On real estate risks.
Real estate is one of the least volatile and probably safest asset classes.
It is incredibly hard to have a permanent loss of capital — until you add leverage.
Because it is deemed safe, certain countries even allow players to over-leverage and…
Real estate is one of the least volatile and probably safest asset classes.
It is incredibly hard to have a permanent loss of capital — until you add leverage.
Because it is deemed safe, certain countries even allow players to over-leverage and…
…allow cross collateralization loans. This creates very high probability something will break eventually (fragility) as it did in 1990 & 2008.
It is a classic Peltzman Effect in play, where people engage in high-risk behaviours because it’s deemed that the underlying is safe.
It is a classic Peltzman Effect in play, where people engage in high-risk behaviours because it’s deemed that the underlying is safe.
Ironically, the risks don’t happen very often which create a feedback loop of poor decisions and over-leveraging.
Positive outcomes without evidence to the contrary encourage even more risk taking, until the final judgement day (downturns happen every 12-15 years: 1990 & 2008).
Positive outcomes without evidence to the contrary encourage even more risk taking, until the final judgement day (downturns happen every 12-15 years: 1990 & 2008).
This is very similar to what Taleb calls the Turkey Problem.
Every single month property gets more expensive, players take on more debt to buy more expensive property, and you start to believe it's just part of the game... until that Wednesday afternoon before Thanksgiving.
Every single month property gets more expensive, players take on more debt to buy more expensive property, and you start to believe it's just part of the game... until that Wednesday afternoon before Thanksgiving.
Therefore, we can assume that the behavior of most real estate investors is one of a fragile Turkey, which is a major problem (at least to us).
The metaphor for "fed frequently and fed well" is constantly receiving monthly cash flow and occupancy looking solid.
Nothing looks...
The metaphor for "fed frequently and fed well" is constantly receiving monthly cash flow and occupancy looking solid.
Nothing looks...
...out of the ordinary for a very long time, reinforcing bad behavior and high risk-taking until there is a Black Swan event that occurs.
So how does one of the safest asset classes out there create the most bankruptcies and defaults for its participants?
It's a Turkey Problem.
So how does one of the safest asset classes out there create the most bankruptcies and defaults for its participants?
It's a Turkey Problem.
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