The Driving Force Behind the Housing Headlines

Today’s Money Morning strikes a positive note and celebrates the rewards that can come from things not going to plan. After all, if you’re really lucky, you might make millions! 
How so? Don’t ask me, ask Harry Triguboff.

You might be familiar with the name. Harry is the boss of Meriton, Australia’s largest property developer. The Australian Finanical Review reported on Monday that Mertion had sold land in Sydney’s northern beaches to listed developer Sunland Group for $18 million. Meriton disposed of the property because the company couldn’t get its development proposal past the Pittwater Council and NSW Government. That’s too bad, I guess, but don’t feel too sorry.

Meriton paid $5 million for the land in 2009. They just sold it for $18 million. Now let me be clear here. Triguboff just banked $13 million dollars for doing nothing other than buying some land, holding it and get rejected. Not, you might say, a lot of value adding production went on. Now I’m not attacking Harry. He’s just making a living. But there’s an observation that needs to be made here. The economy will make much more sense once you see it.

 That capital gain, in the economic sense, is what’s called economic rent. Economist Michael Hudon describes this in the preface of his book The Bubble and Beyond: ‘That element of price that has no counterpart in actual or necessary costs of production. Banking charges, monopoly rent and land rent were the three types of economic rent analysed in this long classical tradition.’  

You and I can just call it what it is — a free lunch. It’s also  what drives the economy. More importantly, as we regularly point out in Cycles, Trends and Forecasts, it’s the real place to make money in Australia. Why? Well, you’re certainly not going to make much working for wages. Here’s the latest RBA chart on that. 3–5% a year? No thanks!

Source: Google Finance
Click to enlarge

AND you get taxed to high heaven and have to keep all those stupid bits of paper to get a pittance back. I’m sure Harry wouldn’t even get out of bed for something so pathetic. And he’d be absolutely right, too. The most rational thing to do in Australia is to try and capture those rising economic rents. If you want to know how to do that, start here.

Harry’s not alone, by any stretch of the imagination. The Age reported this last week:

Flipping has long been a part of Melbourne’s property industry, but the surge in skyscraper approvals in recent years has dramatically multiplied the worth of development sites in the CBD if they can be sold with an approved permit.

Source: The Age
Click to enlarge

Amazing what one little government permit can mean on the ‘open’ market isn’t it?  Of course, it’s never without risk. There’s no such thing as an investment — or life — that can be lived without risk. But I hope you can see the true behaviour of what drives the real estate cycle.

Of course, it helps when the political process seems to have your back in such endeavours.

Take the kerfuffle over the amount of investment lending going on in the housing market. The Australian Finanical Review reported on Wednesay that ‘investors accounted for a record 49.7 per cent of total loans in July…at the same time, the proportion of first-time buyers continues to slide.

Indeed. The solutions mentioned include ‘tough’ lending constraints on banks or raising interest rates. I’m not sure the banks would go for the first one. Neither will the Reserve Bank have much desire to raise interest rates. It would put the heat back in the Australian dollar. It would raise borrowing costs for businesses when Australia needs more investment as the miners cool off. Not likely.

Anyway, do we really need to sacrifice the whole Australian economy to have a functioning housing market? One would hope not. Might a reasonable solution be to just take the incentives away from speculating in real estate and rewarding production and investment? There’s actually a Senate inquiry going on into afforable housing at the moment. I wait with interest to see what it concludes and what action is taken. My bet is nothing.

Don’t get me wrong. The future looks bright. Every day I read about the wonderful technology about to be unleashed on the world. But those productivity and economic gains don’t show up where you might expect. 

So if you want to know where they DO show up, and what it means for your wealth, my suggestion remains the same: Learn about the real estate cycle, and make it work for you. If not, I hope you’re happy with those 3% wage rises. Because that’s all you’ll ever get.

Callum Newman+
Contributing Editor, Money Morning

Ed note: The above article was originally published in Markets and Money.

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors. If you're already a subscriber to these publications, or want to follow Callum's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

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