FOCUS ON WEALTH OR VALUE TO CREATE?

“Unlike income, which is a flow variable, wealth measures the amount of valuable economic goods that have been accumulated at a given point of time” (Investopedia , 2021)

Wealth has always been a crucial issue for human civilizations. The greed for their possession motivated wars, deaths, robberies, slavery, even marriages. Even more today, it is pursued in the markets' illusion that nothing changes, especially when it goes well. It's just an illusion. Nothing is everlasting. The value of patrimonial goods that constitute nations' wealth has always varied like a roller coaster.

The value of things depends on human perception and interpretation. Even emotions and psychosocial views of each, and the aggregated group within each one is integrated, influences the value. Nassim Taleb (2001) has very well warned about this peril. And, in the end, market value results from an enormous matrix in which all players interact and influence each other (Gomes, 2004) in the market growth and fall. Market values are not exempt and disconnected from the moods of society. Value is more an opinion.

No wonder markets had a blind trust in Bernie Madoff until they lost tens of millions of dollars in 2008. And, because of that, even many rich became indigent, some even committed suicide. An analogous situation seems to happen in today's leading financial markets , living the illusion of an exceptional Era. Just look at the Buffett Indicator of current markets and see how frightful it would be.

Market values rise nowadays to absurd levels, sustained in a unique context of low-interest rates with high cash liquidity, multiplied by the intrinsic greed of traders who observe and copy themselves behaving like a flock of sheep. At one point, you experience the euphoria of the market that grows because everyone buys, and suddenly you can go to the despair of a fall in which everyone will want to sell.

In the market society, an increasingly essential service for the market is appraisal (not just real estate). Its function must mitigate the asymmetric information costs that invariably arise in any transaction between antagonistic parties. One party tends to benefit from accessing information over the other. If the class of appraisers is fragile, the market and the economy become weak as well. And cases happen.

Thus, it is difficult to appraise in a market where demand is more optimistic than the side that wants to sell. The role of the evaluator becomes ungrateful, especially the one who intends to be professional and impartial, aware of the market and risk, practicing ethically and disconnecting from common emotion and following. In this context, it may happen that his advice is not well received by the client who is blind, so he does not value the service that tends to be poorly paid. For the appraiser, who needs to survive, it will be easier to follow up the generalized wave.

But what is wealth?

A more classical perspective may define wealth as the Value of Financial Assets plus Real Estate Assets (especially housing) of families in general, minus their debts (Shorrocks et al., 2021 ). Other definitions expand to the "market value of all physical and intangible assets that are owned, after subtracting debts" (Investopedia ) or synthesized to "the accumulation of scarce resources."

Two crucial variables stand out, market value and debt. The first variable is a group opinion interpreted by each individual, such as one professional as the appraiser. An estimate is only reliable at the time of its execution. Soon after, the context can change for even illogical reasons or the emergence of a black swan (Taleb, 2007 ). The assessment has such an unstable validity.?

The second variable is crucial because it reduces share to its actual dimension; it is like a sword over the illusion. Market value fluctuates (even uncertain) in time and opinion, but debt does not and can grow with compound interest.

Wealth results from accumulated unconsumed capital, free from debt to third parties, obtained from external means (such as resources' exploitation) or internal means (the personal effort). Suppose it considers each economy as an open system, such as the living body is one; thus, wealth is similar to lipids that accumulate in the body because did not consume all calories obtained from food. And, the body saves the fat that can process at future times if there is a shortage of energy (food). Wealth should have this function, which it does not achieve without liquidity and falling value. Perhaps the important thing is not accumulating wealth per se (property estate or stocks) if it will not generate enough value to cover the costs and risks of its ownership.

In the human body, fat has predictable costs such as health problems that shorten life and the hospital bill. Possession of inactive assets or unviable (inefficient) exploitation turns them into liabilities, not assets with utility value. In modern society, if wealth depends more on real estate than on active value creation, such as industrial production or productive intelligence , it starts to indicate the passivity of its economy. The government will then focus on its (almost) "single" source of income, with increasing taxes on real estate and mortgage credit. It is a declining economy.

How can focus on wealth generate illusion?

As is well known, the Covid-19 pandemic is causing the fall of GDP worldwide. That's it, except in China, the spot where the virus emerged! Thus, in almost all societies, businesses are closing. Unemployment is on the rise. Economies are getting more fragile. The governments of the wealthiest countries increase their long-term debt to overcome those difficulties. But, the context of near-zero interest rates and the highest liquidity is having an incredible effect.

If economies generate less value (GDP), get more indebted, have they become RICHER?!

According to the Global Wealth Report 2021 (Shorrocks et al., 2021 ), world wealth increased by 7,4% and per capita by 6% in 2020! The prices of real estate and bonds (stocks) on the leading stock exchanges in the world rose in a way that had not been seen for a long time. Most incredibly, the economic blocs in which wealth grew were North America and Europe (not China) that increased about 10%; the latter grew by 6% (Latin America and India became poorer than before). But Europe was indebted by 10,3% more, North America just 4,7%, but China owes 15,3% more. This phenomenon is due to the overvaluation of market securities due to the high expectations generated by the higher frequency of transactions and low-interest rates.

In the immediate context, by capitalizing on their companies , Jeff Bezos , Elon Musk , and the like are winning, who are now the wealthiest billionaires at the moment.?

Until when?

This fantasy moment could end soon. As is traditional, in the first phase of the bond market adjustment, real estate will benefit as a usual safe-haven asset. So, big investors will disinvest in the (crazy) stock market to buy real estate. Long-term investors like Warren Buffett and Bill Gates are already wary of buying real estate properties (or in the form of securities) and farmland (the most basic and essential raw property possible).

In the next two to three years, the trend of demand for real estate by international investors may emerge. In the world market at your disposal, the requirements are the combined package of the return plus mitigating risk and adequate liquidity. Economies with a high institutional standard that generate trust (where the State works in favor of the economy) will get away with it but lose the others (Gomes, 2020 ).

But does any real estate product?

No. In the modern perspective, wealth is no longer the possession of heritage itself, which can even become a problem. Without exploration, the property can become a high operating cost liability with taxes across the value chain and ownership costs.

It should not expect that taxes will reduce, namely in countries without a large cluster of high-value-creating industries. On the contrary, there is not another solution in countries with a heavy public "organization" that absorbs all the available money, current and future, to pay for the crippling bureaucracy and nonsense of elites who lack discipline or other sources of capital. The past elites could abuse and possess vast assets when they had immense poor workers to (ab)use in their preservation, but now the best workers emigrate.

If the objective is to capture the interest of investors, namely the most informed, the estate must perform as an ASSET. That is, it must generate income, trust (controlled risk), and high liquidity. It's not about the business related to who chooses Portugal to live; this is a different product. The real estate paradigm has to change to become a machine that generates cash flow, but stably (Gomes, 2018). It will no longer be selling construction on land but instead using space with a specific environment provided in time. It could be, for example, the sale of services for residential use and socialization and work environment for the future emerging class of digital nomads.

In the new socioeconomic context, increasingly globalized, "liquidity" must be the watchword. The product must become a highly atomized title of ownership that can be easily transacted on the secondary market. In the most classical form, such as REITs, the issuance goes through traditional financial entities that can control the business through information (Gomes, 2004).

However, it could multiply even more value from a property business process if the title acquires the atomized dimension, such as tokenization . The smallest individual value, represented by a token, will be easier to transact through an online network platform than the possible minimum traditional real property unit. This new model may minimize many costs, such as a State gathering of taxes, in a particular business that performs worldwide and not so nationally, as the blockchain network.

Why the value must come from the machine that generates cash-flows will be the subject of the following article.

The publication of this article in Portuguese is in the online magazine "Engenho e Arte "

?References:

·??Gomes, Jo?o Correia, 2004,?An integrated process for housing investment and financing, Ph.D. thesis, University of Salford, United Kingdom??

·????????Gomes, Jo?o Correia, 2018, Uma Nova Vis?o sobre o Imobiliário - Plataforma para a Cria??o de Riqueza no Século XXI, Sabedoria Alternativa, Lisbon (https://plataforma-imobiliaria.com )

Lisbon, 13th july 2021

Jo?o Correia Gomes (Ph.D., MSc, civil engineer)