Open real estate is a house of cards

Kurt Heck appears to be asking me for more detail in why I do not favour an “open market” real estate market. He talks of “true level” in real estate as if it is a result of some invisible force rather than a result of speculation.

The wealthy in every country have always speculated in real estate, but their speculation was limited to condensed business areas and popular tourist areas. Back in the 1930s, the comedian/actor Bob Hope bought up tens of thousands of uninhabited acres of coastal real estate, anticipating the phenomenal growth of southern California, and became a very rich man. He took a big risk and won, and there is nothing wrong with that. But when speculation expands to already developed residential areas, the nightmares begin.

This began to happen in southern California around the 1970s and by the 1990s, homes that used to sell for $30,000 were selling for $300,000.

What transpired was everyone began to see what happens when speculation takes place, and began buying properties for rental. It was simply a matter of buying a property, renting it out, watching the value climb, borrowing on it, then buying another property. You didn’t need to be rich to do that, so everyone who had enough money to get started joined in. This lead to a very “unnatural” growth in real estate values. It seemed fine to speculators; however, to the average person looking to buy a home, things became more difficult. At some point, the average person could no longer afford or even qualify for a loan to buy a home. This brought more real estate speculators and scurrilous loan institutions out of the woodwork, and they began to offer “creative financing”. No-money-down loans, interest-only payments for a set number of years, etc. The object was to keep the real estate golden goose moving for those in the know. This all seemed wonderful except that prices reached a point where even creative financing wouldn’t help sell them, and values began to drop. Now you have a situation where many people who bought at inflated prices with creative financing owed more on their houses than they were worth. As most of them had been having problems making the payments anyway, they were left with no option but to walk away from the property. This led to the sub-prime meltdown, the destruction of the real estate market and serious damage to the economy of not only the United States, but also of banks worldwide that had got into the creative financing movement.

It was never a “market-driven” evaluation. It was a “greed-driven” evaluation. The value of the properties were not their “true value”, but rather an inflated value resulting from speculation.

The worst part of the entire scenario was that the United States government fed the entire mess by keeping artificially low interest rates. This caused many homeowners who had gained a lot of equity by the bubble to refinance, take out as much money as they could get, and either buy yet more properties or just go on a spending spree.

It was like a feeding frenzy of sharks, and like a feeding frenzy, it finally ran out of prey to feed on.

Those people who sold their homes when the first large increases in value came about were, in many cases, never able to afford to buy a home again. For the potential new buyers just coming out of school, forget about it. They are living three and four to an apartment.

I say again: Thailand is ripe for such speculation and putting controls on real estate is the wise thing to do. Let the Donald Trumps and wealthy Thais of the world play their game with business areas and resorts; real estate also represents homes. Like food, electricity and water, it is a necessity for people who cannot afford to play such games. And those who espouse “open markets” are very simply real estate speculators trying to cash in.

John Arnone

Yasothon