I’m in Detroit right now.

I’m staying in a nice neighborhood where you can buy a 2,000 sf house on a 6,000 sf lot for about US$125,000. A house double the size, at around 4,000 sf, might run you US$350,000.

In comparison, a new underground parking spot in downtown Toronto could cost you around CDN$60,000. And a small 1 bedroom apartment, could easily run you the same price as the above 4,000 sf home.

These are two completely different real estate markets.

What’s happening in Detroit is that many/most of the houses are being valued at below their replacement cost, which means it generally doesn’t make sense to build new. Why take on the risk of building when you can buy for less?

Oftentimes this a decision that real estate companies will face: buy or build? Depending on the market, the answer could be very different.

One of the things I often hear people say to me is that “you can never go wrong with real estate.” And indeed, if you’re talking about Toronto real estate over the past decade, then yes, it was fairly difficult to go wrong.

But that’s not a universal truth - either here or elsewhere. Real estate is very much an imperfect market and it has always been prone to protracted market cycles.

Furthermore, if you’re in the wrong city or part of town, there could be absolutely no market for your property. Take this example from Business Week:

Helene Pearson’s belief in homeownership was shattered in Roseland, the mostly black Chicago neighborhood where President Obama got his start as a community organizer. Pearson, who bought her two-bedroom, red-brick bungalow on South Calumet Avenue for $160,000 in 2006 with a high-interest loan, put it on the market a year ago for $55,000—and didn’t attract a single offer. Her bank has agreed to take it back in exchange for canceling her remaining mortgage debt. “I was so excited to buy my first house right down the street from my mother, but they got me good,” says Pearson, a 35-year-old guidance counselor and mother of two girls. “This scarred me so badly that I never want to buy again.”

Here you have a case where the value of the property (whatever it may be - clearly it’s not even $55,000) is below the replacement cost. That is, the value is well below what it would cost to actually go out and build a similar property. When you have a scenario like this, it intuitively translates into very little new investment.

And this is the case in many places, which is why when I hear somebody say “that you can never go wrong with real estate”, I secretly cringe inside.

I’m in Detroit right now.

I’m staying in a nice neighborhood where you can buy a 2,000 sf house on a 6,000 sf lot for about US$125,000. A house double the size, at around 4,000 sf, might run you US$350,000.

In comparison, a new underground parking spot in downtown Toronto could cost you around CDN$60,000. And a small 1 bedroom apartment, could easily run you the same price as the above 4,000 sf home.

These are two completely different real estate markets.

What’s happening in Detroit is that many/most of the houses are being valued at below their replacement cost, which means it generally doesn’t make sense to build new. Why take on the risk of building when you can buy for less?

Oftentimes this a decision that real estate companies will face: buy or build? Depending on the market, the answer could be very different.

One of the things I often hear people say to me is that “you can never go wrong with real estate.” And indeed, if you’re talking about Toronto real estate over the past decade, then yes, it was fairly difficult to go wrong.

But that’s not a universal truth - either here or elsewhere. Real estate is very much an imperfect market and it has always been prone to protracted market cycles.

Furthermore, if you’re in the wrong city or part of town, there could be absolutely no market for your property. Take this example from Business Week:

Helene Pearson’s belief in homeownership was shattered in Roseland, the mostly black Chicago neighborhood where President Obama got his start as a community organizer. Pearson, who bought her two-bedroom, red-brick bungalow on South Calumet Avenue for $160,000 in 2006 with a high-interest loan, put it on the market a year ago for $55,000—and didn’t attract a single offer. Her bank has agreed to take it back in exchange for canceling her remaining mortgage debt. “I was so excited to buy my first house right down the street from my mother, but they got me good,” says Pearson, a 35-year-old guidance counselor and mother of two girls. “This scarred me so badly that I never want to buy again.”

Here you have a case where the value of the property (whatever it may be - clearly it’s not even $55,000) is below the replacement cost. That is, the value is well below what it would cost to actually go out and build a similar property. When you have a scenario like this, it intuitively translates into very little new investment.

And this is the case in many places, which is why when I hear somebody say “that you can never go wrong with real estate”, I secretly cringe inside.