On today’s show we’re talking about a debt bubble. There have been numerous debt bubbles over time. There was the sub-prime debt bubble. There’s clearly a sovereign debt bubble in many countries around the world including the US. There is arguably a debt bubble in automotive loans as the number of auto loan defaults in the US is skyrocketing. But we’re not going to talk about any of those. The debt bubble that is going to have a ripple effect throughout the economy is the student housing debt bubble.
You might say that students are making an investment in themselves. We’re not giving a bunch of 18 years olds $40,000 in debt to go buy large screen TV’s. We’re investing in our youth. They are our future. A university education is essential to succeeding in this increasingly competitive world. I’m extremely grateful for my degree in engineering. It has served me very well.
There are some degrees that lead directly to a career. We’re talking about degrees in medicine, law, engineering, physics, chemistry, psychology. These degrees have commercial value because they are valued in the marketplace. But then there are Students are spending tens of thousands of dollars on degrees that frankly have questionable value in the marketplace.
I believe 100% in making an investment in yourself. Like any investment, there should be a return on that investment. What exactly does a bachelor of commerce prepare you for? What would a degree in European and Russian studies prepare you for in the marketplace? I have not come across any job descriptions that call for a bachelors degree in humanities.
Now I’m not degrading any of those fields of study. I’m just not buying into the idea that students take on thousands of dollars of debt where there is zero ROI. If you grew up in a wealthy family and they can fund your degree in philosophy, then great. But the idea that you borrow tens of thousand for a degree in Linguistics seems questionable to me.
So what does this mean for you as a real estate investor?
Universities are anchors in many communities. Housing is built around them. Commercial amenities are built around them. Public transit infrastructure is built around them.
We know from demographics that University enrolment is scheduled to decline starting in 2025. There simply are not as many young people graduating high school over the next several years. Naturally, you can expect that universities will aim to offset the decline with foreign students. But that too will eventually be limited by the number of student visas. Some Universities will do a better job than others in marketing to and attracting foreign students. This means that we will see a number of outright university failures. Some of these schools will be absorbed by nearby schools resulting in a consolidation. Others will simply go into bankruptcy.
A good example of that was Mount Ida College, a private college in Newton Massachusetts. It closed its doors about a year ago. Some of the assets of the school were purchased by the university of Mass. The students were given automatic admission to UMass Dartmouth, even though their academic programs are different. Student’s were also given the chance to join Newbury college which is also closing.
If you are investing in a community that has a university as one of the economic anchors, there is additional due diligence necessary. One of the measures is how many scholarships are the school offering to students? Scholarships sound like something that student’s have earned. But in the business of universities, a scholarship is nothing more than putting the tuition on sale. It’s a discount, designed to induce students to choose this school over then next one. If you see tuitions rising, and the number of scholarships increasing, that may be a warning