Conversations With Casey
November 18, 2009 | Visit Online Version | www.CaseyResearch.com • About Casey
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Doug Casey on Real Estate
(Interviewed by Louis James, Editor, International Speculator)
L: So, Doug, it’s well known that in addition to investing in resource stocks, especially gold juniors, you also have a passion for playing the real estate market. What can you tell us about real estate in today’s world?
Doug: Real estate has been very, very good to me. The reason that’s true is that I buy only things that I like myself. I don’t try to second-guess what other people may want. If you do that, you’re guaranteed to wind up with mediocre stuff that nobody really wants. I have an inclination to buy unique properties, as opposed to commodity-type stuff. That approach is not for everyone, but it’s worked for me.
But let’s start with the big picture. I’ve bought real estate in many countries, all around the world, and I find that it helps to have an international view.
L: We’d expect no less from the original International Man.
Doug: You wouldn’t, I know. But most people still think like medieval serfs, tied to the land of their birth. People say that real estate is a local market, and of course that’s true. Location, location, location – you have to know enough to pick good locations, so you should deal in an area you know well. But at the same time, if you take a global view, with over 200 countries in the world to look at, you have 200 times the chances of finding an anomaly – either on the buy or the sell side. Those anomalies make for exceptional deals, exactly what you want to capitalize on. It also gives you a better idea of what the market likes, what works, what doesn’t, and so forth. If you’re isolated and insulated in just your little community, you’ll never get one up on the rest of the crowd.
L: That makes sense, but let’s start with the U.S. real estate market, because that’s where most of our readers are.
Doug: It’s also the epicenter of the financial quakes spreading around the world today.
L: A lot of people have to be looking at what seems like a degree of economic recovery, and wondering if real estate has bottomed in the U.S.
Doug: Real estate has definitely not bottomed in the U.S., and probably not anywhere else either. You have to take a long-term view of this. Remember that through most of U.S. history, residential real estate was not viewed as an investment. You didn’t buy a house to make yourself wealthy selling it to someone else. It was viewed as an expensive consumer good that depreciated – you bought or built a house to live in it, just as you bought clothes to wear or a horse to ride. It was just a part of life – a necessity, a convenience, but an expense.
But then, especially just after World War II, the government started to institutionalize mortgages, which is to say, add huge leverage to the housing market. That’s what has transformed houses into speculative vehicles. That trend has been building momentum over the decades, as more and more debt was centered on real estate. Mortgages turned into commodities futures contracts. It was a huge change from the days where you knew your banker, he knew you, and he was lending his own money.
The result has been a huge amount of overbuilding, in residential, office and retail commercial real estate. It’s going to take years and years to work this off. In addition, the entire psychology of the market has changed.
I don’t believe this recession is going to end the way all the other post-WWII recessions have – with a new and bigger boom. This is a major, secular turning point. It’s not just another cyclical low to use to load up for the next run up.
L: Okay, so, U.S. real estate is still headed down, and maybe headed much farther down if this recession turns into the Greater Depression you’ve been calling for. But at some point, it will have to hit bottom. How will anyone who wants to own real estate in the U.S. know when it’s time to buy?
Doug: I think the economic depression we’re embarking on now – a depression being a period of time in which the average person’s standard of living drops significantly – will be much worse than the one in the 1930s. So we can look at how bad things got then, as a minimum guideline for when to start looking for a bottom. For example, Greenwich, Connecticut, was one of the hottest, glitziest real estate markets back in the late 1920s. A look at comparable prices in the newspaper ads from the period indicates that residential property fell 90% over a period of about five to ten years. There’s no reason that couldn’t happen today, especially in overbuilt markets like Florida, California, etc., but it could easily be much worse.
L: Why do you say that?
Doug: Because in those days, most people paid cash, to start with. If you had a mortgage, you usually put at least 20% down, and the length of the mortgage was generally five years. Today, with even prime mortgages having much less money down, lasting 30 years, and floating rates, there’s much more leverage.
But there’s another reason. The bottom back in the 1930s was famous for people being able to buy properties for just back taxes. Today, you can buy square miles of some cities, like Detroit, for back taxes alone – but nobody’s doing it. No one sees the $500 minimum bid as worth it, partly because the properties are likely to simply remain tax liabilities well into the future.
I’ve got to say that this is the big elephant in the room that no one is talking about. To me, more important than the overbuilding, more important than the amount of mortgage debt, is that real estate taxes are completely out of control in the U.S. Nobody talks about this, for some reason, but the fact is that in many parts of the U.S., you’ll pay 2% of the assessed value of your house to the government, just to live in it. There are people across the U.S. paying $10,000, $20,000, and even $50,000 a year in taxes on what are actually quite normal houses.
L: You think you own your house, but you have to pay rent to the government, or else.
Doug: Exactly; if you don’t pay rent to the government, you’ll find out who really does own your house very shortly.
This is cash money that has to be coughed up, whether you have a job or not. And a lot of people are still going to be losing their jobs in the years ahead. We aren’t anywhere near the bottom of the employment situation. So, I think there are going to be large numbers of places – and I mean all over, not just places like Detroit and Flint, Michigan – where you’re going to be able to buy whole tracts of McMansions for past taxes. But you’ll think twice before doing it, because those taxes are going to continue.
L: They’ll get worse, won’t they? With government revenue from other sources falling through the floor, they’ll squeeze wherever they can, and your house is an easy target.
Doug: That’s precisely right. It will get uglier for that reason, and I’ll give you another reason why it will get even uglier; interest rates are being suppressed to insanely low levels. This is an artificial rate set by the government in a truly stupid and doomed effort to stimulate the economy into renewing unsustainable patterns of production and consumption. Eventually interest rates are going much higher – because they must, for reasons we’ve discussed in past conversations. Real interest rates are going to ten or fifteen percent, or more, as they did in the early 1980s. That’s going to put the final nail in the coffin of U.S. real estate.
But there’s more…
L: Wait! Don’t order now! We’ll throw in a free garage!
Doug: [Laughs] That’s right, except that people are more likely to throw in the towel when they see what happens to their utility bills in the coming years. Water, garbage, but especially electricity, gas, heating oil – energy prices, for reasons we’ve also discussed, are going way up. That means more cash money that needs to be paid whether you have a job or not, if you want the air conditioner to run in the summer and the heat to work in the winter.
And it gets even worse; most of the overbuilding is way out in the suburbs. Bedroom communities. People moved out of downtown areas because they became expensive, and transportation was cheap. Many people are not going to be able to afford to drive their gas guzzlers 100 miles per day, round trip, to a job that won’t have any prospects for a pay raise, since most people will be thankful just to have a job at all.
I think we’ll find significant tracts of suburbs that will be literally abandoned in the not-too-distant future. Just as mansions were abandoned in the ’30s or sometimes turned into flop houses – nothing wrong with the houses, except people just couldn’t afford to live in them. All that construction was a misallocation of capital, making the country poorer, even while – paradoxically – people thought it was a sign of wealth.
So, no, U.S. real estate hasn’t bottomed yet at all. And it’s not just going to be just in residential real estate, which is where the little guy is going to get killed. It’s going to happen in office space and other commercial real estate as well. This is very ugly, and it’s just gotten started.
L: So, even when it does bottom, not everything selling cheap will be worth buying? I can imagine that an office building picked up for pennies on the dollar should work out okay at some point, unless the entire city it’s in is abandoned. But huge swaths of bedroom community houses far from shrinking cities might have to wait generations before there’s demand for them again – and you’d need to spend money maintaining them the whole time.
Doug: Agreed. U.S. housing stock will suffer from years of deferred maintenance by the time the final bottom comes. Although, right now, you can already buy a 30-story office building in downtown Detroit for a few million bucks. As I mentioned above, one of the reasons I’ve done well in real estate is that I tend to buy things that I like personally and can see using myself. Why? Because I understand these things, and you shouldn’t invest in things you don’t understand.
L: And if you ended up having to keep these properties, you wouldn’t shed a tear, because you like them anyway.
Doug: Yes. I think these bedroom communities of ticky-tacky houses way out in the desert, or in places that should still be cornfields, are dead ducks. They’ll end up being torn down or becoming new ghost towns. People forget that there are lots of ghost towns and always have been – and not just in the U.S.; it’s happened in Europe too, where the land has been highly populated for over two thousand years.
And as far as commercial real estate, fuhgeddaboudit. As we keep pointing out, a big part of the problem in the West is that we’ve been consuming more than we’ve been producing. That means that all these stores catering to unsustainable patterns of consumption and production are not going to have customers. They’re going to go out of business. Their buildings will be empty.
Now, at some point, there will be a bottom, when buying such commercial property will make sense, but I can’t tell you when that will be. We’ll have to keep tabs on the situation and look for a confluence of a number of factors, including interest rates, taxes, demographics, energy prices, and politics.
It will happen, but I don’t know when, so at this point, I’m completely uninterested in speculating in U.S. real estate – and I don’t foresee being interested for at least five years. I reserve the right to change my mind, but I think it’ll be at least five years.
Now, that doesn’t mean that if I wanted a house, I wouldn’t buy it now. You can get a fixed-rate mortgage now with an artificially low interest rate on houses below the jumbo level (I think it’s about $550,000). Given where interest rates and the value of the dollars you borrow are going, that’s going to be a gift in the future.
L: But that’s not a speculation. You’re saying that if I wanted to buy a house I like, to live in, the near term might be a good time to buy.
Doug: Yes, that would make sense, if only because that fixed-rate mortgage could be practically wiped out by the inflation to come. You’re looking at what could be a very large gift. Too bad for the entity that lends you the money, but that’s what they get for playing this government-rigged game.
There’s a true story I tell to remind people of how cheap real estate can get under crazy circumstances. I was in Rhodesia at the tail-end of the war, in 1979 – I must have been the only foreign tourist in the whole damned country. I took a bus from Salisbury to Umtali (they’ve renamed both of them: Salisbury is now Harare, and Umtali is now Mutare). There were no other cars on the road at all – I guess it was actually rather risky.
Anyway, I got to Umtali and found that it had become an armed military camp. I looked around and asked people what I should go see, and was told to check out the Leopard Rock Hotel. It was a fantastic place on 200 acres, with a nine-hole golf course and 50 acres in coffee. Very beautiful. The hotel had about 15 suites and was built like a castle. It was huge.
I could have bought that place – silverware, linen, food in the fridge, everything, the whole shooting match – for $85,000, cash. When I went back to Rhodesia (now Zimbabwe) after the war, in 1985 or 1986, the same place had just changed hands for $13 million – about 150 times the price I was offered. Of course, if I’d done it, I would have had to live there and run the place, or it would have turned into a looted derelict within a week. My whole life would have changed course. But that can be true every day, depending on whether you turn right or left at any street corner.
Opportunities like this really do pop up from time to time around the world – if you’re willing to go look for them.
L: That leads naturally to the question of where you do like real estate now, if not the U.S. Where in the world are you buying today?
Doug: Let’s look at the various regions of the world. For people in the U.S., Canada is the easiest place to move to, and I do think Canada will fare much better than the U.S. in the Greater Depression. But that doesn’t mean I want anything to do with Canadian real estate now. It’s far from cheap – in fact, Vancouver real estate has become some of the most expensive in the world today. If I owned anything in Vancouver right now, I’d be hitting the bid.
I do have property in Hong Kong, which may be the most volatile major real estate market in the world. Right now, it appears to be at a manic top. I’m looking to sell my apartment there. This may be hard to believe, but I think I’ll get something on the order of about 25 times what I paid for it. Of course, I bought it very cheap, during a China crisis….
L: Could today’s high prices be the result of a bubble caused by the Chinese stimulus spending?
Doug: I suspect that’s a major element, but frankly, I don’t know. I have to visit and find out why these prices have risen to such crazy levels. But it doesn’t matter; I’m hitting the bid.
L: Any time you see something go way above what the market fundamentals justify, it’s time to take profits. We do that all the time with stocks.
Doug: That’s right. I’m going to shoot first and ask questions later, in this case.
The question now is: Where are the nice places in the world today that are still cheap?
It’s most unfortunate that governments all around the globe are increasingly rapacious and virulent. The institution of the nation-state as we know it is actually the biggest problem – other than the cosmic one of Life and Death itself – to living on this planet. Governments all over the planet are getting truly out of control, and that makes it less pleasant to live under their jurisdictions.
L: The number of nice places is shrinking.
Doug: It is. So, back to the regions to look for speculative opportunities. Forget Canada. Forget Hong Kong. And definitely forget about all of Africa. The continent is a basket case that’s not going to change for a long, long time.
Doug: It’s primarily because of the arbitrary lines the Europeans drew on the map when they divided it up into all these stupid nation-states. That divided tribes and turned each country into a vehicle for theft for whichever group got in control.
You can also forget about Central Asia and the Middle East, partly for the same reason; but also because it’s the epicenter of the War Against Islam. You can forget about most of Europe for the same reason – the demographics in Europe are going totally the wrong way, and those governments are among the most voracious. I wouldn’t even think about Europe now.
L: Does that include Eastern Europe, where there’s been a trend towards liberalization since the collapse of the Soviet Union?
Doug: Good point. Actually, with the corrections those markets have seen, especially in the Baltics, they could be interesting. Some highly profitable anomalies could be shaping up. I was talking about Western Europe when I said it was going the wrong way. Eastern Europe deserves a closer look.
L: I’ve seen charts showing large drops in some of those markets.
Doug: I would expect so. Back in the Far East, places like Thailand, Laos, Cambodia, and Malaysia are very interesting. Especially Burma. I like them a lot, but as much as I do, assuming you’re a person of European descent, they are not places where you will ever be accepted as a member of society.
That brings me back to South America – I think it’s going to have its day in the sun. I think Argentina, Chile, and Uruguay are the places to be in South America. Brazil has gotten too expensive. Bolivia and Paraguay are too screwed up. I like the “southern cone” countries, and among them, for reasons we’ve discussed at length in the International Speculator I think Argentina offers the best speculative opportunities. And I think it’s the nicest place to be as well, even though Chile has become the most advanced and forward-looking of these countries.
Among the reasons I think Argentina is the best place to own real estate is that real estate taxes are basically nonexistent. And there’s no credit. It’s a completely cash market, which means that the prices are real. I don’t think the political situation is likely to get any worse, and it’s quite possible it could get better.
L: In the last Argentine crisis, a huge economic and fiscal crisis in which the Argentine peso lost three-quarters of its value overnight, as crazy as things got, the government never touched land titles.
Doug: No, they didn’t. And, in fact, while land prices in Argentina are up since the bottom of the last crisis, they haven’t exploded upwards. I see a lot of European immigration headed to Argentina. Europeans that come to Argentina, or Uruguay, for that matter, are going to realize that real estate costs a tenth of what it does in Europe, the cost of living is a quarter of what it is in Europe, and they’d have much more freedom, because the governments are much smaller and much less effective – it’s like they’re still back in the 1950s. They’ll realize that this is the place to be for real estate, and lifestyle in general.
If we were having this conversation 60 years ago, if I’d looked over the world then, I believe I would have said that the United States was absolutely the place to be. But it’s not anymore. Everything changes. And it’s way too early, as a speculation, to even think about buying U.S. real estate.
I can’t stress this too much. You know, back in the 1930s, co-op apartments in Manhattan that today sell for millions of dollars – you literally couldn’t give them away. The co-op fees were more than anyone wanted to pay. Residential units worth millions of dollars today were literally free. Could it happen again? I’m not going to say that it will, but prices of residential or commercial real estate in the U.S. should not be of any interest to a speculator today.
L: What about Spain? It’s basically Europe, but cheaper.
Doug: Yes, well, I put my finger on Spain’s Costa del Sol in my Crisis Investing for the Rest of the ’90s, and I was absolutely right.
L: It was a ten-bagger for you, wasn’t it?
Doug: Yes, it absolutely boomed. And now it’s going into reverse, it’s in freefall. That’s because every European who wanted a place in the sun went to the Costa del Sol. It got hugely overbuilt with a tremendous amount of debt used to finance it. Now it’s time to pay the piper. I don’t know when the bottom will be in Spain, but I’m in no hurry to go back there. All the overbuilding has actually made it less desirable, from my personal aesthetic point of view.
I’d rather look at Portugal, which is still the backwater of Western Europe. If I had to live in Western Europe for some reason, Portugal would be my first choice. I have to say that I haven’t been there for several years, so I can’t say much about it from a price point of view, but from an ambiance point of view, it’d definitely be my first choice.
L: What about Down Under?
Doug: Australia and New Zealand are going to do relatively well in the Greater Depression. Prices, certainly in New Zealand, where I have property, are down considerably from their peak. The trouble with New Zealand, as much as I like it, is that it’s… at the end of the road.
L: It’s a long way from anywhere.
Doug: It is. It’s a nice place to hang out, but while prices have come down a lot, the currency has come up a lot. The kiwi dollar has doubled since I was recommending that people buy real estate in New Zealand ten years ago. So it’s not a bargain anymore.
If you want a bargain, I’ve got to tell you, Argentina is it. Lifestyle, costs, benefits, freedom – even with all of the problems every country has, including Argentina, the place is without a doubt my best pick at the moment.
L: I know you’re sincere in that, so I’ll go ahead and play along with a “shameless plug” question, as David Galland might say: are you still selling lots at your Cafayate project in Salta province?
Doug: Yep. I suggest that people go to www.CafayateLiving.com and check it out. It really is becoming a bit of a Galt’s Gulch because of the kind of people who are showing up there. It’s an oasis in the desert, next to a fantastic little town where you can get whatever you want and have every amenity known to man, at very reasonable prices. That’s where I’m going to be spending a great deal of my time, and I suggest that others who see the world the way we do at least take a look at it.
L: As far as amenities on the project site, what’s completed? Is the golf course done? The clubhouse? What can people actually do there, besides sit and watch the grapes grow?
Doug: Well, the 1,500 acres the project occupies are right adjacent to the town, so you can ride your horse into town, if you’re of a mind to do so. We do have 200 acres of vineyards, and you can watch the grapes grow if you like, while drinking some of last year’s harvest. The first clubhouse, the golf clubhouse, is built. The 18-hole golf course is built and the first nine holes are playable. The second nine will be playable by March. The first polo field is under construction. Forty kilometers of horse riding, biking, and jogging trails are being completed. Two lakes are built and being stocked with fish, so you can catch fish for dinner if you want a break from great beef. We’re planting just about every kind of fruit tree, berry bush, nut tree, and vegetable variety you can imagine, and raising organically nurtured animals so the food we eat will be of the highest quality possible.
Within a year, about 30 houses will be completed, and the spa, the gym, and the social club will be done. You’ll be able to play go, chess, bocce ball, or read in the library. You could play billiards with your neighbors, or maybe just sit and smoke a cigar. I can’t think of a more civilized place to hang out.
L: Very good – that was indeed pretty shameless. Thanks for your time, Doug.
Doug: I enjoy these chats. Whether you agree with me about Argentina or not, just remember: it’s too early to buy a place in the U.S., unless you want it for personal use and get it with a big mortgage you can afford.
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