Buy land, young man; they are not making any more of it, are the sound words of Mark Twain.
Notice, though, he did not say, “Buy a house young man, they are not making any more of them.” They plainly are.
In the past few weeks we have had a couple of reports about the housing boom (notice, it is not called a “land boom”) that have not made enough of the distinction between land and building.
It is a fair enough error. People usually say they are going to “buy a house” or a unit. They do not say they are going to buy some land and a dwelling.
But the distinction helps give a better understanding of the property (neutral term) boom; why there will be another and another; why it is too bad for the new generation of first home-buyers and why it is not such an inequitable thing.
Last week (ending July 17), the Reserve Bank was bemoaning the difficulty of measuring changes in property prices.
It said figures were distorted – not deliberately, but though the nature of what is being measured. Some measures are more accurate, but lag in time because they rely on figures posted in the Land Titles Office, some months after the sale. Other measures take samples through real-estate agencies, missing the private market.
All measures are marred by the fact that only a tiny percentage of the whole housing market is sold at any one time. This leads to distortions. If, in a given quarter, lots of one-bedroom hovels are sold it will indicate wrongly that prices have fallen. If, on the other hand, many mansions are sold, it will indicate wrongly that prices have risen. Only over many quarters of figures do these things iron out to a discernible trend that removes the variable quality of dwellings from the ingredients, thus concentrating on the land element.
The Reserve Bank, incidentally, concluded that the trend is that the boom is over.
Well, maybe this one is, but there will be another. And another. And another.
What about the poor first home-buyer, though?
The Productivity Commission made a few helpful suggestions that would tinker at the edges: free greenacres at cities’ edges, ease planning restrictions and change tax arrangements. But those things will not defeat the fundamental economic forces that drive the price of land. Usually ever upwards.
Most people are used to the price of goods going down while the quality of the goods goes up. In 1960 the basic Holden cost more than year’s average weekly earnings. Now it is half that and the car is vastly superior – air-conditioning, CD player, bigger engine, better brakes and so on.
It is a similar story for refrigerators, photography, toasters, you name it, and also with more recently invented gadgets.
But land is not a commodity. You cannot make more of it to meet demand. A competitor cannot come in with lower prices and better quality. In that respect, land is similar to French Impressionist paintings. But it is different from French Impressionist paintings in that everyone needs a dwelling. They can do without paintings.
So while population continues to grow, expect more property booms. Also, as cities grow, land in the inner areas becomes more valuable. For example, the 400 blocks in Forrest represented about 30 per cent of Canberra residential land in 1930. Now they represent less than half of one per cent. You cannot make more land in Forrest.
Sure, you can cut land into smaller blocks and you can build lots of apartment blocks. Those units become more like commodities and respond to supply and demand more like commodities. That is why in the most recent boom units rose faster and are now falling faster than houses which have a greater portion of land in the total price.
The commodification of the dwelling market by building lots of units is all very well. But people buying them should consider that the land portion of their dwelling is much lower and the building component is much higher. The building component depreciates. It wears out and has to be replaced in time.
Incidentally this will result in many arguments among unit holders in decades to come as to whether a whole block should be demolished and rebuilt or whether it should be patched up.
While the building depreciates, the value of the land goes up with economic growth and more – well beyond the consumer price index.
Land in some places – particularly the inner areas — has gone up tenfold in the past 20 years. A block that was once twice or three times annual average weekly earnings is now eight to ten times annual average weekly earnings.
Is there any intergenerational unfairness in this? Not really. The baby boomers might have had it easy on land, but later generations have had it easier on cheaper, better and newly invented gadgets and better medical treatments that have made life easier, more convenient and longer.