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Currency VS Money: How Currency is Effecting Real Estate.

Currency VS Money: How Currency is Effecting Real Estate.

Author: Carl Langschmidt

The nuance between money and currency is not well understood by most yet it’s imperative that you understand the difference if you want to protect your wealth over the long term from an inevitable market correction.  I use the word inevitable because every single currency throughout history, and there have been thousands of currencies, has crashed at some point and historically returned to a gold standard. The fundamental difference between currency and money is a concept known as “Store of Value” real money is a store of your time and energy. Currency fails to be a store of value because the supply of the currency changes and is essentially controlled by reserve banks and governments. If the currency supply doubles your hard earned dollars halve in value. When the Greeks started adding copper to gold coins thousands of years ago they inadvertently created currency and eventually collapsed their economy with an abundance of worthless copper coins.

Today we are witnessing the effects of currency expansion (aka quantitative easing) but make no mistake it’s hyperinflation by governments trying to solve their problems with deficit spending and printing money. When looking at Figure 1.1. You will notice how currency supplies around the world have almost doubled over the past 10 years. Interestingly the US has printed more money in the past 10 years that in its entire history.

Figure 1.1 - Currency Supply changes in major countries.

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The effects of this inflation are especially noticeable in real estate. Real estate prices rise perfectly in sync with the supply of currency as people look to invest their newly printed currency in assets, thus the rapid rise of stock and real estate prices over the past decade. We often assume supply and demand is the main driver of real estate prices but when looking at Figure 1.2 - which shows  the actual and projected population growth of Toronto, clearly prices are not rising with demand when you consider that the avg home price has doubled over the past 7 years while the population growth over this time has been in the low teens.

Figure 1.2 - Toronto Population growth & projection

 

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Recognizing inflation for what it is, is the first step to figuring out your game plan for the inevitable correction that is coming in the not too distant future. The pendulum swing from real money to currency and back to real money has historically occurred over a 40 year period, the Gold standard was completely dropped in 1971 so we are well past the 40 year mark but the real indicator to me is the reckless real estate investing behaviour we are seeing which is a clear sign that too much currency is in circulation. A Cibc/Urbanation study revealed that half of all new Toronto condos are being purchased as rental investments with 44% having a NEGATIVE cash flow for the investor. Not to mention that the avg preconstruction condo is selling for substantially more than newer resale condos. Clear signs investors are playing a dangerous game especially when you consider many investors tend to leverage one investment into the next. Ie: Remortgaging a home to buy a precon condo, leveraging that condo to buy a rental property etc. That’s the behaviour that sinks investors and crashes markets. Ensuring each investment is not highly leveraged with a positive cash flow and ample wiggle room for a correction should be oblivious but clearly is not happening in this market. Warren Buffets’ “Be Greedy when others are fearful and fearful when others are greedy” should be every investor's mantra but clearly is falling on deaf ears. The good news here folks is corrections and crashes creates huge opportunities and the biggest transfer of wealth will occur in our lifetimes when the market returns to a real money. In the meantime play the inflation game responsibly buy real estate that makes sense. While I personally don’t see Gold saving the day as it did in the past, A modern Cryptocurrency, Like Hashgraph, is more likely to save the day if you ask me but a few Gold bars might be a good insurance policy. If you are looking for a Toronto house for sales with good fundamentals reach out and we will gladly connect you to one of our local neighbourhood experts who can help you navigate this market.