The Invisible Gorilla and Australian Real Estate

In the pages of The Markets and Money, we often celebrate the frailties of the human heart. But today we’ll examine those of the eyes.

For example, some people can’t see a gorilla in a room, even when it’s right in front of them. I mean that both figuratively and literally. Today’s DR will show you why — and explain what it means for your investment strategy.

First, the markets. US stocks sank 1.5% overnight and gold is, for now, holding over US$1200. In the local market yesterday, the standout performer was newly listed aged care operator Regis Healthcare [ASX:REG]. It got off to a nice start indeed, up 10% for the day. You’d think that can only juice expectations for the coming $4 billion float of Medibank Private.

The healthcare sector is strong across the board. If you’re on the hunt for companies with good prospects, it’s not a bad place to start…although prices aren’t exactly cheap. Check out the performance of the Aussie healthcare index, XHJ, since the market lows in 2009:

Mr Market Likes Health Care

Source: Stex
The other thing you may have missed recently, with the weak gold price and crumbling mining shares overshadowing it, is the performance of Australian real estate trusts.

The Australian Financial Review reported yesterday that they have outperformed the market by 11.5% this year. They sailed relatively smoothly through the choppy market waters of September, too. According to the AFR, ‘Australian REITs under JP Morgan coverage closed the month at a 20 per cent premium to net tangible assets.

Mr Market knows a thing or two about the state of Australian real estate. Apparently, it looks healthy to him. And yet, over at Cycles, Trends and Forecasts, we still get letters from people who simply cannot accept the idea that the real estate cycle can go higher from here.

On the one hand, that’s fair enough. Scepticism is a very healthy thing to have in markets. But an understanding of conventional economics won’t help you understand the real estate cycle. That’s because conventional economics ignores the role of land in the Australian economy.

Conventional economics combines land with capital, instead of analysing each separately, as classical economists like David Ricardo and Adam Smith did. This means modern economists are blind to the major driving force of the economy, the way the human eye can be blind to a gorilla right in front of it.

I’m referring to the famous Christopher Chabris and Daniel Simons 1999 experiment here. In this study, the subjects watched a video of a group passing a basketball around. Half the group wore white shirts. The other half wore black. The viewers were asked to count how many passes each team made.

The total count is irrelevant. The experiment was actually in ‘selective attention’. Half way through the video, a student wearing a gorilla suits walks through the middle of the players and thumps its chest, before walking off the other side.


Apparently 50% of people who watch this video (unaware of its purpose, of course) do not notice the gorilla at all. How could they miss something so blindingly obvious?

According Chabris and Simons’ book, The Invisible Gorilla, the reason is this:

When people devote their attention to a particular area or aspect of their visual world, they tend not to notice unexpected objects, even when those unexpected objects are salient, potentially important, and appear right where they are looking. In other words, the subjects were concentrating so hard on counting the passes that they were “blind” to the gorilla right in front of their eyes.

That’s what investors and economists do when they ignore the land market. If you want to understand the economy, you simply cannot blind yourself to what’s happening to the economic rent — the earnings from land.

Take the news from the family involved in the Sunbury, Victoria, property deal reported last week. If you didn’t catch it, they are, according to the Herald Sun, on the brink of becoming multi-millionaires by selling a very large tract of farmland to developers.

They bought it 30 years ago for $300,000 and could sell it for as much as $70 million. It might be part of an entire new suburb, South Sunbury. $70 million?! Sure beats working for a living. The story even made the Channel Nine news.

It’s windfalls like this that are watering the seeds of the real estate cycle. As more of the public see this, it can only encourage more and more speculation in property. Glenn Stevens can jawbone all he likes.

And of course, as my colleague Phillip J Anderson pointed out, there are a lot of newly wealthy Chinese that see buying in Oz as a windfall. That’s important, because it looks like it’s getting easier to get money out of China.

As the AFR reported yesterday, ‘China further eased restrictions of -outbound investment this week, with a fresh wave of capital expected to make its way into the Australian ¬property market.

What can I say? Don’t ignore the gorilla.


Callum Newman+
For Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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