The Housing Market Will Never Be The Same

Back on our travels this week :). Marbella will be home for the next few months.

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3 Random Thoughts

1. Housing Will Never Be The Same

This week I wrote about the pathetic investment options out there for Irish investors.

Despite high ongoing fees (mortgage, maintenance, insurance etc.) and the actual headache of being a landlord, it’s easy to see why real estate functioned as the de facto investment portfolio for an entire generation.

Wealth creation was a rinse-and-repeat function where couples stuffed money away until they had enough for the ‘next house’. As a result, we have an economy where 70% of household wealth is tied up in real estate.

Driven by the profits it created, Ireland became obsessed with owning real estate.

But real estate as an investment won’t be nearly as successful for our generation. (If you are able to get a house, that is)

All you have to do is look at the anecdotal evidence all around us to confirm this. 

My parents bought the house they currently live in for 30k (pounds) 35 years ago. The house is now worth roughly 450k.

 I typically despise these back-of-the-envelope calculations when It comes to property, given the endless variables and ongoing costs involved but bear with me.

That's a gross return of 15 times the original value. Now there are upgrades, a change in currency and other adjustments to consider here, so for argument's sake, let's call it 10X

To achieve the same level of growth over the next 35 years, you would be left paying 4,500,000 euros for what is a pretty modest house.

THIS WILL NOT HAPPEN

Sure, we will still see property prices increase over time, but the rate of growth won't be anywhere near as meaningful for one simple reason. 

Interest rates.

We have squeezed interest rates as low as they can go.

The house price appreciation we have seen was justifiable because the mortgage rates on housing continued to fall in recent decades. This allowed people to take on more debt without severely impacting their ability to repay that debt.

If we go back to my parents, they were paying 14% on their mortgage. Mortgage rates are currently between 2 to 3%.

A relentless drop in interest rates gave way to higher and higher prices for houses, but interest rates are now on the floor.

The juice has been squeezed.

 In fact, the trend has started to reverse.

Average 30-year Fixed rate Mortgages

The power of this 'bulletproof' money-making strategy has been significantly reduced.

Our generation will need to adopt a new investment strategy. What worked for our parents won't work for us.

Trees don't grow to the sky.

2. Good stock/bad company 

Last year I wrote a piece about whether or not to invest in Meta (Facebook). (Read Here) 

Recap: I listed everything I hated about the company for 10 minutes before closing by saying, 'if the stock price continued to fall, it would become an attractive trade'.

Since November, Meta has jumped 58%.

Do I think Meta is a good company?

No

Was it a profitable trade?

Absolutely

There are 2 points to note here.

1. Know the difference between an investment and a trade

2. A terrible company can be a great opportunity at the right price.

PRICE IS EVERYTHING.

So much of the general investing advice out there is about finding great 'quality' companies with strong balance sheets and solid growth potential…. Technically that is good advice on paper, but not much use in the real world.

Perhaps in this utopian scenario, there are mega-growth companies just lying around at bargain prices. In reality, however, everyone is looking for these companies, so they are extremely hard to find at a justifiable price.

Financial websites will tell you to focus on finding great companies you love and just hold them over time. No need to worry about the price; If it is a quality company, it will grow into the valuation.

I call bullshit on all that fluffy nonsense.

Finding the greatest company in the world means nothing if the valuation doesn't make sense.

Let's take Amazon, for example.

Despite functioning as the online marketplace for the entire world and hosting the leading cloud service provider (AWS) the stock fell over 50% last year.

Amazons 2022 Decline

Amazing company, but everything has a price.

Meta was the complete opposite.

Investing isn't about finding great companies.

In the irreverent words of my buddy Donald J Trump, it's all about 'the art of the deal'.

It's just one weird multi-trillion-dollar game of bargain hunters. An endless loop of trying to determine what something is really worth vs. what it is selling for.

Think Antiques roadshow, but with suits.

It's never about whether a company is good or bad, just whether it is good value.

So stop asking yourself if you have found a great company and concentrate on whether or not it's a great stock. There's a difference.

"The stock market is filled with individuals who know the price of everything, but the value of nothing."

- Philip Fisher

Free Weekly Stock Tips

3. The Year of the Entrepreneur.

If you look at the data, more and more people are starting their own businesses.

In the U.S. alone, new small-business applications were up 44% in 2022 from 2019, with over 5 million businesses created. That's 14,000 new businesses a day.

The pandemic has allowed us to rethink the way we do things, and advancements in AI and an abundance of supportive platforms make it easier than ever to bring a product or service to market.

• Topmate and Shopify provide an instant platform.

• Workstation provides the productivity ecosystem you need.

• Chat GPT functions as your research assistant

• Zapier automates pretty much everything.

• Calendly takes care of all your scheduling.

• Canva provides all the creative tools you need.

The list is endless

It's not easy, but there are so many opportunities for those willing to take the leap.

2 QOUTES

"Nothing so undermines your financial judgement as the sight of your neighbour getting rich".

-JP Morgan

"Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years. So I think — the market is about 3,800 today, or 3,700 — I'm pretty convinced the next 3,800 points will be up; it won't be down. The next 500 points, the next 600 points — I don’t know which way they’ll go. So, the market ought to double in the next eight or nine years. They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it."

 -Peter Lynch

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