{"id":173365,"date":"2024-06-07T12:00:08","date_gmt":"2024-06-07T18:00:08","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=173365"},"modified":"2024-06-07T12:00:45","modified_gmt":"2024-06-07T18:00:45","slug":"what-would-happen-to-real-estate-if-a-major-war-started","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-would-happen-to-real-estate-if-a-major-war-started","title":{"rendered":"What Would Happen to Real Estate If a Major War Broke Out? 8 Factors to Consider"},"content":{"rendered":"\n

It\u2019s not as idle a question as we\u2019d all like to believe. I\u2019m no catastrophizer, but authoritarian regimes have grown bolder over the last few years. Look no further than Russia\u2019s invasion of Ukraine or China\u2019s increasing threats of \u201creunification\u201d with Taiwan. <\/span><\/p>\n\n\n\n

I recently read <\/span>The Fourth Turning Is Here<\/span><\/a><\/em> by historian Neil Howe and found his arguments compelling. The one-sentence summary: Human cultures repeat a four-generation cycle, culminating in a major crisis, an existential threat. That crisis usually takes the form of total war. <\/span><\/p>\n\n\n\n

The last generational crisis started with the Great Depression and climaxed with World War II. <\/span>Howe argues that we entered the generational crisis era with the Great Recession<\/span>, <\/span>have seen it evolve through rising populism and political polarization<\/span>, and the<\/span> decades-long deterioration of our institutions has left many near-dysfunctional.<\/span> In the timeline of these cycles, Howe proposes that we stand a few short years away from the climax of this crisis phase: most likely a large-scale war. <\/span><\/p>\n\n\n\n

Every month, our passive real estate investment club at SparkRental <\/span>gets together and discusses<\/span> the <\/span>risks of different real estate investments<\/span><\/a>. We\u2019ve never <\/span>talked about<\/span> war risk, but if one started brewing on the horizon, we certainly would.<\/span> <\/span><\/p>\n\n\n\n

Reasonable people can disagree over the likelihood of a major war, as <\/span>in<\/span> one that mobilizes the United States, over the next decade.<\/span> But the risk isn\u2019t zero. It exists as a risk factor, however small or <\/span>great<\/span>. As a real estate investor, what could you expect from a large-scale war? <\/span><\/p>\n\n\n\n

History repeats itself sooner or later. Here\u2019s what we can learn from it and eight factors to consider. <\/span><\/p>\n\n\n\n

1. Higher Tax Rates, Fewer Tax Breaks<\/span><\/h2>\n\n\n\n

War is expensive\u2014not just in human lives but also in cold, hard cash. It costs a massive amount of money to pay for troop salaries, small arms, tanks, jets, bombers, drones, artillery, ships, submarines, aircraft carriers, missiles, and all the other accouterments of war. <\/span><\/p>\n\n\n\n

Somebody has to pay for it all. And that somebody is you, as a middle- or upper-income taxpayer. <\/span><\/p>\n\n\n\n

Earners in the top tax bracket <\/span>during World War II<\/span> paid a dizzying 94% income tax rate.<\/span> And the bracket thresholds shifted downward, so more taxpayers fell into the higher income tax brackets. <\/span><\/p>\n\n\n\n

We could expect the same to happen to fund the war effort. <\/span>And we could expect tax loopholes <\/span>and common<\/span> tax breaks and deductions to disappear.<\/span><\/p>\n\n\n\n

For example, the <\/span>mortgage interest deduction<\/span><\/a> and <\/span>1031 exchange<\/span><\/a> could <\/span>both<\/span> evaporate overnight. <\/span>The estate and lifetime gift tax exemption would <\/span>almost certainly<\/span> drop to a small fraction of its current level.<\/span> <\/span><\/p>\n\n\n\n

Uncle Sam may even start slapping Americans with new types of taxes, such as an annual wealth tax. The progressive wing of the Democratic Party has been making noises about it for years now, and a cash-strapped government would leave no rock unturned in the search for funds.<\/span><\/p>\n\n\n\n

2. High Inflation<\/span><\/h2>\n\n\n\n

The federal government spending (and likely printing) mass sums of money will <\/span>have a predictable impact on<\/span> devaluing the dollar.<\/span> <\/span><\/p>\n\n\n\n

High inflation also helps the government reduce the <\/span>real<\/span> value of its existing debt. That\u2019s great for Uncle Sam but not <\/span>so great<\/span> for Americans who don\u2019t want their savings gutted by inflation. <\/span><\/p>\n\n\n\n

In World War I, some material costs tripled or quadrupled <\/span>in price<\/span>.<\/span> The price of steel, for instance, <\/span>leaped by 334.6%<\/span><\/a>. <\/span>Inflation also soared in the early days of WWII (<\/span>10.3% in late 1941<\/span><\/a> and early 1942), and then the federal government <\/span>put artificial controls in place<\/span> to curb it.<\/span> For example, they capped wage growth to no more than 15% per year. <\/span><\/p>\n\n\n\n

That worked for a little while. <\/span>But<\/span> as soon as <\/span>they<\/span> lifted these controls, inflation skyrocketed <\/span>once<\/span> again to a terrifying 28% in 1946.<\/span> <\/span><\/p>\n\n\n\n

That\u2019s the thing about economic interventions by the government: They can\u2019t artificially contain the market for long. <\/span><\/p>\n\n\n\n

3. Low Interest Rates<\/span><\/h2>\n\n\n\n

The combination of high inflation and low interest rates might sound counterintuitive today, but the government <\/span>simply<\/span> can\u2019t afford to pay high interest on its debt when it\u2019s trying to fund a war.<\/span> Its priority shifts from managing inflation to managing debt costs. <\/span><\/p>\n\n\n\n

It <\/span>happened in World War I<\/span><\/a>, it happened in<\/span> World War II, and it\u2019ll happen the next time the U.S. enters a total war.<\/span> <\/span><\/p>\n\n\n\n

4. Lower Demand for Housing<\/span><\/h2>\n\n\n\n

What happens <\/span>in<\/span> economic hardships? Friends and family move in with one another to save money. <\/span>It\u2019s<\/span> called household bundling, and it\u2019s visible in recessions and periods of wartime hardships alike.<\/span> <\/span><\/p>\n\n\n\n

Now imagine that a <\/span>huge<\/span> percentage of men (and some women) ages 18 to 45 suddenly drop out of the housing market to go to war. They\u2019re no longer renting studios or one-bedroom apartments, that\u2019s for sure. The romantic partners they leave behind might move out of the suddenly too-large houses and apartments and into shared accommodations with friends or family. <\/span><\/p>\n\n\n\n

All of that puts downward pressure on housing. This is precisely why U.S. <\/span>home prices cratered in World War II<\/span><\/a>. <\/span><\/p>\n\n\n\n

5. Risk of Heightened Housing Regulation<\/span><\/h2>\n\n\n\n

In our Co-Investing Club at SparkRental, we <\/span>do<\/span> take<\/span> local <\/span>landlord-tenant laws<\/span><\/a> into account as<\/span> a risk factor when <\/span>we discuss<\/span> prospective deals.<\/span> Anti-landlord regulation adds risk to investments. <\/span><\/p>\n\n\n\n

The federal government has set a precedent for eviction moratoriums during the pandemic. Some state and local governments extended them long beyond the federal moratorium <\/span>ended<\/span>. It\u2019s now in the playbook for governments at every level, and I <\/span>have no doubt<\/span> that <\/span>eviction moratoriums will rear their head again<\/span><\/a> sooner or later. <\/span><\/p>\n\n\n\n

That\u2019s just one salient example of a potential regulatory risk. Last time around, the federal government froze all new housing <\/span>development<\/span>. <\/span>In<\/span> 1942<\/span>, <\/span>Order L-41 from the War Production Board halted all private housing construction.<\/span> <\/span><\/p>\n\n\n\n

Remember how the government artificially held inflation in check in World War II? One way they did that was by restricting rent hikes. Over <\/span>80% of rental housing<\/span><\/a> suddenly went under rent control.<\/span><\/p>\n\n\n\n

These are just the tip-of-the-proverbial-iceberg regulatory changes that have happened before. Who knows what new regulations will appear in the next crisis?<\/span><\/p>\n\n\n\n

6. Tighter Lending and Credit<\/span><\/h2>\n\n\n\n

I asked my friend Kerry Sherin at <\/span>Ownerly<\/span><\/a> what risks she saw to real estate in the event of a major war. <\/span>She immediately honed in on tighter credit markets<\/span>, saying<\/span>: \u201cUsually, banks and financial institutions tighten lending standards, which makes it harder for investors to get capital for real estate development or acquisition.<\/span> Borrowing costs may increase if central banks raise interest rates <\/span>in an effort to<\/span> fight inflation. <\/span>These problems might limit <\/span>the activities of investors and <\/span>have a negative impact on<\/span> the real estate market.\u201d<\/span><\/p>\n\n\n\n

7. Less Demand for Retail and Office Space<\/span><\/h2>\n\n\n\n

Nearly half (45%) of <\/span>young men served in the military<\/span><\/a> in World War II<\/span>. Over<\/span> a third (35%) of older men born between 1900<\/span>-1910 served as well<\/span>.<\/span> <\/span><\/p>\n\n\n\n

Those men no longer clocked into the office. They no longer went out to restaurants, cafes, or bars. They no longer bought clothes, furniture, or watches. <\/span><\/p>\n\n\n\n

Sure, their wives and girlfriends remained. Some took up manufacturing and office jobs. <\/span>But many had less money to spend than they did <\/span>previousl<\/span>y<\/span>\u2014<\/span>p<\/span>rivates<\/span> in the army <\/span>earn<\/span> a lot less than bankers <\/span>and managers and<\/span> marketers and writers.<\/span> <\/span><\/p>\n\n\n\n

What impact do you think all that had on office real estate? What about retail stores and restaurants? <\/span><\/p>\n\n\n\n

8. Strong Demand for Industrial Real Estate<\/h2>\n\n\n\n

The military-industrial complex shifted into high gear in World War II\u2014emphasis on \u201cindustrial.\u201d<\/span><\/p>\n\n\n\n

One month after the attack on Pearl Harbor, President Roosevelt created the <\/span>War Production Board<\/span><\/a>. Its primary purpose was to convert civilian manufacturing to <\/span>the production of<\/span> war materials. <\/span><\/p>\n\n\n\n

Industrial demand and production soared. That doesn\u2019t mean it was all rainbows and butterflies for owners of industrial real estate\u2014in many cases<\/span>, industrial<\/span> businesses were no longer in control of their destinies. But the properties themselves saw plenty of demand and use. <\/span><\/p>\n\n\n\n

Where to Put Money in a Major War<\/span><\/h2>\n\n\n\n

If<\/span> you knew a <\/span>major<\/span> war was on the horizon<\/span>, what would you do with your money<\/span>?<\/span><\/p>\n\n\n\n

The most obvious answer is to move money away from inflation-vulnerable investments and into precious metals like gold and silver. Precious metals have repeatedly served as a hedge against <\/span>both<\/span> inflation and geopolitical uncertainty. <\/span><\/p>\n\n\n\n

It\u2019s possible that <\/span>cryptocurrencies<\/span><\/a> would<\/span> fare well if, by that time, they had more usefulness as actual currencies and less as speculative investments. <\/span><\/p>\n\n\n\n

In SparkRental\u2019s Co-Investing Club, we\u2019ve been cautiously bullish on industrial real estate in the current market. It seems a safe bet in a war scenario as well if you can stomach the risk that your property\u2019s use might get co-opted by Uncle Sam. <\/span><\/p>\n\n\n\n

I also like <\/span>mobile home<\/span><\/a> parks as the ultimate affordable housing. <\/span>In a war, owners could <\/span>potentially<\/span> protect themselves from the worst <\/span>of the<\/span> regulatory risk by renting out lots rather than park-owned homes.<\/span> <\/span><\/p>\n\n\n\n

Campgrounds and low-cost vacation rentals <\/span>stand<\/span> to perform well. <\/span>People<\/span> may earn less, <\/span>but<\/span> they still need to escape town periodically.<\/span> <\/span><\/p>\n\n\n\n

What about stocks? It turns out that <\/span>major<\/span> wars don\u2019t disrupt stock markets as much as you might think. Sure, stock markets crash on the eve of an outbreak of wars, but <\/span>then<\/span> they rebound surprisingly quickly<\/span><\/a>. <\/span>It appears<\/span> the initial fear at the start of a war is <\/span>a good<\/span> time to buy the dip. <\/span><\/p>\n\n\n\n

Lastly, <\/span>it wouldn\u2019t hurt to have<\/span> a second passport or at least a second residency.<\/span> My wife and I have lived overseas for nine years <\/span>now, and we<\/span> have long-term residency in Brazil through 2029. Our daughter Millie was born there and has dual citizenship. <\/span><\/p>\n\n\n\n

Final Thoughts<\/span><\/h2>\n\n\n\n

In a major war, the most worrisome risk isn\u2019t that your portfolio drops by 30%. It\u2019s that you get drafted and die or lose your home, family, or life in an attack. <\/span>Just<\/span> putting it all in perspective.<\/span><\/p>\n\n\n\n

There would also be sharp social expectations that you support the war effort in a meaningful, tangible way, at some <\/span>sort of<\/span> sacrifice to yourself.<\/span> Rugged individualism <\/span>isn\u2019t celebrated<\/span> in wartime\u2014quite the opposite. As a real estate investor, you\u2019d want a good explanation handy for how you\u2019re supporting the war. <\/span><\/p>\n\n\n\n

Few people alive today have lived through total war. When it inevitably comes, whether five or 50 years from now, it will turn our society upside down once again. The rules of the game will change in an instant, and anyone still playing by the old rules will lose their wealth almost as quickly.<\/span><\/p>\n\n\n\n \n

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<\/div>\n\n\n <\/div>\n <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

It\u2019s not as idle a question as we\u2019d all like to believe. I\u2019m no catastrophizer, but authoritarian regimes have grown bolder over the last few years. Look no further than […]<\/p>\n","protected":false},"author":158586,"featured_media":173370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7385],"tags":[],"class_list":["post-173365","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-wealth-management"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/173365","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=173365"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/173365\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/173370"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=173365"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=173365"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=173365"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}