How You Get Financially Manipulated in Real Estate

Imagine you’ve got just $200,000 and you’re eyeing a house worth a whopping $1 million.  To make this dream a reality, you go ahead and get a home loan for the remaining $800,000. Sounds like a smart move, right? Not so fast. Here’s where things start to twist.

First off, in a scenario where everyone can get their hands on cheap and easily available credit, the price of homes just keeps skyrocketing. What was once affordable is now priced outrageously, all thanks to the flood of loan money pouring into the market. So even before you’ve signed the dotted line, you’re already caught in an inflated bubble.

Now, let’s play out two scenarios:

Best Case? Not Really: Say the house value shoots up to $5 million—sounds like a jackpot, right? But hold your horses. If you decide to sell this goldmine, sure, you pocket a cool $4 million profit. But guess what? You need a new place to live, and unless you’re downgrading or moving to a cheaper area, any comparable house is also going to cost you a fortune thanks to the same inflated prices you just benefited from.

So, unless you have multiple properties and are serious about treating real estate as a business, actively looking for opportunities for reinvestment in underexploited areas and have the time/resources to manage those investments, you are mostly chasing a fool’s gold. The average homeowner who “invested” in the house they live in is just running around in circles.

This is not to say homeownership isn’t important. It gives you a sense of security, but only if the bank collection agents aren’t at your doorstep every month because you defaulted on the huge loan you took. Remember the bank is still the real owner of the house, until you pay off your loans 😉

Worst Case, You’re Stuck: Now, if the market tanks and your $1 million home dips to $900,000, you’re in a real pickle. You still owe the bank a ton of money, and now it’s on a house that’s worth less than what you paid. Meanwhile, the bank? They’re still collecting interest, sleeping easy while you sweat the mortgage payments.

In both cases, who’s the real winner? The bank. Always the bank. They lend you massive amounts, sit back, and collect interest while you gamble on property prices. If you win, you barely break even when you buy again, and if you lose, you’re stuck with debt on a devalued asset. Meanwhile, the bank has made its money, come rain or shine.

It’s a rigged game where the house (or in this case, the bank) always wins, and you, the consumer, are just a pawn in their profit-making scheme. It’s a harsh truth to swallow, but that’s the reality of diving into home loans without recognizing the strings attached.

While we are at it, let’s also crack open the not-so-mysterious case of sky-high real estate prices in places like Dubai, where you’d think the “no interest” rule would keep things more reasonable.

But no, the banks there have still found a way to make a killing, and here’s the scoop on how they do it, even without slapping the interest tag on it.

Banks in Dubai might not charge you the usual interest, but they’ve got a clever workaround. They use financing structures like Murabaha—where they buy a property and sell it to you at a higher price.

Think of it as their own version of interest but dressed up in a different suit. Or they might hook you up with Ijara, which is basically leasing until you own the place, but you’ll pay plenty more than the original price by the end.

Then there’s Musharaka, a joint ownership deal where you buy the bank’s share over time, again at a premium.

What does this mean for property prices? They keep shooting up. Every time a buyer like you comes along, backed by these “interest-free” loans, it inflates the price for everyone else. It’s the same old song and dance—banks get their cut one way or another, ensuring that buying a house isn’t just about finding a place to live. It’s about navigating a financial minefield where the banks are the only sure winners.

So, even in the land of no interest, the banks have figured out how to keep the real estate game in their favor, making sure that while you might think you’re climbing the property ladder, you’re actually just running on their hamster wheel.

As we are discussing property inflation, also let’s examine the nature of inflation. There are two types of inflation. The one you feel and the one you don’t feel.

The one that is fuelled by higher salaries or payments overall is still tolerable because if the price is higher your earnings are higher too, provided wages go up overall for most people and are not isolated to a tiny segment of the society.

However, the inflation fuelled by debt makes lives miserable because while the salaries or the earning power has stayed more or less the same, the prices are still going up.

So, what could earlier be afforded with a year’s income can now only be afforded by 5 years’ worth of income! This has a flywheel effect and more and more people are having to take on debt either out of greed or necessity because there is no other option. And as a result, they are bound to the financial institutions for the rest of their lives, never experiencing any degree of freedom at all.

By the way, if you are reading this a hundred years from now, you may be laughing at the “cheap prices” I have mentioned, because assuming things have continued to go the way I described, without any policy interventions, I won’t be terribly surprised if a one-bedroom house in an expensive city costed a billion dollars in 2124.

Of course, you have probably bought it using a home loan that will be paid off by 2324, in easy payments over the course of 200 years, by 7 generations of your family.

PS: By the way, to be fair, I don’t mind collecting interest on my money. Does that make me a hypocrite? Well let me ask you. Do you like kissing your partner? Yes? Would you like someone else to kiss your partner? No? Then you are a hypocrite too.

PPS: By the way, if you are a bank, you can please still hire me for training for your people, even if you don’t like me, just like I am still maintaining bank accounts, without particularly liking banks. I love money just as much as you do.