What is real estates innate value? Is real estate a good storehouse for value. This is a question worth some consideration as the world emerges from the most difficult economy since the Great Depression.
The ideal store house for value is some item that offers complete liquidity and consistent unchanging demand and relative supply. In this case, you have a product that offers a perfect reflection of economic value available to you at all times. Because the demand and relative supply don't change, in theory, this item is the perfect barometer of inflation's effect on value or should be.
Real estate does not because of the difficulty measuring all the drivers of price and the effect of a relatively large transaction amount offer complete liquidity. Next, because of population shifts, demographic shifts, economic shifts, and population growth demand is evolving. For example, in Japan population is shrinking applying a significant downward pressure on value in that nation for real estate. Curiously, for the individual Japanese because of the other effects the relative value of their total supply could be rising on a per capita basis. As illustrated by the example because of these points, real estate is not an ideal repository for value. On a day to day basis, some commodities (and I would argue gold is not a good example) come much closer to achieving this position. Most of the time, oil is a great example and some food stuffs also are good examples.
However, is the ideal store house the best place to protect your hard asset value? In my opinion the answer is no, because changes in global use of commodities sometimes quickly undermines the value of these items. Perhaps, as Will Rogers said land is the best storehouse. Will Roger's quote, "Buy Land, they aren't making any more is largely true.
Real estate's value is driven by three components. The first is land value. The second is location value. The third is building value. The latter is most damaged by time and depreciation and the least predictable. However, in a world of increasing demand for building products, the third is also the one most uniformly effected by inflation indexed pressure because of new construction. The first is the least significant and most rigid because this is strictly a use value component. The third is the largest growth opportunity as people have shown a tremendous capacity to put more into less area for hundreds of years overtime. This tendency is driven by a intrinsic pressure of the best location being the most important factor of value. Buying great location will produce tremendous value.
Investors can use these factors in a very confused global economy to protect assets now and to develop value in the future.
Blake Ratcliff (US Naval Academy Graduate & Marine Officer, Serial startup entrepreneur, COO/CEO, multifamily / residential investment founder, and property manager).
Blake's crafted 100
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