Why Bitcoin Could Make Real Estate Affordable

BTC's impact on real estate

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Access to affordable housing continues to be a problem for large cohorts of people around the world, in developing nations and developed nations. Currencies worldwide continue to lose purchasing power, and monetary premium finds its way into assets, while labour compensation is flat creates a divide that fewer can cross. 

Prospective homeowners are forced into more unfavourable terms to access housing, be that longer terms, higher interest rates (when you factor in currency debasement). In simple terms, the number of working hours to acquire a home continues to rise, and as it does, it prices out certain people. 

This is the nature of inflationary finance, where cash holders are desperately looking for “safe ways” to store their purchasing power. Real estate is more than a place to stay but represent a significant part of peoples net worth. 

Real estate is seen as a hard asset and curries higher stock to flow ratio (scarcity) compared to the inflationary currency., 

Real estate speculators also leverage this situation with the ability to purchase real estate with cheap credit (mortgage debt) and endlessly rising future cash flows (rent).

This only creates more artificial scarcity for real estate and forces prices upwards. 

Real estate thrives on marginalising others.

If you’re starting from scratch as a millennial or gen Z, trying to get into the real estate game, you are pretty lucky. It would be based on the assumption that your parents can co-sign or collateralise a loan on your behalf. 

Alternatively, you’ve avoided student debt but somehow found a reasonable paying job that the bank will give you a loan for a home. You’re probably limited in the amount and terms, so you’re forced to look at lower-income neighbourhoods. 

You purchase this “starter” home to rent out and service your debt or live in and use that to leverage later to acquire more property. 

From my crude example, you can see how few people qualify to play this game. Of those that do qualify, others get preferential treatment due to their collateral and relationship with financial institutions. 

Creating rent-seekers

These incentives have encouraged a generation of retail and institutional rent-seekers who use interest rate apartheid to acquire capital at favourable rates. These rent-seekers gobble up supply with borrowed money and then use their monopolistic powers to get others to pay back their debt while they leverage their portfolio to acquire more real estate.

There is nothing wrong with developing real estate and building homes for others. Still, the current real estate market is more of a parasite where some get to suck up the time and labour of others due to their favourable proximity to currency issuers. 

Sure, you’re making money, but there are many unseen economic losses due to this structure. When people are concerned about the safety and stability of their living situation, they are less likely to take risks and innovate. As a society, we may have these buildings, but they come at the cost of potential human innovation that could have benefitted soceity greatly. 

Real estate rent-seeking drives a host of unseen economic losses that are not factored into calculating the “value of the real estate market”. 

Personally, I think we’ve already reached a point where the current global real estate market is a net negative for society. But I understand that it is a product of broken incentives and that people are simply acting rationally given the rules at play.

Land is not scarce.

The idea that land is scarce was only a limitation of our ingenuity and technology at the time. We’ve expanded cities to house millions; we’ve taken one piece of land and built high rise complexes to accommodate more people than it otherwise would if we did not occupy real estate in the sky. 

Modern technology also makes a living in harsher climates feasible; it’s given us new ways to harness the production of energy, which in turn expands the areas that once were off-limits—giving us more options for residential and commercial real estate. 

In extreme cases, we’ve even seen new real estate created out of nothing, like artificial islands, which may be a gimmick, but it still proves my point that there is still more than enough land and ways to develop it into real estate.

The idea that land is valuable because it’s scarce is hardly as accurate as perhaps 100 years ago. 

Unlike bitcoin, as demand for real estate increases, so too can supply, homes can be demolished for new high rises, land that was once unfavourable can be developed and increase the supply. Therefore, diluting the monetary premium held in your real estate. 

As the value in real estate grows, so too does the incentive to flood the market with new supply and drive down costs. 

As we discover new ways of developing real estate and increasing supply, real estate holders are actively diluted and only maintain their premium due to government enforcement of regulations and perhaps lack of access to capital. 

Real estate is deflationary.

But how can you say that? The price of real estate continues to go up and has done so for years. Yes, I agree the price in fiat terms has grown as every time a new home is purchased or built, new currency units are added to the system through a home loan. 

If every time someone purchases a home, they need to create new monetary units, that means more units are chasing housing inventory that is harder to produce. Then, in turn, the price would increase in that unit of measurement terms.

However, if we look at real estate in bitcoin terms, it’s going down. A home that may have cost 100 Bitcoin a few years ago cost a lot less bitcoin now. It will continue to trend towards needing less bitcoin to purchase a home as bitcoin is more scarce and valued more than real estate. 

Real estate index priced in bitcoin versus fiat (USD) – Source: PricedinBitcoin

So how does bitcoin break the cycle?

Bitcoin will change the nature of real estate forever. Instead of borrowing “money” through new currency creation via a debt contract to purchase a house, individuals will borrow houses by posting Bitcoin as collateral. I know this description sounds a little weird but give me a chance to explain. 

  1. House lenders have inventory. Bitcoin holders need a place to live but don’t want to give up their valuable Bitcoin.
  2. The Bitcoin holder borrows a house by posting Bitcoin as collateral.
  3. The Bitcoin holder pays monthly interest payments to the housing lender.
  4. If the housing lender calls the house and the Bitcoin holder doesn’t give it back, they take the bitcoin collateral.

Since bitcoin is far more valuable in appreciation than a home, the home lender has the security of holding the better asset. The bitcoin holder will not risk defaulting and losing their bitcoin. 

What is the benefit of bitcoin-backed mortgages?

The idea of building a home with equity such as a cash building or cash buying seems crazy now. In some cases, it doesn’t even make financial sense to purchase homes with cash; you could rather acquire a better performing asset and leverage debt to acquire real estate.  

We assume that debt is how we acquire homes, but this doesn’t have to be the case now that we have bitcoin, a form of collateral that anyone can own, acquire and grow over time. 

By moving to a bitcoin-backed loan, you eliminate the need for long processes and limitations of financial intentions. Since you’re posting the collateral, there is no need for all these calculations and background checks. 

The process to acquire a home should be quicker, cheaper and rely on far fewer intermediaries for one. 

Other benefits to this approach include:

The benefit to property owners

  • In case of default, you get paid in the world’s best monetary asset, Bitcoin. The Bitcoin you receive will be worth more than the house’s value over time.
  • You could earn monthly interest payments in BTC on your property.

The benefit to property borrowers

  • Retain ownership of your Bitcoin since it will retain its value better than the house itself.
  • You are “renting” with the option to buy.
  • You can’t get forced out of your home by a landlord.

Bitcoin is the pin to the real estate bubble.

This is not some pie in the sky idea; we’ve already seen Candian firm LEDN raise $70 million to start work on bitcoin-backed mortgages, and if the theory above is correct, they won’t be the only business following this model. 

Leveraging bitcoin adoption, we flip the entire real estate market upside down. Transitioning from a debt-based monetary system to an equity-based system where Bitcoin is the world’s best collateral will bring massive opportunities.

As people live, work and save in bitcoin terms, they’ll realise the deflationary forces around them, and real estate will be no different. The housing price will continue to drop in bitcoin terms making acquiring a home a reasonable prospect without tying yourself to 30, 40. In some countries like Japan, we’ll even see 100-year mortgages. 

Having your shelter needs met and having the cost of shelter decrease each year will unlock so much human potential and drive even further deflation in other sectors as people are freed from the burden of paying off a home.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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