Real Estate Before And After Bitcoin
This article attempts to predict what the transition to hyperbitcoinization will look like through the lens of the real estate market. Naturally there are elements of fun and fantasy to this exercise. Part 1 covers the transition. Part 2 will explore what the real estate market could look like on a Bitcoin standard.
The U.S. dollar has lost. Bitcoin is the new global money. Hyperbitcoinization has arrived. The world – and the real estate market – have changed forever. In a world now operating on a Bitcoin standard, those that create actual value are rewarded and the parasites that once fed off the money printer are scratching their heads as to how it all happened. The real estate market functions rationally again. Before we examine what the real estate market looks like under hyperbitcoinization we’ll recap what happened during the transition, starting in 2020 …
Part One: The Transition
As part of their COVID-19 pandemic response, many governments introduced moratoriums on evicting tenants from residential rental properties – after all, jobs had been lost and livelihoods destroyed by their lockdowns. Banks “did their part” by allowing holidays for mortgage repayments. For a while, the real estate market completely stopped transacting. The ability to travel, see, touch and feel real estate and the economic uncertainty created by the government’s response to the pandemic was a perfect storm. However, after the northern hemisphere summer and complete recovery of equity markets, the real estate sector followed suit and “got on with it” despite some of the practical transactional hurdles still remaining. Institutions and middle/upper-class households with secure jobs were equally flush with cash and began to put it to work in the second half of 2020. When mortgage repayment holidays started to wind down towards the end of the year a minority of stretched borrowers were forced sellers, but luckily sold into an incredibly strong market with prices ensuring they mostly sold at profit. Similarly, homeowners around the world confirmed their investing genius with yet another year of double-digit price growth despite everything that had taken place. In the commercial space, government intervention also ensured recalcitrant tenants could not be moved on easily, however the new money created flowed into the hands of institutional investors and ensured that capital values remained high despite poor income performance from retail, office and hotel assets in particular. Meanwhile, logistics valuations hit new records as e-commerce became entrenched globally and data center construction boomed to meet demand from big tech’s continued expansion and influence.
2021 was the year inflation started to be noticed and better understood by the general population. According to government statistics it reached levels not seen for 40 years, however distrust in these numbers grew and some outspoken voices started to question whether hyperinflation was already beginning throughout the western world. Towards the end of 2021 the Turkish lira began to collapse – the first major fiat currency domino had fallen. Throughout the year institutional investors had begun to accumulate single family homes across America, with groups such as BlackRock paying 50% premiums in many cases. In places such as Canada and Australia, governments began the socialization of private housing by announcing shared-equity schemes masked as ways to help first-time home buyers enter the market. Measures initially introduced as a short-term response to the pandemic were extended indefinitely. As the attractiveness of U.S. Treasury bonds waned further, the Chinese continued to be major buyers of high-end real estate and infrastructure globally, simultaneously pushing up prices and pushing out locals – extending a decade-long theme. Once again, prices rose in double-digit percentage terms across almost all real estate sectors.
At the end of 2021 the Federal Reserve Board was openly flirting with tapering asset purchases and raising interest rates during 2022 while admitting inflation was no longer “transitory,” sending jitters through the market as pricing and demand for real estate started to soften slightly. Lockdowns returned to Europe, travel restrictions escalated and pandemic fatigue took hold globally, bringing back some of the practical challenges faced in 2020. Focus began to increase on the conundrum faced by central banks – the impossible trade-off between trying to deal with rising inflation and bursting a debt bubble that would have tremendous economic and social consequences.
Throughout 2022 it was increasingly clear governments and central banks had no real intention of stopping inflation. Multiple double-digit prints in major western economies brought more rhetoric from bankers, but they only spoke about raising rates at an ever-distant point in the future. Capital markets responded by entering a euphoric risk-on mode, pushing equity markets to all-time highs. Bitcoin had an incredibly strong first quarter and although it gave up some gains during the middle of the year, went on to surprise most by resuming its consistent upward grind thereafter as it established itself as a macro asset of institutional and nation-state significance. El Salvador’s first “Bitcoin bond” was oversubscribed and their second triggered a number of South American and African nations to adopt similar legal tender policies and funding structures.
Moving into 2023, multiple high profile S&P 500 companies announced bitcoin strategies. This took much longer than the market initially anticipated after MicroStrategy’s pioneering moves in 2020. With bitcoin’s market capitalization now entrenched over $3 trillion and it’s resilience fully tested through another cycle, their entry had been further de-risked by Democratic party infighting preventing an anti-Bitcoin position becoming part of either party’s 2024 election platforms. As this was all unfolding, residential real estate prices had doubled since the start of 2020 and now half of all home sales in the U.S. went to an institution. Violent social unrest had started to consistently emerge throughout Europe and North America, but was mostly quelled by increasingly strict policing of now almost-permanent lockdowns. Rental controls became ubiquitous globally and tenants could not be evicted, but this had no impact on nominal real estate values given the combination of institutions being a dominant buyer and continued currency debasement. However, for those on a Bitcoin standard already, when priced in bitcoin real estate was on a continual decline.
Although governments were generally powerless in being unable to counter bitcoin’s ongoing growth, they had significantly more success debuting central bank digital currencies (CBDCs) built on the Ethereum blockchain. Paradoxically this caused more people to begin adopting a Bitcoin standard, increasingly frustrated by the never-ending lockdowns and expanding surveillance state. Throughout this period multiple major currencies began to fail against the U.S. dollar, with governments and central banks only response being to further debase the currency, leading to hyperinflation and more negative social consequences. After bitcoin’s U.S. dollar price surpassed $1 million, Canada and New Zealand became two of the highest profile examples of modern hyperinflation and incredible stories began to emerge from their real estate markets. In Canada, where the government had already extended their socialization of housing by acquiring residential real estate outright and providing housing free of charge to essential workers, the lucky few remaining middle to upper class big tech employees were able to retire existing mortgages with a single annual bonus. In New Zealand, university students from China purchased entire condominium complexes and wineries with the allowances from their loyal party member parents. In these examples, in local currency terms real estate prices continued to rise as people fled their currencies. This was of little consolation for locals though, as when priced in stronger currencies or bitcoin, real estate was crashing hard. Wage growth could not keep pace with inflation and when combined with decimated cash savings it became impossible for most people to buy a house. Transactions ground to a halt. Even equity-rich sellers chose not to cash in as the market moved too fast for them to be able to redeploy into a comparable replacement property.
Bitcoin’s adoption escalated further in the second half of the decade and its U.S. dollar price marched towards $10 million. Many on a Bitcoin standard chose to leave their fiat careers as life in a surveillance state policed through CBDC wallets failed to align with their values. Fiat cash flows were also no longer necessary as their bitcoin wealth had the potential to provide financial freedom. This was still possible in the few U.S. states and rouge nations that had broken free and either adopted a Bitcoin standard or allowed it to flourish unfettered, but getting there was impossible for most people as temporary government border controls in response to the pandemic became permanent features and convenient methods of preventing capital flight. Once the CBDC wallet’s social credit system was operational, various controls were introduced to combat inflation, pushing consumers to low-cost deflationary choices and taxing “unsociable” expenditure punitively. This extended to various aspects of home ownership, particularly accessing mortgages which became increasingly difficult for the majority of bitcoin owners who had a KYC footprint. Without fiat salaries and despite their (often hidden) bitcoin wealth, many traditional banks would only provide services and mortgages to Bitcoiners who held their satoshis in bank custody. Self-sovereign Bitcoiners rejected this requirement. Instead, they looked forward to hyperbitcoinization looming ever closer as the system was more obviously unsustainable as time passed. For those determined to acquire residential real estate, alternative lenders emerged to service this niche. The product offerings required significant compromises initially but gradually improved to offer loan-to-value ratios, tenor, interest rates and key management practices that were tolerable for some. Ultimately increased competition amongst these lenders combined with a desire to accumulate bitcoin drove the bitcoin-backed mortgage sector forward and borrowers benefited.
Even though the surveillance state was on its last legs, its grip on control tightened and consequently it became more common for people to vote with both their feet and wallet – rejecting CBDCs and limited freedoms by moving to bitcoin-friendly jurisdictions (if they could circumvent travel restrictions). Whilst this trend began with a trickle earlier in the decade, now many Bitcoiners either had the means or had chosen to rise up against authoritarian control. This was accelerated by various countries introducing wealth and property taxes. For those unable to leave easily or liquidate assets quickly, the taxes often forced the sale of real estate as incomes and cash flows could not meet the new tax obligations. Some jurisdictions learnt from the Canadian and Australian models of shared equity schemes and took partial ownership rather than demand the new taxes be paid in cash.
By this time there had also been much change in the commercial real estate landscape. With significant office supply having been completed in the earlier part of the decade – a pre-pandemic overhang – starts for new office construction had completely dried up. Almost all traditional office occupiers adopted predominantly work-from-home models, with the exception being government and big tech companies who continued to expand their leased footprints, citing health reasons for dramatically increasing workplace utilization ratios and abandoning activity-based working models.
In most of the world almost all retail assets were decimated, with the combination of increased centralization and ecommerce further extending the already established trend of malls being redundant. This started to encourage some decentralization on a smaller scale, such as the reemergence of “high streets” for non-discretionary goods and services. But ultimately even these locations still had a glut of physical space. The retail sector was one of the first to preview what real estate values and investment performance might look like in a hyperbitcoinized world – the financial premium evaporated from valuations and the ability for the physical space to derive value for its occupier became paramount. Debt funding either dried up completely or was prohibitively expensive.
The hotel sector never recovered from the 2020 shock, with initial forecasts of a fast rebound to pre-pandemic occupancy levels proved incorrect as lockdowns and travel restrictions became so common, unpredictable and burdensome that most people who could afford to travel gave up waiting for the opportunity to do so unencumbered.
Industrial and logistics real estate was the darling of the pandemic years and this continued throughout the decade. For a while, logistics valuations grew at an even faster rate than money supply, as developers couldn’t deliver new stock to service a permanently increased level of e-commerce demand quickly enough. Prologis became the largest real estate investment trust (REIT) in the world, with Goodman and GLP also in the top 10 consistently. However towards the middle of the decade this trend petered out as the necessary supply had been delivered and inflation took hold. Real wage growth and employment levels weren’t able to support logistics rents and the valuation premium for the sector eroded.
Residential development became largely unfeasible as incomes – and therefore rents and sale prices – were unable to keep pace with the continued inflation in construction costs. This put significant pressure on supply. Rent controls were happily adhered to by the corporate institutions who had been given the informal consent to be the buyer of last resort as a proxy for the socialization of housing.
Most institutional real estate investors and developers continued to operate on an entirely fiat standard throughout the decade. Those that adopted bitcoin to different levels – from small balance sheet allocations to a full Bitcoin standard – found their performance and competitiveness increase as a result. For example, asset managers were able to hire the best talent by offering wages in a desirable currency that increased in purchasing power. Investors outperformed their peers simply as a result of a small bitcoin allocation in what would’ve otherwise normally been held entirely as cash (pending deployment into real estate assets). Developers and builders with bitcoin balance sheets were able to more confidently underwrite feasibility studies for new projects because even if fiat currency debasement accelerated over the course of a project, their money held its purchasing power. Construction cost increases in fiat terms were more manageable than for their peers who were finding it impossible to justify new projects with time-frames that inevitably meant the initial underwriting was redundant soon after a commitment to proceed.
Towards the end of the decade the loss of trust in fiat currencies began to escalate as more governments were defaulting on debt obligations, often turning to their largest creditor China for a bail out, thereafter adopting the digital yuan as their new currency. As the cadence of this quickened and very few fiat currencies other than the yuan and dollar remained, private bitcoin adoption had become the norm. Finally, the U.S. government made the arguably bold but ultimately inevitable decision to announce it could no longer service its debt. It adopted a Bitcoin standard, dragging all other nations using the U.S. dollar along with it. The dismantling of oversized authoritarian bureaucracies commenced, along with a period of necessary austerity in which all late adopters of bitcoin – governments, corporations and individuals – would finally learn the lessons of low time preference under a Bitcoin standard. From here on, the real estate market would never be the same …
Part Two: Post Hyperbitcoinization
The opportunity cost of using bitcoin to acquire real estate is significant. You are trading money that will theoretically increase in purchasing power forever for an asset that is less scarce and subject to depreciation and ongoing ownership costs.
The period after hyperbitcoinization will be one of significant upheaval. Those with large bitcoin holdings could have incredible power in dictating the terms of trade given the demand for their scarce bitcoin. Ultimately this won’t prevent the money being distributed, as trade cannot be avoided. Early bitcoiners will probably always respect their money’s scarcity but understand that some spending becomes unavoidable, particularly if all transactions are priced in bitcoin and it is the only money. The rest of the world adopting bitcoin essentially at once will cause its purchasing power to increase exponentially – think the meme “infinity divided by 21 million.” Therefore, many earlier adopters will be wealthy enough for multiple lifetimes and happier to part with bitcoin for real estate than they are today despite the opportunity cost, especially given it could be at very attractive pricing.
For the majority who aren’t early adopters, the incredible scarcity of bitcoin will cause them to prioritize using what irreplaceable hard money they have as collateral in exchange for the provision of goods and services, including real estate in essentially a “loan to own” structure. Bitcoin-poor real estate owners will happily receive interest payments in bitcoin as a method of accumulation, with the additional benefit of taking possession of the collateral in the event of default. In this structure, the value of the real estate (priced in bitcoin) could be significantly higher than the value of the bitcoin collateral posted, eg., collateral of 0.1 bitcoin will “buy” the use of a house worth 1 bitcoin for a defined long term, with interest payments only a fraction of the 0.1 bitcoin collateral and denominated in satoshis. A new type of business could emerge to facilitate and manage this structure on behalf of the real estate owner.
A pure rental model will be similar to today’s. However, rental yields should be much higher than the interest rates in the above loan structure, given the bitcoin owner has no collateral at risk and the real estate owner has no potential to take possession of bitcoin collateral through a default. Market rents should move in line with changes in the productivity of the working population and their wages. This is the opposite of today’s dynamic, where given the impacts of currency debasement residential real estate owners’ returns are almost entirely from leveraged capital appreciation. Predicting how much yields and interest rates will vary to today is impossible, but fortunately under a Bitcoin standard wherever they end up should be market-driven and based on the comparative supply and demand for both real estate and bitcoin.
Those forced onto the Bitcoin standard but still holding real estate may find that their mortgage debt has either been written off or is so small in bitcoin terms that retiring it is relatively easy. However, they’ll be doing anything they can to increase their bitcoin balances. Therefore, for a while it might be that the rental market for their real estate assets is incredibly cheap in bitcoin terms as competition to obtain a bitcoin income stream is intense. Similarly, the same strong desire for real estate owners to receive bitcoin from a sale may cause prices to be very cheap initially. The market will ensure bitcoin distribution starts to take place organically.
Commercial Real Estate
Real estate services provider Savills estimated the size of the global real estate market was $327 trillion in 2020, with 21% of this (or $69 trillion) being non-residential. Assuming 10% of the non-residential stock is owner-occupied (based on Nareit research), there is approximately $62 trillion worth of commercial real estate owned by various types of investors – REITs, funds, family offices/high net worth individuals, etc. As mentioned in the article “Bitcoin Is A Better Store Of Value Than Real Estate,” the utility value of most of this real estate is likely significantly less than the financial asset that it has become today. Hyperbitcoinization could vaporize the financial premium within these valuations, with an obviously major impact on these investors’ portfolios.
REITs and fund managers will be forced to adapt or shrink. Many won’t make it. If hyperbitcoinization happens suddenly and quickly, their investor base will attempt to flee from liquid ownership structures. However, the majority of structures – whether that be private funds or directly owned assets – are illiquid and will experience maximum pain.
Businesses who have been earlier adopters of a Bitcoin standard may find it beneficial to acquire the real estate they occupy – ultimately they will be the buyers of last resort in a market where the limited fungibility of real estate will become very obvious once it’s been largely demonetized.
Some businesses or even whole industries may not survive hyperbitcoinization. For example, it is hard to imagine a banking and finance industry anywhere near its current size. Similarly, with hard money creating actual trade-offs rather than endless expansion, governments will be forced to shrink dramatically. Demand for office space could be decimated for some time. Much has been spoken of the demise of central business districts (CBDs) due to lockdowns making working from home more widespread permanently, however it’s quite possible that hyperbitcoinization could have an even bigger impact on the way cities are developed.
After a period of disruption, pricing and yields for commercial real estate will likely reflect the value created by the business occupying it, rather than the growth in money supply. The need to develop and manage commercial real estate won’t ever go away entirely, but the investment industry that has grown around it will be a casualty of hyperbitcoinization.
This is a guest post by James Santi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.