The Financialization of Real Estate Is the Problem, Not Bitcoin CryptoBlog

This is an opinion editorial by Jeremy, advisor to Escape to El Salvador, a community of professionals who help expatriates obtain residency and citizenship in El Salvador.

In recent years, there has been a lot of noise about so-called “crypto-colonizers” moving into developing countries and taking advantage of affordable housing and other amenities provided by disadvantaged locals. The Washington Post, Business Intern and even the New York Times reported from Puerto Rico, throwing around terms like “gentrification” and associating this new class of wealthy, globe-trotting entrepreneurs with more viscous words like “utopian,” “idealist,” and “evangelical.”

Now, I’m not here to defend any particular individual or how they made their money, or even what they plan to do with it. Instead, I want to delve into a very specific basis for these kinds of accusations: that the rise in prices is due to demand. Superficially, this is partly true. As anyone who has taken an introductory economics course can tell you, prices are set by the law of supply and demand. Each of them, in turn, can be influenced by a variety of factors. For the purposes of this article, I want to focus entirely on real estate.

Real estate has a supply problem: they are no longer building land and everything is already reserved. Apart from some eccentric efforts to raising islands from the sea, if you want a home, you have to buy it or rent it to someone. The seller will decide the price he is willing to accept depending on various factors: mainly his location, but also his use and the quality of his improvements. You can break this down even further and consider the view, legal jurisdiction, applicable tax regime, soil quality of the land, how easy it is to access, perhaps if it contains rare or useful minerals or other resources and finally, whether there may be a conservation or historical element to its assessment.

On the demand side of the equation, there are just as many nuances. A buyer will decide how much they are willing to pay considering all of the above, plus an additional truth: you have to live somewhere. Not picking a spot isn’t a realistic strategy unless the vibe of an overpass or the unique aroma of the dry area behind the dumpster in the downtown alley really speaks to you. There is one additional factor that weighs heavily on the minds of both buyer and seller and has driven up property prices more than any other: financialization.

As a thought experiment, imagine how much a house would cost if its value depended entirely on its usefulness as a home. In other words, how much would you be willing to pay to keep the rain from falling on your head while you sleep or to have a safe place to raise a family? How much do the materials of its construction contribute to its price? Size is important, as well as aesthetics etc., but surely you would agree that the asking price for most homes far exceeds its utility value only as a home. The rest of its price has more to do with its usefulness as a financial asset. In fact, this could be the primary price driver in most real estate markets today. So how did we get here?

Our current global economy is designed around a simple idea: by slowing the erosion of the value of money through inflation, you stimulate investment and growth. Sounds easy, right? The problem is that most people aren’t sophisticated enough to invest in a complex market, so investing in real estate becomes a proxy for a long-term store of wealth. This type of system is inherently unstable given the fate of all fiat currencies that have ever been tried. Ultimately, each currency issuer succumbs to the desire to print ever-increasing quantities, which leads to hyperinflation. Asset prices rise with the supply of money and everything ends up being too expensive to buy towards the end of the cycle.

If it wasn’t obvious, we’re at the end of the cycle. Prices for everything are skyrocketing and it’s human nature to want to blame it on the fact that home ownership, which once seemed like an attainable goal, is now just a distant fantasy. If you look around and the only people who seem to be able to afford the house you wish they had are the new rich, then they might seem easy to blame, especially if they are obviously terrible. But, and this is the important part: they are not responsible for the price increase. Blaming them for the unaffordability of the market is like blaming a baby for her pregnancy. Scammers are not the disease, they are a symptom.

So now that you’re completely depressed, you might be wondering, “What can we do about this?” The answer is simple, although for these disadvantaged inhabitants it may seem counter-intuitive. The answer is to adopt bitcoin as quickly as possible. Switch yourself, your family, your neighborhood and your country to a bitcoin standard without delay. Only by removing the ability to print money from the hands of the ruling class can we put an end to the hyperinflationary death spiral that we are currently experiencing. If you’re in a developing country, one of the best ways to get started is to reach out to that bitcoin immigrant you might have blamed quickly. Know that if they spend bitcoin on a house in your community, for example, that’s a great way to get bitcoin circulating in the local economy, and that’s what adoption looks like.

There are no shortcuts here and the transition will be bumpy. But unless we switch to a deflationary currency that doesn’t create an incentive to financialize assets like real estate, the situation will get worse.

This is a guest post by Jeremy. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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