Real estate is a very interesting market. To start, all real estate is local as the saying goes. This is true. While national and international numbers are helpful, ultimately, each real estate market is different. What is taking place nationally often is countered with local markets.
For example, the national real estate market in the U.S was on fire the last 10 years. However, I would not surmise that coal mining country did very well. Presently, while the residential market is still holding firm, placing like San Francisco and New York are suffering major drops.
Many know the reasons for this and understand there are difficult times ahead. That said, many believe things will bounce back in the medium term after some of the challenges are overcome.
This is where some can be making a mistake. Things do not always return to normal.
Take Tokyo for example. That was a high flyer in the late 1980s. While it still has some of the richest real estate in the world, look at this chart. It is a real eye opener.
Even though this is a few years old, it details how far down that city fell over the course of the last 30 years. The real estate market is still not back to the point it was back then.
For those old enough, at that time, Japan was the country that was going to overtake the United States and become the most powerful economy in the world. It is similar to how everyone is approaching China.
The Japanese economy was strong and the Yen kicked the dollar's ass. This made it easy for Japanese companies and individuals to buy real estate in the United States. They were getting it at a huge discount due to the exchange rate.
Unfortunately for Japan, the idea of them becoming the most powerful economy was a big misguided. The early 1990s saw a demographic outcome that sent the country into an economic tailspin. Deflation took over on a massive scale and, despite of 25 years of printing, they are still mired in it.
In short, the Japanese population is getting older with each passing year. This is a fact that many other countries will face over the next few decades. Most of Western Europe is already in this, China is next on the chart and finally South Korea.
Cities are not only facing demographic issues but also changing in society. We will see how serious the work from home movement is. If that takes hold like many are expecting, that is going to obliterate urban real estate markets. The artificial pricing came from their near monopoly on jobs will no longer be present. This could let a lot of air out of the real estate prices for a long time.
Few think in these terms. However, there are many example of where assets did not reach their prior pricing for a long time (if ever). I would say, prior to being bought out, there were some still awaiting $475 Yahoo.
Real estate is known for their long cycles. They tend to have long bull runs (near 10 years) followed by painful bear markets. It is not uncommon to find someone who held a property for 10 years and still sold at a loss (condominiums in Florida in the 1980s come to mind). Time the cycle wrong and it can be financially fatal.
Unfortunately, we might be in for such a period. There is a ton of debt out there and when it starts to unwind, things get messy very quickly. In the major cities, the numbers are so big per unit that they add up very quickly. A 30% drop in a Manhattan apartment prices at $10 million requires a lot of single family homes in the suburbs to offset it.
One difference that might have to be considered when looking at bubbles popping is the impact of technology going forward. We are in an era where technology is moving at a pace never seen before. Thus, even a 5 year slowdown in a market could mean massive technological changes right around the time things are set to turn around.
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