• A man in the desert would value water over most things and would be willing to pay for it.
• A person with enough money might value a Mercedes over a Toyota - it provides more driving comfort, better craftsmanship, better protection, and maybe even a better re-sale price. Hence, better overall value.
• A person who has worked extremely hard and takes a SPA weekend at a 5-star resort might be considered as extravagant by most, but for him/her, the relaxation and regeneration gained is of utmost value.

I ask myself this VALUE question in an overall investment context. One of the largest single investments people make is buying a home. Now, for donkeys generations we have heard that owning is better than renting. And this for a plethora of fairly logical reasons, which I won't get into here. I am sure you already know them. These reasons seem understandable. But logic and value are often at odds. Would you pay 100$ for a liter of water ? Heck no. But the guy in the desert would. It could save his life. Would you pay 2000$ for a 3-day weekend at a spa ? Likely no. But the stressed-out businessman/woman who's been working 18 hour days to make a deal, just might. Even more likely yes, if the deal goes through. So again, value, as is beauty, is in the eye of the beholder.

In today's overall market environment, and after giving it some further thought, I'll be honest - I'd rather rent. "Buss, what are you talkin' about, rent. Sheesh. Who the hell rents these days?". My answer: some very smart people. And the smart people are, most usually, far ahead of the sheeple in their thinking and their actions.

What do people see in their homes? Security, chance of personalisation, tax write-off (depends on country tax laws), pride, etc. All are legitimate I suppose. But I would venture that the #1 thing people see is an increasing price, hence they think a better value. Home prices have been on a torrid pace these last years and have been basically rising for a decade. That decade was punctuated, and still is, by easy-money and the market bubble. Prices have risen in the US, UK, Australia, etc. Canada? I don't know, but probably. But my response is : so what. What does that give you? More money?. Depends. That equation only works if you plan on selling and buying in an entirely new location where prices are decidedly lower. If not another location, and that is by far the majority, then you will buy another house in the same general area which has also risen in price. So, why do people sell? Some, to step-up their size requirements (kids), others because they want a bigger something…yard, pool, garage, whatever. All are legitimate. But as you know, the rising tide of prices raises all the boats. You will likely have to give out more of your money via a mortgage for the next grade up in perceived value. The net result : more comfort, or luxury or whatever and likely a bigger mortgage. But not necessarily a better value from an investment perspective.

In my book, better value means investments which offer better purchasing power at the correct time.

Why do I mention this? Because I believe that in a deflationary scenario, housing prices will drastically fall, and hence your home price's market value. But your mortgage will not fall - you still owe the full amount. The analogy is very easy : you bought high, now you have to sell low.

Why sell ? Because in a deflationary environment, DEBT is what buries you, and CASH or liquidity is king. But, if you wait too long, then it becomes even worse because all the home owners are rushing to the exits to sell and not enough buyers can be found. Hence spiraling prices downward even further - supply outstrips demand.

Also, in the current job environment, many couples require two (2) incomes to make the whole calculation tick over. If any partner loses a job, then often this means losing the whole kit & caboodle. That is why personal bankruptcy figures keep going up to all-time highs.

In conclusion, that is why some professionals and insiders I am aware of have already sold their homes. They rent now and they will re-buy later a beautiful villa at 20 cents on the dollar. To these people renting is more valuable because they locked in a high price for the sale price and now keep their savings and liquidity "dry" for the time when prices are low. And if they were doubly smart, they sold their houses around Jan 2002, invested in the EURO or CAD or AUD or whatever and made an additional 15-30 % on top. This strategy I suggested nearly 18 months ago. It is still not too late - but the deadline moves much closer in my opinion.

So, in a sense, value is all relative.

17 March 2004

Der Invest Informant

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