Investing in real estate is not without risks, especially in the current market. Some extremely high profile “experts,” are getting their fingers burned as we speak. Donald Trump is one that immediately comes to mind, and although he is unlikely to end up losing the shirt off his back, the chances are he will be spending a good proportion of the next few years in and out of court defending his “good name,” and protecting himself from a variety of lawsuits ranging from the creditors of Trump entertainments, which filed chapter 11 for the second time earlier this year to Credit Suisse, the bankers of one of his failed apartment developments.

So when is a good time to invest in real estate? And I make a distinction between investing for monetary gain and investing in a piece of property to live in. The market around the world has dropped considerably in value since the peak prices of 2006/7, but I feel has a considerable way to fall still. This is a generalization, but looking at the current world situation and the lengths being gone to by the world’s governments to artificially prevent the market from correcting, I have come to the conclusion that they are not going to be able to do so and in general it is not yet time to invest in property unless you are going to live in it, or you are reasonably sure it will provide enough income to pay for itself. In the latter case, I would suggest waiting also because a property that costs 80% less will pay for itself all the sooner.

I will give an example, and it does not really matter which country is used as an example, the fact is, the amount of privately owned real estate has shrunk considerably when compared to institutional and governmental ownership. Take Spain for instance.

The Spanish banks, although largely not involved in the US subprime mortgage mess, managed to create a mini subprime crisis of their own, and are a good indicator of where the world is headed real estate wise. This is how the scenario has played out so far in Spain.

1. Boom, boom, boom. Between 1995 and 2007, Spanish property prices increased by more than 200%, fueled by low interest rates, 40 and now 50 year mortgages available to anyone with a pulse. Prices rose to such an extent that the nation went heavily into debt and by 2004, household debt stood at €595 billion—equal to 74.5% of the country’s gross domestic product – and much of it tied up in mortgages. Average house prices are around 8 times average salaries.

2. Debt debt debt. Household debts of this magnitude became unmanageable and foreclosures began to increase in 2004/5, continuing to increase throughout the following 4 years. At the same time, credit became scarce, because the banks were finding large portions of their outstanding loans going unpaid. Developers went broke forcing banks to seize assets and partake of “debt for equity swaps,”

3. 2005-2009 Banks refused to sell these seized properties at genuine market values, because that would mean heavy losses and allow property values to correct downwards, which would mean the banks would be forced to re-evaluate their own assets and would be shown to be insolvent.

4. 2009. The Spanish banks have now become the biggest property owners in Spain. At the same time, the insolvency in the banking system has forced the Spanish government to start bailing out banks beginning with the regional savings bank Caja Castilla-La Mancha, which will almost certainly not be the last. The European Central bank also sneakily injected €60 billion into Spain by buying Spanish covered bonds. All of it destined to keep the banks afloat. This last piece of information went largely un-noticed by any of the national or international news sources.

My thinking now is that we have reached critical mass. Throughout the down turn, official average Spanish property prices have fallen a few percent, but new builds have stopped almost completely, the amount of sales has gone through the floor and the Spanish economy is being affected because it has come to a standstill. Unemployment is now at 17.8% - and that is the official figure. There are some where between 1.5 and 2 million empty properties and still property prices are staying where they are. Kept there artificially by the government and banks.

Spain is by no means alone in this situation, and I am sure if you are American or British, you have seen similar scenarios played out in your own country. How much real estate does the US government own? Across the world, the governments are taking over banks or injecting huge amounts of capital, and the banks are, in turn, using this capital to take over either individual, privately owned real estate, or entire developments when the developer goes broke. Some of this gets sold off piece meal, but by and large it is sitting on a bank’s asset sheet somewhere at a value (my estimation) somewhere around 900% more than it would be worth in today’s market if all this stock was put up for sale.

It is very difficult to predict exactly where this will end up because of the amount of “quantative easing” being done by all the governments. The UK, the USA, and the Eurozone have already been forced to inject vast amounts of new money – from nowhere. But this is just serving to keep the stock markets from collapsing. I mean – General Motors went broke the other day and the stock market didn’t take any notice,

I cannot speak for China, because it is all but impossible to find any true figures as to what is going on over there. But I can say that in North America, Western Europe, the Middle East, Australasia and Central America, there is a critical mass of real estate owned by the government – either directly or indirectly through the financial institutions. The amount of residential property already sitting on their books is too vast to be able to quantatively ease their way out of, and the commercial property defaults are beginning.

Commercial property funds around the world have been frozen, and values have fallen 40-60% from peaks. And we have only just begun. Anyone who thinks the real estate bubble has already burst is sadly mistaken. It is nowhere near burst yet. It will burst properly over the next two years. And this will be the time to invest in real estate before hyperinflation kicks in. I do not believe it is going to be possible for the governments Inc to be able to get away from this bubble. It was caused by twenty years of runaway lending with no basis in reality and the time to pay the piper is fast approaching.