I was reading this article describing the massive fall of house prices in the US and the investers cashing in and there is a fabulous quote near that bottom
I could say I bought for 50 cents on the dollar of last year’s price, because I did, but I think that’s a little bit of hyperbole because last year’s price was last year
People always talk about the value of things like it’s money in the bank and this is the fundemental failure in the ridiculous “house price investing” that I’ve noticed in NZ and England. People buy a house for X dollars. That is a real value, that’s how much you paid. In a year, if someone tells you that your house is worth 2X, that’s nice to know but meaningless. It only has any use if you sell your house for 2X. People always talk about cents in the dollar in terms of investment costs comparatively. You can only compare the price if you sell something though.
Unfortunately banks don’t work like that and will lend you more money against your mortgage if the increase in valuation of your house has increased your equity. So that 2X means something to the bank and as a result people feel richer because they pull money out and spend it, usually on consumer goods which devalues quickly. This is okay, as house prices usually go up. However in big bubbles like we’ve witnessed around the world happening, if the bank lends you on 2X and suddenly your house goes back down to 1.5X, you’re in big trouble. If you had to sell, you’d be selling at a gain of 50 cents to the dollar but at a loss to the imaginary (valuation) price. That’ll be 75 cents in the dollar of what the bank lent to you on. Ouch.
So the rule is simple, when you sell you are always selling at one dollar to the dollar. Valuations are indicative only and there has never been a stock or asset that hasn’t dropped in price at some point, that is a economic impossibility. Make hay while the sun shines and if you have any cash lying around or can generate some cash at the moment do so, you will pick up some bargains in the next year to two years.
