If our value formula is predicated on the value formula of random people who happen to be "close" to us, then what everybody thinks valuable would be amplified in value, meaning its value is less than we think. By the same logic, the "worthless" things that are hidden from most people's view are actually worth more than what people value it for.

This is why you need to think really deeply about what you want to work on. There is more to see out there than our mimetically blinded eyes can see. What's out there is the only thing that actually matters since it has the value that we need to capture.

Two things surprised me the most when I first moved to the U.S. First, how much money there is. Second, how little that money buys. Don’t get me wrong, living in the Bay Area, I enjoy all the benefits the tech companies provide. However, don’t you dare to do something in the physical world, the situation here is worse than many developing countries. Construction projects take decades, infrastructure is crumbling, houses are old but expensive, healthcare and education are unaffordable and the list goes on.

You might find those examples anecdotal, Tyler Cowen backs them up with data in his book, The Great Stagnation. His main argument is that the U.S. has been living off low-hanging fruit, but that fruit is mostly gone and technological progress has stalled since the 1970s. It’s not only Cowen, lots of Silicon Valley leaders have been making the same argument over the years 1, 2, 3.

Solving a problem starts with understanding why and I want to share my personal take on that. The problems are manifold, but I believe we can see some common patterns emerging easily. 

First, diseconomies of agglomeration. The term agglomeration is an economic term used to refer to the phenomenon of firms being located close to one another. Since 1950, the world has seen a dramatic rise of urbanization. Urbanization has lots of economic advantages such as low transport costs, accumulation of knowledge and human capital etc. However, it comes with the disadvantages of high land prices, economic inequality, poor infrastructure and corruption. Living in the Bay Area, I can comfortably say that we have collected the low hanging fruit of urbanization, now we are suffering the costs.  

Second, Baumol’s cost disease. Baumol’s cost disease predicts that when there is an industry that is very productive, it causes the other industries to get unproductive and expensive. Last month, I was quoted $450 as the labour cost for a shower head replacement which is supposed to take half an hour. Most engineers in the Bay Area don’t make that much money.

If we extrapolate Baumol’s cost disease, you can see why the innovation is lacking everywhere except the internet. The brightest people end up in FAANG companies and scraping the bottom of ads optimization techniques, where the problems in the physical world lack the talent it desperately needs. 

The common pattern that I blame is centralization. Centralization causes lack of competition, both for my work at Facebook and the repairmen’s work in my house. Centralization creates network effects that allow FAANG companies to pay juicy salaries, tech workers to pay fat rents to landlords, repairmen to charge exorbitant fees, California residents to pay high taxes to the state. It’s all a self perpetuating cycle whose costs far outweigh the benefits at this point. 

As a techno-optimist, I think we are at the end of this phase of centralization. I think this decade will see a rapid advancement of decentralizing technologies which will unlock unforeseen productivity gains. Remote work will challenge the network effects of cities. Open networks (a.k.a DAOs) will challenge businesses that benefit from network effects the most. Cryptocurrencies will challenge the government currencies. Solar energy will challenge the grid. 2020’s will be the year of decentralizing technologies because they will unlock an untapped potential and allow productivity gains that we have never seen in the past. 

The moral argument against real estate investing

We all want to change the world. The simplest way to change the world is by changing how you spend your money. What you spend your money on is a vote for what you want to see in this world. Buying an expensive car signals to the world that you want to see more expensive cars. Paying millions of dollars for a house signals to the world that you want (or are at least OK with) housing being so expensive.

There is nothing difficult about building more houses. It's not like going to Mars, we already have the technology. As a society, we just chose not to build with all the zoning laws and regulations.

It's weird that real estate is seen as an investment asset. Investment is about putting your money into technologies that will increase productivity and output of goods. A house by itself doesn't produce anything. Investing in real estate is like investing in kitchens or cars. However, historical reasons made housing act like an investment vehicle, this behavior has been reinforced through laws and rules and that's why we don't expect housing prices to fall with technology like other goods. However, housing is a basic need like food that should be a consumption asset, hence, it's supposed to be affordable and reliable.

The current housing situation in the U.S. is the opposite of that, with most houses being old and extremely expensive. This is terrible for the younger generations who can't even dream having a family and kids in the current market conditions. Millennials only own 4% of the real estate in the U.S, so no wonder most young people live with their families, they are single or childless. Most of the real estate is held by older generations who have multiplied their wealth over the decades while we have stripped younger generations of their hopes and dreams. We sacrificed the most important thing for any society to flourish. Source

I decided against investing in real estate on moral grounds because I am extremely unhappy with the current situation and I want this to change.

The financial argument against real estate investing

The tailwinds behind real estate price appreciation are slowing down or reversing

Population growth was a big factor in real estate prices, but global fertility rates have been falling at alarming rates. Source

Global migration from rural areas to urbanized areas globally has contributed massively to the astronomical rise of real estate prices. However, urbanization rates have already come to a halt in the developed world and they have been decelerating rapidly in the developing world. Source

Interest rates have come down to a few percentage points over the last decades, and are now close to the theoretical limit of 0%. Since creditors wouldn't provide below 0% mortgage rates, we can assume that we are close to peak interest for borrowing money for real estate. Source

Covid-19 forced everyone to spend most of their time at home, causing massive demand increase for real estate, while the supply is squeezed to record levels. This even caused lumber prices to reach record levels. This extreme low supply, high demand situation is temporary and will be relieved as Covid comes to an end. Source

The democratization of finance and investing threatens real estate's throne

There are 400 trillion dollars worth of wealth in the world, and 280 trillion of that wealth is held in real estate. This means 70% of all global wealth is in real estate. Source 1 Source 2

Historically, most people didn't have access to equity markets (investing in the stock market required capital and intermediaries until very recently). This is partially why most of the wealth is stored in real estate.

The recent democratization of finance enabled anyone to participate in alternative investment methods including stock markets, derivatives, commodities, futures and cryptocurrencies. Culture changes slowly, but I expect younger generations to store less than 70% of their wealth in real estate.

There is also an argument to be made about contrarian investing here. There is nothing contrarian about investing in real estate.

There are several technologies which might make real estate prices to go down

Remote work is already allowing a certain percentage of workers to work from anywhere, making location less important. Augmented or virtual reality can provide the sense of presence we get from being physically in the same space, also making location less important.

Self driving cars will decrease the importance of location, allowing people to commute from farther locations in a faster and safer way.

Automation will decrease the demand for human labor, allowing communities to be less densely populated

3D printing and automation technologies might decrease the cost of housing. Startups like Cover are rethinking the way we currently build homes.

Plant based meat and vertical farming will possibly unleash large areas for housing projects and development of new cities.

The trend towards building online communities instead of local communities will decrease the benefits of agglomeration. Humans tend to have niche desires, and technology will allow us to connect with anyone in the world who shares the same interests.

You should only invest in things that you know

People should only invest in the things they work on and know. I work in technology, live and breathe it in my daily life. I have lots of information about lots of technology companies and products. Since I am an early adopter in several technologies, investing in the technologies that I personally use usually returns me good ROI.

Real estate is a completely different beast that is out of my circle of competence. I should be extremely honest with myself about what I know and ignore investing in the things that I don't know.

The practical argument against real estate investing

Real estate investing and management have a lot of hidden costs. Apart from buying and selling costs and hassles, real estate also has an ongoing maintenance cost. I am not only talking about the financial cost here, the bigger deal is that it requires my time and attention.

I am trying to be very cognizant of where I spend most of my time, and I have come to realize that I don't want to spend any time on real estate maintenance. I tried outsourcing this in the past, but still got annoyed because it doesn't help with any of my life priorities unlike other investments.

To be fair, investing in the stock market also requires my attention, probably more so than any real estate investment. However, I see that as part of my job, because I try to put my money where my mouth/career is.

What might change my opinion?

I also have a list on why I should invest in real estate, but that list is much shorter than this one, so I decided not to include it here. To summarize, most scenarios to invest in real estate are about either safety or pessimistic scenarios about the future. I am a super optimistic person who believes deeply in technology's positive impact in our lives. I should probably hedge against this optimism if I want to be more risk averse.

Also, I am not at all against buying a house to live in. I am super supportive of that if anything. All of my arguments here are about buying a house for the purpose of investment.

I am open to change my opinion, feel free to email me if you think I am wrong.