Today’s Daily Reckoning comes to you in a state of the breathless wonder. Is this finally the day we can say with a straight face that Playboy has actually been educational?
In case you didn’t catch the news, the Playboy mansion in Los Angeles is rumoured to be on the market with a price tag of US$200 million.
Talk about capital growth! Playboy Enterprises bought the place way back in 1971.
Not only that, that deal set a price record for the time. Local real estate man Gary Gold is quoted saying, ‘That was the highest sale ever in Los Angeles… It was the first house to sell for over a million dollars.’
A million dollars ain’t what it used to be. In fact, it’s almost chicken feed today for the high rollers of the world.
Time turns, but some things do stay the same. The Playboy mansion is now believed to be the most expensive property on the market in the US today.
There is one catch, according to the MG report. The buyer has to let 89-year-old Hugh Hefner live out his days there.
For $200 million, you’d think you wouldn’t have to put up with the vendor as well!
But this deal tells you a lot about the financial world we live in…
The best inflation protection
The first thing we can say is real estate is one way the rich in the US protect themselves from the Fed’s regular bouts of inflation.
The crux of the matter is the amount of dollars in circulation might go up, but there’s still only one Playboy mansion. It takes more dollars to buy it because those dollars are worth less.
That’s why you simply cannot stay in cash in the financial system we have. Your purchasing power will be slaughtered slowly over time if you do. The Playboy mansion is proof of that.
Central banks actively want inflation. That’s the system we have. That means you have to be in assets that can rise faster than the rate of inflation.
Author and financial publisher Bill Bonner has real estate as one of three assets ‘old money’ families own to protect their wealth over decades. That’s in his book Family Wealth.
Taking the time frame into account, of course. Property is not something the old rich ‘flip’. That’s a rare mindset, but one we should both cultivate.
Most people won’t. That’s why you have to be wary of the real estate cycle. The key is to have the ability to ride through the ups and downs.
Major property booms almost always end in a bust.
It’s the wild speculation when property is booming that brings most investors and economies undone. The subprime crisis in the US is the proof of that.
But Australia’ hasn’t been immune, either…
Australia’s forgotten bust
Consider the life of former State Bank of South Australia boss Tim Marcus Clarke. He died in December last year. But the news only went mainstream last week.
It’s what happened to the State bank 30 years ago that’s of interest to us. It got into severe financial difficulty after a risky lending decision in the 1980s made under his watch, according to the Sydney Morning Herald.
The paper notes it ‘collapsed in 1991 with debts of $3 billion and forced a massive taxpayer-funded bailout and the resignation of then South Australian premier, John Bannon.’
It’s around this time that Westpac had to have a billion dollar rights issue. That was to maintain its capital base from their bad property loans too.
What’s even more interesting is that the collapse and bailout of the State Bank of South Australia justified the privatisation of the state’s electricity assets in 1998 with a $5 billion sale.
The debt overhang crippled the South Australian government and it needed big asset sales to cut borrowings.
Does that sound like Greece to you too?
How to play the system and win
It’s the same old story, same old game. Only the faces and names change.
Take the UK for example. After riding through only seven years of grinding recession and austerity after another real estate bust, they’re cranking up another property cycle.
Over in London, the Financial Times reports that riskier loans are making a comeback. See for yourself…
‘“Buy to flip” investors in London’s property market may find it easier to sell on new-build flats bought while under construction, following the launch of a new mortgage product for would-be buyers.
‘A home loan has been launched, allowing secondary investors in property developments to borrow money to buy out the original purchasers, marking the re-emergence of a type of mortgage contract used in the run up to the financial crisis.’
Apparently this type of loan is for the ‘sophisticated’ investor who understands this sector.
This from a country that had to basically nationalise its banking system after 2008 because so many property loans were in default.
Where were the sophisticated investors then?
As the life of Tim Marcus Clarke proves, you can run a bank and still not see the coming collapse.
But some men did see 2008 coming, and went on the record to say so.
If you’d like to know how to do that for the next one, your best chance is to learn from the man who can tell you how.
You can do that here.
Associate Editor, Cycles Trends and Forecasts
Ed Note: This article was first published in Money Morning.