In last Thursday’s edition of Money Morning, Kris Sayce explained what really drives the markets over the long term. You can review that here.
If you’re a regular reader, you’ll know the answer isn’t interest and unemployment rates. Or the latest round of corporate earnings reports. And it isn’t even the massive round of stimulus China’s government may — or may not — pump into their economy.
It’s land values.
Now there are a lot of factors that determine land values. Population growth is one important aspect. Infrastructure is another key driver.
A $20 billion windfall
You don’t have to look far to see the huge influence of land values on the wider economy and markets — and of infrastructure on land values.
On Friday, The Age reported on Melbourne’s $19 billion new train tunnel, planned to connect Clifton Hill with Newport. According to the article,
‘In a report released on Thursday, Infrastructure Victoria concluded that the Melbourne Metro 2 project — a proposed train tunnel running from Clifton Hill to Newport via Parkville, Southern Cross Station and Fishermans Bend — could add about $20 billion to land values.’
That’s right. $20 billion. And what did the home and business owners have to do for this? Just buy in the right place at the right time and sit tight. That’s it.
(The report did highlight the possibility of hitting local property owners with a ‘value capture’ fee to recoup some of the cost of building the tunnel. But with the powerful Property Council already up in arms about the proposal, I wouldn’t expect to see that go through any time soon.)
Anyhow, Infrastructure Victoria’s report of a $20 billion windfall reminded me of a book I’m reading, Pete Earley’s Super Casino — Inside the “New Las Vegas”. Good read, by the way.
It seems booms, busts, and radical speculation have been an integral part of Vegas since its earliest days. Long before the first casino sprang up, fortunes were won, and lost, in the Nevada real estate game.
Helen Stewart is a great example. In 1878 her husband, Archibald, took over a ranch in Big Springs (soon to be Vegas) when the owner defaulted on a $5000 loan. When Archibald died — shot by Helen’s lover — she turned the ranch into a campground. She did good business serving thirsty prospectors, drawn to Nevada by the Comstock Lode, which was rich in silver.
She was also smart enough to realise that eventually someone would build a railroad linking Salt Lake City and Los Angeles…a railroad that would pass through Big Springs. Knowing the engines couldn’t run without water, she snapped up nearly 1,800 acres of land around artesian wells.
When the railroad finally came in 1902, they offered her US$55,000. That’s around US$1.48 million in today’s dollars. (There’s some inflation for you.)
Of course she took their offer.
The owners of the San Pedro-Los Angeles-Salt Lake Railroad line wasted no time. They divided her land into 40 identical square blocks and called their new ‘city’ Las Vegas. Some creative advertising helped spark a land rush. The result?
Within three years the company sold all of their land for a grand total of US$265,000. Almost five times what they paid for it. Not bad, right?
It’s interesting to see how infrastructure drove the boom, and the boom then drove Nevada’s economy in the century ahead. You’ll also note how little — if anything — has changed today. We’re even still talking about rail lines boosting land values.
Now you may be saying, that’s great for the current landholders, but how can I benefit from this?
The answer is twofold.
First, you need to know where to buy. Meaning areas of expansion. Areas that will see new infrastructure, like the Melbourne tunnel project, come into play after you’ve bought your property.
Second, you need to know when to buy. If you buy at the top of the Real Estate Cycle, you’ll almost certainly lose money, new train line or no. I trust you know where we are in the Cycle, right?
If not, go here to find out today.
Managing Editor, Money Morning