Macro Economy

The macro economic situation that makes tokenising real estate market more attractive

House Ownership: A growth trend and a burden on the next generation.

Let us look at what the trends of the housing market, especially house ownership in the USA (case study) is likely to be for the coming decade. Since we are in the middle of COVID-19 pandemic, a lot of housing market figures we will see for the last one to two years are going to be influenced by this.

First we take a look at the demographic of the USA for the coming decade. It clearly shows that younger people (30-35-45 yrs) will dominate the overall population in the coming 10-15 years as shown in Fig 1. Thus these millennials will be wanting to settle down with their growing family, and on the other hand the retiring age group (55-65+) would want to release the equity of their houses in order to beef up their retirement bucket (for cash flow).

Fig 1: USA demographic by age group dominance (in numbers of people in the country in that age range). So for example 25-29 years of age people will be largest in number in 2020 in the USA. By 2035 this age group would be shifted to 40-44 years.

Fig 2: The long term 30 years mortgage interest rate of the USA. We are at the point of lowest interest in the last 30 years. This is not sustainable, and hence owning house will eventually become more and more expensive over the coming decade.

Fig 3: The supply of the new housing permits have also dipped during this COVID-19 crisis and this lower supply means that the demand curve would likely outweigh the supply side keeping the prices of houses higher (while mortgage interest rates remain lower).

Going forward into this decade, because COVID-19 we have had a massive increase in money supply (free money without any productive labour), given to the working population in the USA. This can be seen in money supply (M1 and M2) charts in Fig 4 and Fig 5. We have printed more money in 2 years than what was printed in the last 40 years !. Because of the nature of real estate in preserving value of money over time, much of this capital will be poured into mortgage repayments and be cycled into the housing market.

Fig 4: Money Supply M1 in the United States increased to 6750.90 USD Billion in January from 6619.40 USD Billion in December of 2020. M1 money supply includes coins and currency in circulation and not held by the US treasury or Federal reserve

Fig 5: Money Supply M2 in the United States increased to 19395.30 USD Billion in January from 19186.90 USD Billion in December of 2020. M2 money supply includes M1 and also includes savings, money market funds, certificates of deposits and other time deposits.

But just like drugs giving a boost to the person taking it, these artificial injections of capital will have a long term impact of stealing the wealth of the future generation. Money cannot be printed out of thin air. It has to be borrowed from somewhere. Either from productive human labour or in this case from the taxes to be paid by the future yet to be born generation. In principle what we are doing is that the future generation will be indirectly/directly taxed in all areas of their life and pay for the misdeeds and greed of the current generation.

Thus the debt carried by the future working generation will mean, the wealth that they generate by working, will be spent largely in financing higher house prices, study loans and other necessities of life. Thus it would mean that the large amount of wealth locked up in their houses may need to be cycled at some point in their career and for that the current housing system is ill equipped to do so. This macroeconomic phenomenon where the free money has been locked up in real estate and finally the burden passed on to the millennials in the form of housing loans will have its negative impact.

The current system is controlled by the banks are not setup to help when people fall on difficult times. For example if a person has been paying his mortgage for 5-7 years and now is unable to pay his dues for 2-3 months because he has lost his job and has no other backup cash flow, then he would have his house seized by the bank and will be put up on the market at reduced price. All the hard work this person may have done is neither rewarded or looked into. So although the person may have added value in his house, he is unable to unlock this and overcome this period of crisis

Our platform Reitcircles takes a broader and long term view on this segment and tries to solve the above macro economic issues, by helping normal house owners, use their hard earned asset to finance some of the daily needs in times of hardship and also to reinvest and diversify into other asset classes, that can bring in higher returns.