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Surviving A Global Depression – Real Estate: From Collapse To Black Hole

Updated on January 25, 2009

Although it may seem unthinkable in an age when millions of American houses are in foreclosure, there is little doubt that the global depression could turn the current property collapse into a real estate black hole.

In the past couple of decades the valuations of real property in most developed countries had increased well above the reach of the average worker. The unreasonable and unprecedented spike in property prices had created a new caste system. Those who already owned property could live lavishly just by remortgaging their ever-increasing asset, while many others were destined to rent for eternity, as the prospect of ever coming up with a down payment or qualifying for a sustainable and realistic mortgage payment was nothing but a vague dream. Then came the subprime crash and the huge balloon deflated with a sickening rapidity. Soon, millions of houses in the United States were valued at an amount which might have constituted a reasonable down payment for the same property a couple of years earlier.

The prices of property almost everywhere has massively deflated, but even in this collapsing worldwide market, there are still absolutely staggering differences in pricing for essentially the same house, simply based on geography. Let’s consider two houses, both listed for sale in January, 2009. Both have four bedrooms, cover about 2,000 square feet (186 square meters) on a reasonable-sized lot, and were built in the 20th century. They are both in pleasant, calm, neighborhoods in English-speaking, stable, peaceful countries. They contain similar fixtures and appliances. They are almost identical in every way. The difference is that one is on Bellevue in Chicago and the other is in Swift Current, Saskatchewan, Canada. Both these locations experience a very similar climate.

The real difference is in the price. The first house is on the market at $2,749,000. The latter is also for sale, but for $131,900. How one house can cost 21 times more than the other is not just an illustration of the tired old real estate agent’s chestnut “location, location, location,” but a sign of what the value of a house really is. The cost of the building materials, labor, etc. that went into the Saskatchewan house isn’t too different from the Chicago house. The former is fully detached and the latter is a townhouse but that doesn’t affect the cost to any great degree. The difference in the valuation is that Chicago's Near North Side is believed to be a more desirable place to live than Swift Current. Now, I’ve been to both places, and I can assure you that as long as you don’t go to Swift Current in January, it is a wonderful town. Personally, I’d pick it over Chicago. But while you can jump in your car and be at the Sears Tower in about half an hour from the house on Bellevue, traffic permitting, the only place you can be in half an hour from Swift Current is the middle of nowhere.

But what if the middle of nowhere became more attractive than downtown Chicago? What if the charms of a magnificent metropolis such as Chicago suddenly turned into nightmares? What if people shunned places such as Wrigley Field, Millennium Park, Shedd Aquarium or the Field Museum for their teeming masses of desperate, homeless, starving throngs, preferring to be isolated and safe? Then the house in Swift Current might be worth more than the one in Chicago.

You can take this relative economy one step further. I found a not-luxurious but perfectly serviceable two-bedroom house on a large lot not far from Swift Current selling for $10,900. That would barely buy you the area of a few floor tiles in the Chicago house and is less than its typical mortgage payment for a single month. And if you can’t handle chilly winters, you may find similar values in small out-of-the-way towns in western Australia or the U.S. southwest that might be better suited to you.

The lesson is to not be hypnotized by high property values. Property values are illusory at best. They are part hype, part expectation, and part delusion. You charge what the market will bear because everyone else around you is. The house itself is really only worth the cost of the materials and labor that turned the previously empty lot into a residence. The justification for asking those prices can swiftly dissipate and the entire pattern of real estate valuation can be tipped upside down to a point where the cost of the materials of the house itself is higher than the selling price!

Next: Surviving A Global Depression – The Apocalyptic High Severity Scenario

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    • real-estate2010 profile image

      real-estate2010 7 years ago from USA

      Great article! Prices have been propped up for years, and the government and banks are still not letting house prices adjust. Case in point: I live in Las Vegas and it is said that 80% of the homes are underwater, yet there are only approximately 8,000 homes for sale on the MLS. I know people who have not made a house payment in 24 months. If the banks actually foreclosed on all the homes that are in default, there would be tens of thousands of homes on the market for sale, and what that would do is give us the adjustment that the real estate market needs. It is still propped up and at some point, it has to fall! Yet, if you know how to buy right, it can still a good time to buy!

    • Hal Licino profile image

      Hal Licino 8 years ago from Toronto

      Thanks for the kind words. Much appreciated! :)

    • realestateuk profile image

      realestateuk 8 years ago from United Kingdom

      A level-headed post you have here. Devoid of the hype that accompanies much real estate PRs, your post actually spells out a tempered kind of optimism in real estate. As you said, "Property values are illusory at best. They are part hype, part expectation, and part delusion." It's about time someone pointed that out succinctly.

    • Hal Licino profile image

      Hal Licino 8 years ago from Toronto

      Thank you very much. Let's hope we can pull out of this global slump and it will just stay fiction! :)

    • midnightbliss profile image

      Haydee Anderson 8 years ago from Hermosa Beach

      a very good article.

    • Hal Licino profile image

      Hal Licino 8 years ago from Toronto

      I'm not familiar with NAR but all real estate agents are brainwashed into believing that property values will always go up and up and up! Until when? Until a one bedroom apartment costs $100 million? What comes up must come down and it's been coming DOWN DOWN DOOOOOOOOOOOOOOWN!!!! :)

    • bgamall profile image

      Gary Anderson 8 years ago from Las Vegas, Nevada

      This is a very true hub. They said there was no more Real estate in Tokyo, the most expensive city in the world, until prices declined by over 50 percent in a 16 year period. Don't believe the real estate shills like NAR. They are liars. JMO.

    • Hal Licino profile image

      Hal Licino 8 years ago from Toronto

      Thanks ocbill. I hope it's nowhere near as bleak as I'm believing it's going to be, or we're all in for one very unhappy ride!

    • ocbill profile image

      ocbill 8 years ago from hopefully somewhere peaceful and nice

      very good reading. it will be interesting whats to come.