It seems everyone is talking about buying gold these days, so I thought I’d look at a broad comparison between this ‘safe haven’ asset and the type of real estate that I encourage on this website.
Real estate and gold have a number of similarities:
1. Both are physical, tangible assets, and are thus good insurance against inflation of paper or ‘fiat’ currencies (i.e. USD).
2. Both assets therefor tend to do well in inflationary environments. i.e. when new money is being printed, inflation is created because the amount of money in circulation has increased, therefor devaluing that currency. The supply of budget houses in Western New York, or gold is similarly, not increasing at any high rate (in fact as house prices and rents rise, it’s decreasing).
So there could be a case for buying either asset as a protection against the ravages of an inflationary economy. However there are a number of differences:
1. Gold is a ‘dead weight’ asset, in that it doesn’t produce any income. Any increase in value must come from the price increasing. Real Estate produces income as well as holding real value.
2. The price of gold tends to fluctuate ahead of inflation scares – for example the spikes of recent years reflecting the inevitable inflation predictions which followed ‘quantative easing’ (which, as of yet, haven’t been borne out) the price of residential estate tends to react more to the bank lending, and more general economic factors like unemployment and salary levels.
3. Gold has no residual function or value, and is therefor impossible to accurately put a value on. The value of gold is simply an arbitrary amount that people are willing to pay for the asset (usually based on perception of the wider economy and inflationary environment). A residual value could be put on real estate by calculating the current build cost per m2 (plus land purchase cost). This of course indicates that real estate is overpriced in much of the western world, even after recent widespread falls.
4. Gold tends to fall in value in a deflationary or stable environment. Certain types of Real Estate can prosper through almost any economic circumstances. Inflation tends to lift prices and rents, and although deflation tends to have a more muting effect, cash flow should always remain positive. If it doesn’t it’s likely you overpaid for the asset or didn’t look into the local investment environment.
5. Gold is a liquid asset, while real estate can take months to buy or sell (and so is more suited to buy and hold strategies).
Real Estate is a far more complicated asset than gold. Geographical location, local and national economies, and government policy can have serious implications on rents and values. Different sectors also behave very differently – residential trends can be very different from commercial or industrial, for example.
In the next article, ill look at two potential residential investments in USA, to illustrate that buying the right stock at the right price in the right location (which, contrary to what generations of unthinking real estate agents drum out without know what it really means, doesn’t always mean the most expensive location).
So in short – gold tends to rise in value in an inflationary environment and is a good and liquid hedge of value in that specific situation. It is however vulnerable to speculation and manipulation, and can drop just as dramatically if the perceived risks in the market don’t come to fruition. Real Estate, if chosen correctly for cash flow, can be a cash cow in all almost economic weathers.
Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment. You can contact Alan to discuss real estate investment opportunities in Buffalo via E-mail: firstname.lastname@example.org or by phone: +44 (0) 20 7193 2079.
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