Diamonds vs Real Estate

Diamonds vs Real Estate

Would you ever think to compare diamonds and real estate? At first glance, they seem like two completely different things.

Famous economist Anthony Sutton first drew the parallels in his work “The Diamond Connection.” Sutton notes that a diamond is more akin to real estate than one might think because it, like real estate, requires time to convert into other forms of wealth. While a diamond can always be sold within a few hours, the cost is prohibitive. To realize the investment takes time. A diamond sold under pressure is a diamond that will not yield its full value in the market place.

Let’s look from an investor’s prospective how investment in diamonds and real estate, two “hard assets,” correlate and differ.

Similarities

Hard Assets

The most important similarity is that both real estate and diamonds are hard assets, similar to other commodities and unlike bonds and stocks.

Hard assets in general are considered inflation hedges. Hard assets are typically negatively correlated with bonds and stocks. In other words, when the prices of stocks and bonds drop, the value of hard assets tends to appreciate.

That being said, not all the hard assets perform the same. Financial crisis proved that real estate could be very highly volatile. Diamonds, on the other hand, are part of a relatively closed industry that is much more stable.

Differences

Maintenance Fees

Diamonds have no maintenance costs during the investment period. Diamonds are the hardest material on earth, literally, so they don’t need repairs or renovations and they don’t wear with time. There are no surprises with diamond investment, what you pay upfront is the only sum you need to worry about.

Real estate, on the other hand, requires constant maintenance and repairs. Very often real estate has monthly management fees. All these costs need to be calculated into the cost of investing in real estate.

Portability

Diamonds are obviously very portable. They actually have the highest size to value ratio of any natural resource or any other investment good. Several millions of dollars worth of diamonds can fit in one handful and can be transported in your pocket.

Unlike diamonds, real estate is not “very” portable; in fact, it cannot be moved at all. But let’s say, for arguments sake, you could move a property. Most of the time the value of the real estate is linked to the location it occupies, which means even if theoretically somebody could move his house, the investment value would change based on location. Real estate is not physically portable and the value does not transfer easily either.