Why Aussie House Prices Have Further to Run

The Aussie property boom is over. Or at least that’s according to Bloomberg, which claims that our $7.3 trillion housing market is comparatively bigger than the US and UK markets were when they blew up:

After five years of surging prices, the market value of the nation’s homes has ballooned to A$7.3 trillion ($5.6 trillion) — or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them.

Reading statistics like this makes you wonder how the market hasn’t fallen apart yet. And it certainly gives rise to the idea that Aussie house prices are due to collapse any moment now.

But that’s not going to happen anytime soon, according to Cycles, Trends and Forecasts editor Phil Anderson. Phil believes the biggest boom of our time is still ahead of us. Only around mid-next decade is when Phil expects that we’ll see an almighty crash.

Until then, he reckons that house prices will not only continue to go up in Australia but everywhere else in the world too.

Phil says that house prices are meant to go up. He believes it’s the sign of a genuinely productive economy. And that we’d be in real trouble if they weren’t. This is not a magic formula. And it’s not something that just happens by chance.

Phil calls it the ‘Economic Rent’. What does this mean?

First, the house itself is not what’s rising in value. It’s the land that it’s built on that is appreciating.

The only reason it becomes so unaffordable is because not enough people understand the Economic Rent.

The creation of Canberra is a prime example of Economic Rent at work. As Phil writes:

Neither Sydney nor Melbourne would consent to the other becoming the capital. For a while after 1901 the two cities agreed to rotate the responsibilities and take turns seating the elected parliamentarians to govern the country until a new capital could be built somewhere in between.

The elected leaders were well aware of what an announcement (or fore-knowledge of such an announcement) would have on land value in the chosen region as land speculators piled in for a quick profit from the rapidly appreciating locational value, or economic rent. To defeat them, Australia’s first Prime Minister, Edmund Barton, declared that:

‘So far as the law of the land allows, land within the federal area will not be sold. Its ownership will be retained in the Commonwealth. The land will be let for considerable terms but with periodical re-appraisement so that the revenues thus obtained will assist the cost of creating the Commonwealth Capital. More than that, we shall take care to put no fancy prices on land. We shall not play into the hands of the speculators… 

An annual rent of not less than 5 per cent of the unimproved value of the land, as assessed by an appropriate authority, was eventually prescribed for all persons who wanted to live and work in the new capital, payable quarterly in advance. The unimproved value of the land was to be reappraised at the expiration of twenty years, and thereafter at ten-year intervals. With such a simple and elegant idea, Australia went on to build the city of Canberra, truly one of the world’s most spacious and amenable of capital cities.

So, if you decided to move to Canberra and the site you intended to own was appraised as worth $1,000, you paid rent to the commonwealth of $50 per year. The site was yours, to do with what you wanted: you owned it with clear title, subject to the lease; you just had to pay the economic rent for the privilege. The politicians knew what they were doing. Collecting the worth of the site yearly in advance meant that the rent of the site could not capitalise into a tradable commodity. There would be no price in which to speculate.

The price of the site, therefore, is zero.

But, although the price is zero, this does not destroy the site’s use value, or worth.

This has some astounding ramifications. To live in Canberra, one did not need to take out a mortgage to afford the site. (This upset the banks.) Canberra sites could never be hoarded or kept out of use in expectation of future gains: the holding cost of doing so (because you owed the land rent to the commonwealth) was too high. Credit could not be created upon the capitalised land rent. There wasn’t any.

No capitalised rent, no real estate cycle.

No capitalised rent, no need for the vast amount of fractional reserve banking required to buy it.

House prices will only continue to rise

Society doesn’t demand the collection of the annual rental value of the land (the Economic Rent). Instead, in advance of this, it gives rise to a land ‘price’. This will always be going up.

And, according to Phil, it will go up quickly in any city that has good laws, effective property rights, and where infrastructure is constantly being built and renewed.

Take Melbourne, for example.

In the next decade, Victorian Premier Daniel Andrews has promised that construction will start on a rail line from the CBD to the airport. There are probably folks already looking for property along the potential route.

To top this off, Melbourne just created a new suburb called Wollert, some 30 kilometres north of the CBD.

Victorian Planning Minister Richard Wynne says it’s a major boost to affordable housing in Melbourne. But he has to say that. Yet his statement will prove false in the end.

42,000 Melburnians are expected to live there eventually. To make this happen, the Victorian Planning Authority will release 100,000 new lots for development over 2018. Wollert will receive a town centre, five schools, a new train station, and 304 hectares of open space.

All this will lead to Melbourne’s land values creeping up yet again. And it will certainly increase at a faster clip than wages.

The benefits of this new suburb and the infrastructure that goes with it will in the end increase the Economic Rent available to capitalise into the price of land.

If you’d like to know how you could take advantage of Phil’s cycle theory to boost your portfolio, click here to learn more.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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