Originally Posted by
SailorRob
Good stuff ValueNZ! Always be skeptical of anything anyone says and do your own work, and where possible, go back to first principles.
My statement is certainly nuanced, and I will explain. It's relevant to OCA as it's all about property, but please, folks, you don't need to read if you don't wish to.
Firstly, and we will discuss this again, but land is in no way a scarce resource, for the most part anyway. NZ is about 1% urbanised, let's say 2% to save any arguments. Jump on Google Maps and study around any NZ provincial town or indeed Auckland, and you will see plentiful amounts of land, even coastal areas. There are some areas of scarcity, but these are few and far between. It always makes me smile when driving around NZ seeing ruddy-faced, beer-swilling, fat-gutted old men (not relevant here, but this is what I picture Bull to be) who have told me to "buy land as they're not making any more." Well, damn, all I see is land everywhere I look.
Now, another little project you can do is study the per-hectare price of the highest-quality pristine NZ farmland. From memory, it's about $28,000 per hectare. Now, figure out how many 500 square meter sections are in a hectare and make adjustments for roading and whatever else, and see what the actual land value is. Obviously, there are a lot of other costs, but four white pegs and some pipes and roads aren't that expensive. The scarcity and costs are all artificial, and your generation may not put up with the political system that enforces it, nor will the country be able to grow and prosper when everyone's productive capacity is going into pumping up values for the benefit of those further up the Ponzi.
So, if you go onto Homes.co.nz and take 10 randomly selected properties from 4 or 5 NZ towns and cities that have a sales history from the 1980s, and then adjust the prices for inflation using the RBNZ figures, and then factor in that those figures are light (strongly encourage going to the library and studying old papers from the 80s and building your own inflation models), you'll quickly see that there has been around a 2% real return CAGR over that 40-year period. Then you need to see that to get that 2% return has required the two biggest property booms that the world has seen back to back, with price-to-income ratios exploding higher and real net rental yields going deeply negative. If you normalise those PE ratios and factor in that the properties have not been maintained or upgraded to new standards, then most of the 2% gain goes away. Yes, it is there now, I will grant you that, and so my claim of zero over that period does not currently hold for most of NZ (unlike most of the world)
But it's very important to understand Shiller's argument and carefully presented figures of zero (or very close), and he uses European data going back 400 years too. And understand why your hypothesis of surely going up with GDP will not and cannot hold true. It can for a while as ratios crank up and political interference makes its mark.
It's also worth thinking through how it's possible for a really smart dude, the smartest poster on ST, Mav, who is currently reading "Irrational Exuberance," could entertain the thought (though it may end up being true) that after a 20-year unprecedented boom in property prices, which grew household debt to GDP to global historical records and blew out debt-to-income ratios and required 5000-year lows in interest rates, led to NET returns going so deeply negative that it's hard to believe and then had a very brief and small downturn that didn't even take prices back to 2020 levels... that this correction is surely nearly done and we'll be back to normal. I mean, WTF, why would this be your base case? Tony Alexander can go to hell. Sure, they may be right, but to expect this is insanity. Situations like this can take decades to play out, not months.
On top of all this, the government is waging a war on the margins of 'investment property' owners. Why are people going to buy property for a 2% NET return (which is actually much less) when they can get double in the bank? Why do people buy businesses where the entire revenue cannot pay the interest on the debt? Why will they continue to do this? Revenue, not income!! Mav, please tell me the answer to this!
I will say that the chances are extremely high that the prices provincial NZ property saw at the peak will never be attained again in real terms.
So why can't a non-productive asset keep up with GDP over time? Well, the biggest thing everyone forgets is that things don't become more expensive over time, they become cheaper, which is how we get a higher standard of living. Sure, in dollar terms, things become more expensive, but not against GDP or wages. So, what I am saying is that you can buy more goods and services for a week's wages than you could 10, 20, 30 years ago. The rare cases where you cannot usually have had heavy state interference, which ultimately we control as we can vote the pricks out and therefore control the legislature.
Now think through the physical process of developing a farm into a subdivision in 1980 versus now. Every part of the process is so much more efficient now, except the interference from the state. Think of the survey methods in the 80s, the manpower required vs satellite tech now, think of the earthmoving equipment and the pipe laying and concreting, think of all the brown manila folders moving around town by post vs the click of a button. Every physical part is so much more efficient. Yes, the Taniwha are bigger now, but again, will your generation stand for it? Will we stand for productive capacity going to placating Taniwha?
So, as can be seen, developing land now is much more efficient than in the past. It takes way less manpower. As the economy has grown, the amount of the economy needed to subdivide has shrunk. Think of it like the percentage of people working on farms in 1800 versus now for an extreme version of the effect I am highlighting.
Now think about building houses: hammers vs nail guns and factory construction, computer design... But what has happened is homes have become far superior, and this is why new build costs could keep closer to GDP, perhaps as they are not the same things as 100 sqm homes from the 80s without garages and ensuites. The house of 1980 could be built in a tiny fraction of the time now, so as the old homes produce nothing, they fall way behind GDP. They are worth less and less as everything else improves unless you upgrade them to new standards, and then there goes any return, as to keep them up with GDP, you have to spend GDP.
This is why, in most places in the world, long-term returns for existing property are zero. Shiller makes the case better than I, but it should be obvious that a non-productive asset like property or gold will do zero over time. Is NZ different?
We will see.