Real estate has never been more popular or more expensive — when does it all end?

Thursday, 27 January 2022 — Albert Park

[6 min read]

Dear Reader,

The media is bustling with articles full of stories of housing unaffordability woes.

The ABC ran with a story this week headlining that ‘Real estate across Victoria has never been more popular or so expensive’.

It reminds me of a cartoon I saw a few years ago that featured the creation of the ‘world’s first completely reusable newspaper’.

The headline — ‘HOME PRICES RISE’.

‘You’ll never need another one!’

At least, not for most years within the land cycle.

Having said that, we’ve never seen a boom quite like the one we’re seeing now.

All markets across Australia — both regional and city — are experiencing record rises.

In Melbourne, the median house price is now $1.125 million.

That’s up 18.9% over the year.

In regional VIC, prices are up 27%. The median price is now a record $565,000.

It’s the biggest annual increase for 21 years.

Prices have ballooned more than $1,500 dollars a week over the last 12 months!

Real estate agents in Geelong are reporting desperate homebuyers are queueing outside agencies to secure newly released blocks of land:

‘There was probably 50–80 people out the front — there was only 30 blocks for sale.’

From the sound of it, you’d think there’s a shortage of land zoned for residential development in Victoria.

Except, there is more than enough land zoned for development to comfortably accommodate everyone who desires to build a home.

The problem is that developers control the supply of land — not government.

The big home builders will never build and sell housing at the fastest rate to meet demand.

That would be the worse business plan imaginable.

Instead, they’ll build at the rate that’s most profitable.

This generally results in drip feeding subdivisions onto the market in staged releases, to keep prices high and maximise profits.

The mainstream media focuses on the unfortunate homebuyers priced out of their favourite suburbs — but it forgets that the housing story in Australia isn’t about providing homes.

It’s all about making monopolists wealthy.

The biggest beneficiaries are the finance sector that have a licence to mortgage the earth and reap from the interest.

At $9.1 trillion, residential property is Australia’s biggest asset class.

Significantly larger than any other asset class.

Over the last 12 months, the cost of land alone (without the buildings on top) has increased by $1.72 trillion.

97.1% of that is residential land.

In other words — we’re experiencing the biggest land boom in recorded history.

The average rise in land values over the past decade has been 7.7%.

If that continues, we could expect to see land prices at $11.4 trillion in 2026.

Over at Cycles, Trends & Forecasts, we said it would be the greatest real estate boom in history back in 2019 — prior to COVID.

But what I’m seeing on the ground has exceeded all my expectations.

I’m witnessing properties selling more than $100K-plus above neighbouring properties in the span of a few weeks.

Here’s a good example:

The owner of number 22 Tamarisk Av flipping their house back onto the market after witnessing how rapidly the market was rising mid-last year.

The world’s first reusable newspaper will be accurate for a few more years yet — the boom should last until 2026.

After which, we’ll likely experience the biggest housing bust that Australia has seen since the early 1990s.

Why am I so confident?

Click here to learn more…

Regards,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

The North Atlantic can be rough in mid-winter. We had our misgivings. But the only way to get our car back to Ireland was on the ferry…and so we drove aboard and parked the car on the top deck.

We crossed the sea, from Cherbourg to Rosslare, Ireland, with a bunch of Polish truckers. They gathered in the bar before the ship raised anchor. Burly men, they were all stout…almost all with shaved heads, dark T-shirts, and large arms. They drank beer…watched a sports program on TV or chatted and laughed among themselves. Then, we all went to dine…

They, in their jolly trucker’s restaurant. We, nearly alone, in the quiet, regular restaurant. Who was cooler, we wondered?

Luckily, the wind died down…and the swells flattened out. After a couple glasses of dreadful wine and an OK hamburger, we went to bed and slept the sleep of the innocent.

George W Bush sleeps well, we imagine…even though he squandered US$8 trillion and is responsible for the deaths of thousands of innocent people. Even Adolf Eichmann may have slept well. By contrast, saints sometimes toss and turn, troubled by the Trinity…or indigestion

That is the charm of the human race; each person can think what he wants. And whatever pretension or snobbery you choose; someone is bound to look down on it.

One thinks he is cool because he drives a monster truck. Another, behind the wheel of his Tesla, sees him as a hopeless yokel. One pronounces the ‘L’ in salmon, just to show that he knows it is there. Another takes him for a dope. One puts a dirty picture on his wall and proudly says ‘it’s art’. Another would throw it in the trash.

And so, we turn to today’s archi-cool signaller, Larry Fink.

No Penn, no Jobs

Few people have been more successful at making money than Fink. He founded one of the biggest and most influential hedge funds in the world — BlackRock, now with some US$10 trillion under management. Even if you get only 30 basis points from managing the money, that’s still better than you get stocking inventory at Amazon. And in public life, money talks. So, few laughed when Fink gave out the word that his mission had creeped. Henceforth, he would not be merely trying to make money…but to improve the world we live in.

The principle of ‘declining marginal utility’ explains it. Fink has so much money, another dollar or two will mean nothing to him. But cool? He’s no Sean Penn. No Clint Eastwood. No Elon. No Jobs. He has a long way to go before reaching even average rich-guy cool…the point of diminishing returns must still be far ahead.

One of the safest forms of cool-seek these days is to let it be known that you stand squarely in favour of protecting Planet Earth. Along with wearing a face mask when you are running, providing major funds to politicians, or putting a ghastly painting by Lucian Freud on your wall, it signals that you are a hip, earnest human being…and eager to let others know it.

But cool is not constant. The Inquisition was cool in 12th century Europe. Tulips were cool in the 17th century. And in the 20th century, Soviet collectivism was cool in Russia and National Socialism was cool in Germany.

And now, if businesses want Fink’s money, he said, executives must eschew their single-minded drive for profits. Instead, they must ‘disclose a plan for how their business model will be compatible with a net-zero economy.’

He means net-zero carbon emissions…and goes on to specify that they should try to limit global warming to no more than two degrees Celsius above pre-industrial averages, by eliminating net greenhouse gas emissions by 2050.

Of course, there are valid reasons why CEOs and investors might favour investments in planet-saving companies. They might conclude that their share prices will go up as a result of the good publicity. They might think their employees will be more motivated, since they are working to improve the world, not just make a buck. They might actually think it will save the planet…and result in more profitable businesses over the long run.

People AND profits

Or…they might, cynically, just think it makes them look cool. And in Fink’s case, it might help make sure the money keeps coming. It is not by accident or diligence that Fink’s business now has US$10 trillion. And it is neither perspiration nor inspiration that will keep the money coming his way. Instead, it is, broadly speaking, politics.

And now, the captain of industry is meant to change course. It’s no longer enough to bring the ship into harbour with good services and products. Now, he has to worry: Is it cool not to have women on the board of directors? Is it cool to use heaven forfend!, the masculine pronoun in a corporate communication? Should he switch to an all-electric fleet; how will that look in the headlines?

‘People, not Profits’, say the signs held aloft. But how does a corporation know how to focus its resources? There is no recognised gauge of cool…and no reliable market for it. And the more seriously you take your quest for cool, the more people take you for a fool.

It is fairly easy to broadcast a concern for ‘people’ or the planet. It is hard to make a profit. Which course of action is most helpful to customers? To other people? Or even to the planet?

Practically an affront to nature, a profit is the opposite of entropy. It is an expression of ‘negentropy’…when, instead of degrading into disorder, things come together in a special, almost miraculous, way. And it doesn’t happen unless it is made to happen, by people. They may not be driven by a profit motive. But they are always guided by it. And the result is a more prosperous world in which people live longer and get more of what they want.

Chasing cool would be so much easier! CEOs could use the shareholders’ money to make helmets for baby seals…or ban meat from the company cafeteria…or pay their security guards as much as they pay their top salesmen and researchers.

But as near as we can tell, honest profits — not those earned via robbery, fraud, lobbying, voting, subsidies, tax credits, or government giveaways — are the only way of knowing whether you are making the world a better place, or not. Profits tell us that your products or services are worth more than the resources that went into providing them. And that people actually want what you are selling. What other measure of a ‘better world’ is there?

But Fink’s BlackRock treasure? Where did its US$10 trillion come from?

Tune in tomorrow…

Regards,

Bill Bonner,
For The Daily Reckoning Australia