rather by a self feeding speculation. Because of an artificial excess of funds and artificial low interest rates incorrect signals are sent to the market: builders continue to built in a market where there is no shortage of homes and people continue to buy Real Estate because they think prices will continue to raise. (would you buy a house if you knew you could buy it at a price which is 25% lower next year?). The action becomes self feeding like any bubble (the Mississippi scheme, the Tulip Mania, the bubble) up to the point where the demand stalls. Demand stalls because Real Estate prices have become so expensive that even at historic low mortgage rates they become unaffordable: the market dries out. As the recession becomes a depression, taxation increases, more people loose their income and real spendable income drops (because of inflation), the consumer spending pattern changes.

The marginal trades make the price of the street. As sellers have to lower their asking price to meet Demand, the price of Real Estate continues to slide down. The Bubble busts....and the price decrease becomes self feeding.

Note: a mortgage is a consumption credit only and not-self destructing. Hence it is not a vital part of an economic boom.

Posted July 15, 2009

  • Belgian Real Estate rose 'proportionally' as much as in other countries. We have a Global Economy. For this reason alone, it is incorrect to pretend Belgian did not have a bubble. There is and was no such thing as a micro climate for Real Estate.

  • Belgian Real Estate is compared to other countries, extremely expensive...and also 'old' Just check the examples below.

  • Belgian Real Estate is a HOCG (High order Capital Good) and its real value will fall as a consequence of the recession/depression during the coming 5 years. During the recession, maintenance expenses and taxes rise and (Potential) Rental income falls in nominal terms. We are rather sure Belgian Authorities will impose Capital Gain tax and Wealth tax in the near future.

  • Belgian Real Estate will fall as Long Term interest rates soar as a result of the (hyper)inflation. All Real Estate will.

  • Belgian Real Estate is unable to keep up with the Inflation. Expressed in Real Money or Gold, Belgian Real estate sits in a solid Down trend

  • Commercial Real Estate is the next shoe to drop. As the recession/depression gets worse, more and more commercial properties are "for Sale" and/or "for Rent"...but as there is NO demand, they stay vacant.

  • Equities can correct in only months' time, Real Estate needs years. Compared to Equities (Equities also are Real Assets), it takes a lot longer for Real Estate to correct the incurred loss.

  • Stocks are 'liquid' (contrary to Real Estate), assuming these are quoted on a major stock market (most are).

Posted January 10, 2009

After Euphoria comes denial and after denial comes panic. Only when we see panic is the time to buy. Japan's house prices peaked in 1991 and 18 years later still stand an average 60% below their peak.

Posted December 22, 2008

Where is the idiot pretending there is no Real Estate bubble in Belgium? According to inside information the Belgian bubble has already busted.

1 = 1 + 1 + $ 5,000

+ $ 5,000

  • Sell one 60 year old worn out 1,000 sq.ft./100 m² town house with no central heating, no AC, bad or no isolation for €150,000 or approx. $ 220,000

  • Buy one historic renovated  Cottage (2,800 sq.ft./280 m² built – high ceilings – hard wood floors - historic building) for $110,000

  • Buy one $ 100,000 lovely renovated family home (3,000 sq.ft./300 m² house – renovated, central heating, AC, lovely garden)

  • and save $ 5,000/€ 3,250 cash.                                        click here for more

Updated December 27, 2008

Not only do prices of Real Estate come down. Rents are also falling. Even in Belgium Supply is larger than Demand and more and more properties are offered as a rental because they simply cannot be sold.  Demand has fallen as all who could afford have acquired a property. The price of apartments along the North Sea coast have 'officially' come down by 20% .

Posted November 11, 2008

Professionals start to admit that sales of Real Estate in Belgium is slowing down and that we have entered a buyers' market. Prices are down at least 10% to 15%.

Posted October 22, 2008

Even in case we don't fall into a depression, we remain extremely negative for Real Estate. If you think about Real Estate as a healthy investment, you at the same time have to define the meaning of a 'good renter'. Today even a Bank and/or Insurance company have become dubious renters. What about Joe-6-pack?

As the deleveraging of the financials goes on, they also will have to sell Real Estate assets. Who's gone buy them at what price and where will they get the mortgage from?

Posted October 8, 2008

According to Real Estate group Trevi, the price of Belgian Real Estate has fallen by 15% since January 2008.

In the Real Estate sector, at first the market dries up. Next there is a foreclosure on your neighbor's house...and it this forced sale which brings down the value of your own house.

Housing or a roof over your head costs money, weather one has the funds available or not. By buying or building a home and paying hard cash for it one forsakes to the compiled potential interest income over the lifetime of the property.

Depending upon the quality and location, renting a house valued at €300,000 yields from €800 to €1,200; half the financial cost of buying it. The renter doesn’t has financial restraints, doesn’t pay any taxes on the property and all maintenance expenses are paid by the landlord.

As most Belgian's are Real Estate lovers and owners, the topic is extremely sensitive. For many real estate owners, it is already difficult to accept a Home  wears out and gets technically old: isolation standards, heating, bathrooms, kitchens,...  Nobody wants to see his main assets and in many cases his ‘life savings’ erode. But they always do.

Belgian Real Estate is in a similar position as US Real Estate was a couple of years ago; just before ‘the bubble’ busted.

It is characterized by exactly the same disbelief that was seen in the US just before the pin touched the bubble. At that time, real estate brokers were using each and every arrow they had left to get any possible property sold: 30 and 40 year mortgages and flexible interest rates. Some builders went so far as to allow a complimentary pool and automobile.

Today, buying a medium sized house for € 300.000 with a fixed 20 year mortgage, costs € 2,000 per month + taxes and maintenance costs.

In 20 years from now, the total cost of the property will be € 480,000. Assuming it is still worth the initial € 300,000, the financial cost is € 180,000. This doesn’t include taxes and maintenance expenses. If however, prices stay stable or come down like we anticipate, monthly losses can run up to € 1,687 + Taxes and maintenance expenses. Real Estate is together with the Automobile 'the taxation' item by excellence: you simply cannot fold it up and take it out of reach of the tax man.

For the table below, the Total cost was calculated based on a fixed 20 year mortgage.

Price expectations Market value Total Cost Profit/Loss Mo. Profit/loss
60% price increase €        300.000,0 €        480.000,0 €                      - €                       -
00% price fluctuation €        300.000,0 €        480.000,0 €        180.000,0- €                750,0-
50% price correction €        150.000,0 €        480.000,0 €        330.000,0- €             1.375,0-
70% price correction €          75.000,0 €        480.000,0 €        405.000,0- €             1.687,5-

What happened from 1990 to 1993 in Japan is now happening in other countries in sequence!

Over the past years, each and every Belgian who could afford it and even those who could not, either bought a home or built one.  Goldilocks has for years been holding the hands of Belgian Real Estate and not a living soul that believes trees don’t grow all the way into heaven. Belgium is , like Manhattan, London city, California and Florida were, a NOT special situation.

By today, Americans and Brits have already experienced that Real Estate was nothing more than a dream which was fantasized by Greenspan and his buddies. Many Americans were sure the (potential) rental income would at least cover the mortgage expenses and the Renter would pay for his investment. Bankers were over happy to confirm this incorrect idea as each new Mortgage meant an extra income. Reality shows it is not!

History shows over and over again that even inflation has been unable to keep up the real value of a Home. As inflation increases, the Taxation and the maintenance costs increase. To please their voters, Authorities have invented different mechanisms (ex. Indexation) to limit the increase of rental income. Even the inflation index is being cooked in such a way its impact on the rents is minimized.

Belgian birth rates have been coming down for years now. Still the Real Estate bubble kept on inflating against a background of growing supply and falling demand. What we have, is a perfect Von Mises example of misallocation of funds in Belgian style.


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