Wednesday, September 14, 2011

Some Insights & a (controversial) Conversation Topic

I was part of a discussion last week where someone told me that the ‘capitalization rate’ on some of the top, in-demand office building in NYC is no greater than 4%.

No, I did not know that. I didn’t realize that you were being compensated a mere 2% of premium, with leverage, default risk, and business risk over the U.S. 10-year treasury (also backed-up with long dated debt, ha), which is hovering around 2% these days. Boy, is it difficult to make sense of what we see going out in the world today! It is hard to provide recommendations when the concept of “fair value” might have shifted right under our feet.

I did know that nations such as England, Canada and Australia do not have the interest-rate deduction policy written in their tax code. What I did not know was that, unlike the U.S., these nations have markedly higher average home asset prices and ownership per capita! That is all the deduction (pun intended) that government stimulation—via asset inflation—might seriously be both unwarranted and non-justifiable. That was a contentious political statement right there…

…but give me the benefit of the doubt to make the claim: how will we begin to know how to make judgments, given a set of data, until we know who bears the risks? Nobody as far as I can tell knows who is bearing those risks, so I air on the side of caution that personal responsibility is a minimum standard. I believe that there will be a generational shift towards responsibility, which is inevitable given the choices we have available to us today. Be very conscious about the decisions you make, and know who you can trust.