A secret reason why your property is making money while you sleep.
What’s your current device worth? – The one you’re reading this blog on….
What did you pay for it? What’s it worth now? How much of a hair cut hat have you taken on the price?
Pretty much everything in the modern economy loses value over time because it gets superseded by something better. The newer, flashier, more powerful version comes along, and the old faithful one is now worth less.
We’re so used to seeing this play out – in markets from cars, to electronics to fashion – that we think that this is just how the world works.
The newer generation is always better than the one before. Little brother is always better than big brother.
However, there’s a couple of important places where it doesn’t work like this.
The first is with millionaire property bloggers. We tend to age like fine wine and vintage fighter planes.
(Fine wine and fighter planes is another one.)
And property is another.
Property actually runs counter to this superseding effect, and benefits from what I call the “big brother” effect.
Now, it is true that dwellings depreciate and lose value. A ten year old dwelling will be worth less than a brand new dwelling, other things being equal. So it’s not a one-way street.
But there is a tendency for older properties to be worth more than the properties coming on to the market.
And mostly that simply reflects when they came on to the market, and the standards that were in place at the time.
Big brother is worth more than little brother.
The key to understanding this is to remember that right now in Australia, the average house size is falling.
This chart here from CommSec shows that the average Australian floor area of houses peaked around the GFC, and had been trending lower since.
I’m not sure if I really believe that we had such a huge explosion in average floor size between 1985 and 2009.
I think we are taking up more of our blocks, in general, but there’s also been a trend to include car-ports under the same roof as the main dwelling. Detached garages are going the way of the hills hoist.
The ABS will include car-ports as part of the floor area, so I think this will inflate the boom in average floor area to a degree.
But whatever the case, the average floor size is now falling.
And this is just for detached housing. The trend is the same when we look at apartments – it’s actually even more pronounced.
Now think about what happens as this trend continues.
Say you buy a house that’s, say, 250sqm. At the time, that’s what the standard was.
But now imagine ten years pass, and the average floor size falls to 200sqm (just to make the maths easy.)
Your house is now 25% bigger than the houses coming on to the market. What does that do to your value?
Well, it’s the equivalent of keeping the average market size the same, and giving you an extra 25% floor space – adding on an extra bedroom or something.
Your house is worth more.
This is the big brother effect. The older generation of houses are worth more because they were built at a time when houses were bigger, and are therefore simply bigger than the new houses coming on to the market – their little brothers.
And since this downward trend looks set to continue, every property buyer today will benefit from this big brother effect, regardless of what else is going on.
Now I’m not sure I can put a number on how big this big brother effect is. It’s difficult to quantify.
And the big brother effect will be partly or fully offset by the depreciation in building quality.
However, I do know that many of the building materials we use these days aren’t as flash as they used to be. They don’t last as long.
As a result, the time between renovations is falling. A kitchen used to last you 20 years. Now you’re lucky if it lasts ten.
(A lot of that has to do with fashion and taste, not just quality.)
But if the gap between reno’s is falling, that means the premium on newness is falling. Why pay more for brand spanking new if you’re just going to replace it all in a few years.
Better off having more space to work with.
Again, I can’t put any numbers on this, but if the average floor size is falling a quicker and quicker pace, which it seems to be, and the premium on newness is falling, as I think it is, then the balance is shifting.
The big brother effect will be dominating the newness effect.
That means today’s owners will enjoy more big brother capital gains going forward.
And the earlier you get or got in, the more big brother gains you get.
You’ve got to love property don’t you? What other asset class just rewards you for being in the game?
What else makes money while you sleep?
Is the ‘newness’ premium falling?