‘House price rise shows staggering disconnect’

Thursday, 17 May 2018
By Phil Anderson

  • It’s the land, not the house
  • Where the economic gains always go

‘House price rise shows staggering disconnect’. That was a headline in the Australian Financial Review last month.

It’s being reported that house prices in some areas of Australia are increasing up to 200 times faster than income growth.

200 times!

It’s happening most in some of Melbourne and Sydney’s outer suburbs. Apparently the problem is at its worst in the outer suburbs of Melbourne.

Talking about raw land sites, the Australian Financial Review said:

In Melbourne, which accounts for about 40 per cent of the national greenfield market, median lot prices surged 24 per cent to $281,000 in 2017, or nearly three times the rate of growth in existing dwellings, according to the Urban Development Institute of Australia.

Sydney lot prices increased by 3 per cent in 2017 but have increased by 40 per cent in the past four years to a median lot price of about $480,000, according to the UDIA.

Here’s the top 20 suburbs with fastest price rises compared to the growth of incomes of the people living there.

chart image

Source: Australian Financial Review
Click to enlarge

Easy credit, record population growth and a lack of new housing is causing house prices to grow faster than wages. Or so they say. As if it weren’t obvious.

This is exactly what is supposed to happen. House prices are supposed to go up faster than wages.

I’ll explain why below. But first, let’s take a look at the markets at time of writing.


Overnight the Dow Jones Industrial Average closed up 62.52 points, or 0.25%.

The S&P 500 rose 11.01 points, or 0.41%.

In Europe, the Euro Stoxx 50 index finished down 1.44 points, or 0.040%. Meanwhile, the FTSE 100 gained 0.15%, and Germany’s DAX rose 26.29 points, or 0.20%.

In Asian markets, Japan’s Nikkei 225 is up 151.50 points, or 0.6 6%. China’s CSI 300 is down 0.37%.

In Australia, the S&P/ASX 200 is down 16.80 points at time of writing, or 0.28%.

On the commodities markets, West Texas Intermediate crude oil is US$71.77 per barrel. Brent crude is US$79.40 per barrel.

Gold is trading for US$1,292.69 (AU$1,713.95) per troy ounce. Silver is US$16.39 (AU$21.73) per troy ounce.

One bitcoin is worth US$8,367.51.

The Aussie dollar is worth 74.42 US cents.

It’s the land, not the house

So, returning to the reason why house prices rise faster than wages.

It’s called Economic Rent. And it isn’t the house price. The gains are coming from increasing land prices.

This is precisely what is supposed to happen in any economy that encloses the land value and then allows it to be traded like a commodity.

One of the most common questions I am always asked — always — is how can it be possible that house (land) prices can just keep going up.

Houses are already so expensive. People are always telling me that it isn’t possible for houses to keep going up in price.

But they will.

As they should. It’s the sign of a genuinely productive economy. We’d be in real trouble if they didn’t.

This is not a magic formula. And it’s not something that just happens by chance.

It’s completely scientific.

First, the house is not the actual thing that’s going up in price. It’s what it’s built on — the land — that is going up. The value of your location, in other words.

The best location — that is the areas that have the best access to what people want — will always go up fastest.

Where the economic gains always go

The other thing to realise is that all the economic gains from things we humans produce — all the items that save us the most time, the developments that bring us the most benefit — are eventually absorbed by the locational value of land.

So make sure you own some. The system will screw you if you don’t.

This is why, after all the technological advances of the last 300 years, you are still working as long as your grandparents did. An average 40-hour week. Or if you’re retired, then your children are.

Technology has increased our individual productivity, but our working week hasn’t been reduced. Why? Because the value went elsewhere.

So can Australian land prices keep going up from here?

Of course. And they will.

Think about what’s to come. Driverless cars and trucks. Electric vehicles. Road sensors to make all that happen. And what if the bulk of this transition — from the current way we own and operate our cars to being driverless and totally rentable, instantly and on demand — happens within, say, the next 15 years or so?

Or even half of this happens?

Some economists suggest that such a transition will boost household income by an effective US$6k per household in the US. Which would be around AU$7–8k in Australia.  And that’s just one gain, from one area of productive economic activity.  This will really put a rocket under residential land prices during the 2020s.

And what if massively lower prices from the solar PV and battery transition allow a lot more households to quit the electricity grid?  Meaning much cheaper electricity prices for individual households.  This would further boost effective household income. Which means they can bid more for another house, of course.

A further, though different, economic study was done years ago by a dear friend of mine, Tony O’Brien. At the time he was the Research Coordinator for the Land Values Research Group

O’Brien was actually researching the wealth and poverty gap in Australia, using data from 1950 to the year 2000.  He produced a couple of charts in that study that interested me. In particular his study of aggregate land value, taxes, GDP per capita and wages, with his projections to 2020 overlaid. 

Here is the chart:

chart image

Source: Land Values Research Group
Click to enlarge

O’Brien was able to see this would be roughly right because he knew that the land, in the end, takes all the economic gains. That land value is supposed to go up faster than wages.

If anything, O’Brien probably underestimated the land value trend.

If society chose to tax these gains, instead of wages, we’d all be far better off. But that’s another story, for another time.

If you’d like to further understand the real estate cycle, and learn how you could take advantage of it for your own investing, both in real estate and in stock markets, you can find out more here.

Honestly, with this information available, why anyone persists in working for wages beats me.

Best wishes,

Phil Anderson,
Editor, Cycles, Trends and Forecasts