WILL HOUSE PRICES GO UP AGAIN?ES GO UP ON
One of the questions I’m most often asked is: How is it possible for Australian house prices to go any higher than they already are? It’s a fair question.
Of course people were asking that same question back in the 1970’s and the 1980’s too. And my dear Mother, who turns 91 this year, told me recently when she was first married back in the 1950’s they asked the same question!
There are several key points about this question.
The first point is to do with the “Economic Rent.”
The second point is does history repeat? There was a time when Sydney house prices rose by nearly 100% in just 24 months.
Let’s first look at “Economic Rent”
For that we will turn to Philip Anderson, author of The Secret Life of Real Estate and Banking, where he says on page 334, talking about the early 1800’s economist, David Ricardo who first defined ‘Rent’:
‘Simply put, Ricardo said that the economic rent is not a cost of production. He defined ‘rent’ as the difference between the costs of production from different acreages of land. Investors today may not know much about it, but those living at the fringes of society quickly learn about its practical application. In London some years back, one enterprising duo, John Bird and Gordon Roddick, hit upon an idea to put the homeless back to work. They published The Big Issue for those on the streets to sell, thus providing a regular income that wasn’t welfare.
‘The idea worked and was copied in other cities, including San Francisco, but sellers were quick to notice that those who stood on busy streetcorners (say, the corner of Market and New Montgomery) sold more magazines for the same application of labour than those at quieter sites.
‘Fights broke out for control over the best location. Soon, sellers were prepared to bid for these best locations, or defend theirs with violence. This value that arises independently of labour is what Ricardo was first to identify as a “surplus”, the economic rent. Real estate investors know it today as locational value.’
Henry George went on to point out that it is the ‘Economic Rent’, not wages, which will absorb — if not immediately, then most certainly eventually — all of the gains society makes over time.
This is why house prices — in reality the land upon which they are built — keep going up way beyond your ability to afford one easily.
Indeed, house prices MUST go up if we keep improving technology and/or add more people to any given location.
That’s the first thing about the question: how is it possible for house prices to go any higher than they already are?
They’re supposed to.
The other thing is this: banks — and society in general — will find ever more creative ways to help you finance your house.
In the near future, if it is necessary, mortgage times will lengthen to 45 years, say, instead of the 30 years you’re used to.
Or governments will push cities out into areas where land is cheaper, if it can be done. The city of Melbourne is seeing this right now.
Or this will happen, which we are seeing in cities like Hong Kong already, and which is slowly starting to be seen in Sydney and Melbourne:
Reuters 12 December 2018:
‘Young professionals priced out of housing markets in major cities are driving demand in the co-living sector where “microflats” are grouped around shared facilities such as dining areas, lounges, work spaces, laundry rooms and gyms.’
SCROLL DOWN TO CONTINUE
Do you know when Sydney house prices rose by nearly 100% in a 2 year period?
And when house prices FELL by nearly 25%?
If you want to see the answers to these questions, then you CAN GO HERE TO READ MORE
PHIL ANDERSON 1 APRIL 2019:
This chart is purporting to show the estimated impact of innovation and technology on economic activity.
If you know your ‘K-wave’ timing, the ups and downs will jump out at you immediately. So too if you know your Dow history.
Most of all, you could realise where the innovation gains are most likely to end up. The gains are continuing. And they’re going to be massive.
So that’s another reason why I think land prices are highly likely to keep going up. Not only for the next few years, but the entire century, give or take a few busts along the way.
Starbucks has just opened its 30,000th store — in China (it has 30,000 stores around the world, with 3700 of them in China). The first Chinese store opened in 1999. I’ve spoken about this issue before: Starbucks and what they do.
Coffee buying is a discretionary purchase. Honestly, with such an increase in coffee drinking around the world, it isn’t suggesting economic catastrophe any time soon. Is it?
And continuing the theme this year and last, the world’s largest underwater restaurant just opened. It’s in Norway. It has a 36-foot window so you can watch the fish swim past as you eat.
But keep in mind though, the cycle.
We’re due for a slowdown as we approach the mid-cycle point, due shortly. Everything’s pointing to it.
The US yield curve inverted on Friday 22 March, for the first time in a decade.
As I see it, the cycle is still on the way to peak at or near 2026.
IT companies all around the world are now having an even more profound effect in the surroundings where they are located — in a group sense. Their effect is on land values in particular.
This effect is found in the Silicon Valley area of California, in the tech parks of Israel and also in the city of Seattle. (Home to Boeing, Microsoft, Starbucks and Amazon.)
All these areas are seeing IT workers — on top wages — priced out of the very areas they work in. Surely this tells you something?
The ‘solutions’ pledged by both government and associated businesses are not likely to help much. Let me give you two examples of that…
Microsoft has pledged $500 million to try and get affordable homes in Seattle, its hometown. The money is to provide below-market interest rate loans to help low or middle income workers find housing.
Which, since ultimately the rent takes all the gains, will push land values in the region even higher. Why does nobody see this?
Mark Zuckerberg doesn’t see it either.
As reported in the Business Times, on 28 January.
‘The philanthropy started by Facebook's Mark Zuckerberg and his wife Priscilla Chan is backing a fresh effort to address the housing shortage in the San Francisco Bay area, where an explosion of tech wealth has deepened inequality and contributed to an affordability crisis.
‘The Partnership for the Bay's Future — which the Chan Zuckerberg Initiative is starting in conjunction with the San Francisco Foundation, the Ford Foundation and other groups — will seek to preserve and create affordable housing through a new US$500 million investment fund.’
Alas, such remedies just won’t work. You know the reason why? It’s very simple…
The economic rent takes the gains of society. This is not an accident. It’s supposed to happen. It’s the natural law.