The more technology advances, the more valuable land becomes.

We’re starting to see the first glimmers of inflation, especially with the world in an “energy crisis” right now.

But zoom out 20 years – or even five years – it’s clear that everything is becoming cheaper.

Maybe not in dollar terms exactly. In a nominal sense, the price of things is generally increasing. We’ve got inflation that keeps the arbitrary numbers we attach to prices creeping upwards.

But the real cost – the relative price of most things – is decreasing.

Take an i-phone for example. 15 to 20 years ago, the technology embedded in current i-phones possibly existed, but to access it, you would have had to pay a pretty penny. In terms of your labour hours, maybe it would have taken you a full year… maybe more?

Now, how many labour hours does it take these days? Maybe a week? Maybe less.

We often fail to realise how cheap things are becoming because there are so many improvements built into newer models. Computers don’t seem to be getting any cheaper, but the computing power of 10 years ago is already way past obsolete these days.

And it’s not just high-tech stuff. I bought a heater 6 or 7 years ago, and it finally gave up the ghost. So I went looking around – you can buy a cheap fan heater for less than 15 bucks these days!

Sure, maybe it’s crap but still. You can get a functioning heater for less than an hours work on the minimum wage.

Don’t you feel rich?

And its true of bread, crisps, chocolate… almost any thing you can think of. In terms of how long it takes to earn the equivalent of these things, almost everything is getting cheaper.

Why?

Basically humans are just getting smarter and more organised. We’ve had a number of major production revolutions in the past 200 years that have radically expanded our access to the stuff of life.

There was the industrial revolution, the production-line revolution, the digital revolution. And some folks are saying we’re on the cusp of a robot and automation revolution that’s going to take it to a whole other level.

Each revolution has made us more efficient at producing things – lots of things. It takes less labour to make each new item, and as a result, the cost of the thing, relative to labour, falls.

As a result, I live in a consumerist paradise that my grandfather could never have dreamed of.

And if you hold quality constant, everything I want is getting cheaper and cheaper.

But there are two major exceptions to this.

Energy and property.

While the price of pretty much everything else is in free-fall, the price of energy (which is really the commodities of oil and coal) and property (specifically land) are on the rise.

Why is that?

Well, the reason is that our technological revolutions couldn’t touch them. All the computing power in the world, even the most sophisticated robots imaginable, just can’t make more land.

These things are fixed (though a potential solar revolution might create an abundance of energy at some point).

And so even though we live in the ICT age, the thing that’s appreciating most in value is still land.

We are moving to a future where technology continues to drive the price of almost everything towards zero – but land stands out as the exception to the rule, as prices keep surging higher and higher.

In fact, the wealthier we become in terms of purchasing power, the more we have to spend on our address.

In 50 years, the share of income devoted to housing expenses has barely changed. The share spent on food however has fallen sharply.

We are intrinsically connected to the earth, and all the value in the world derives and depends on it.

It’s the only safe-bet left.

JG.

Rural land prices are booming, but it’s all about land.

So we know that property prices are booming right now. House prices are growing at 20% a year.

Of course, the thing to remember that property is actually a bundle of two distinct assets – the land and the dwelling.

Typically, the dwelling depreciates in value, and the land appreciates (they’re just not making any more of it.)

And so when you hear that house prices are booming at 20%p.a, you know that that action is almost entirely in the land market.

And we got a clear sense of that last week when we saw that rural land prices are growing at a record pace.

Strong commodity markets, low stock levels and sustained low interest rates are combining to create the strongest underlying conditions in 30 years and will push prices of agricultural land higher over the next five years, Rabobank’s latest Agricultural Land Price Outlook report shows.

… The predictions are the result of a surprisingly strong rebound in Australian agriculture from years of drought in the eastern states that has agricultural forecaster ABARES expecting farm production to jump 8 per cent in the current financial year to $73 billion from last year, putting it 17 per cent over the five-year average.

“We’ve had a phenomenal year,” report author, Rabobank senior analyst Wes Lefroy, told The Australian Financial Review.

The interesting thing about the rural land boom is that it’s happening in a synchronised way across the country and across different growing regions.

Australia is a big and diverse place. It’s very common to one region to be in famine while another is in feast.

But right now, everybody’s making hay.

“Most states have been reasonably aligned in terms of having a reasonably positive year as well.”

Australia’s disparate agricultural regions are subject to their own – often varying – conditions, and it was unusual to have all of them booming at the same time.

It was clear they all were, however, as optimism levels – seen in farmers’ intentions to acquire land – were uniformly high, Mr Lefroy said.

Tasmania’s agricultural land prices surged 28.3 per cent between 2019 and 2020, in Victoria by 15.8 per cent, Queensland by 15 per cent and WA by 14.1 per cent.

Tight supply is one factor underpinning prices. The number of sales last year was almost half (down by 45 per cent) from 2019.

Tight supply, strong demand, booming prices… Where have we heard all that before.

Yep. Residential.

And why

Because fundamentally these markets – which is effectively just one land market – is being driven by the same thing.

Record low interest rates.

Rates tumbled in 2020 and they’re not coming back any time soon.

And that’s why it’s a nothing but a boom, from coast to coast.

JG.

All this cash has to go somewhere

So the AFR was running the story last week that booming house prices had lifted Aussie’s net worth by $1 trillion in just six months.

Nice. Nice if you own a house. Very nice if you own several houses.

(Yes I am doing very well lately, thank you.)

You can see on this chart here from the RBA, that household wealth is growing at 20% a year – one of the fastest growth rates on record – largely thanks to housing wealth. 

Now, if you’ve been following my blog since the Covid crisis started none of this will be a surprise to you.

I knew that as soon as the developed world announced that we’d be printing money like crazy, a boom in asset prices and wealth was inevitable.

And that’s exactly what happened.

I mean check out this chart here on financial assets as a percent of GDP in the US. That has gone absolutely bananas.

We were worried about a bubble at 4x. What do we make of 6x!??

But bubble isn’t the right word because this epic boom in asset values is built on something very real – money.

Gajoogles and gajoogles of money. Freshly printed money. Just flowing into the system.

Of course that money itself is not real. Some boffin at the central bank just pressed a button and made it up.

But once they did, it became real money, and it became real money that went gushing into the system.

And all that money went looking for a home, bidding up assets as far as the eye could see.

And for the first time ever, we tried the same trick here. The RBA’s balance sheet – which is a measure of how much their printing, sky-rocketed. It went from about $160bn to more than $350bn! It more than doubled!

If that looks epic, it’s because it is. I mean, take a look at the UK’s version. The Bank of England’s balance sheet exploded to 35% of GDP. That’s the highest level since at least 1770!

Now, let’s come back to our original chart.

That shows household wealth growing at 20% a year.

Now if I told you that the RBA had doubled it balance’s sheet, the Bank of England was on the biggest spending spree since 1770, financial assets in the US have gone to 6x GDP, do you reckon we’re done at just 20%

Don’t you think this whole thing could go much, much higher?

That’d be my bet.

JG.

Strange moves this week as the CBA wants to put itself in chains.

So this is a bit of a weird one.

Matt Comyn – the boss of CBA, Australia’s biggest bank – did something strange last week.

He went before the House of Representatives economics committee hearing on the four big banks, and asked them to put him in chains.

Sort of. He said that the banks should voluntarily put a bend in the credit hose and keep a lid on house prices.

… even though housing is far and away their most profitable business unit, after baby meat manufacture. From the AFR:

CBA chief executive Matt Comyn has expressed concern about the speed at which property prices are rising, arguing banks should act now to cool the market before it becomes a much bigger problem.

“We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market,” Mr Comyn said.

Mr Comyn said he was not worried about mortgage stress or the levels of indebtedness by home buyers today.

“If we look at the simple numbers and the relative growth rate of housing over the last 12 months I am not concerned about the period just gone. But in terms of increasing housing debt and increasing house prices we are increasingly concerned,” Mr Comyn said.

The bank said it had noticed an elevated number of loan applications despite the lockdowns in Sydney and Melbourne and, when combined with the trajectory of house prices, that signalled problems ahead.

“We have put up our benchmark floor rate to 5.25 per cent from 5.1 per cent, which is well above the rate customers would pay,” Mr Comyn said.

So, it’s not a problem yet, but it could be.

And CBA have voluntarily tightened the screws, by setting the floor rate (the interest rate used to assess whether people can actually afford the repayments) a couple of notches higher.

What on earth is going on here?

Now I don’t believe for a second that this is about any sense of the collective good. At the same hearing, ANZ’s Shane Eliot said he was thinking about equality.

“Current house prices make it harder to enter into the housing market. This could translate into a shift in wealth distribution towards older more established families and if perpetuated, raises the issue of greater economic disparity,” Mr Elliott said.

So woke.

So call me a cynic, but I don’t think this is there game here.

Rather, I think this is them trying to stay one step ahead of APRA, and to make sure that APRA doesn’t bring the kind of restrictions that choked the market back in 2016.

Remember back then, APRA introduced a range of restrictions – such as limiting loan-to-valuation ratios, and putting restrictions on the growth in the investor loan book and the interest-only loan book.

The banks didn’t like that.

So Comyn wanted to make it clear that the banks would much rather see increases in the floor rate than any other kind of lending restrictions.

“With caps around loan to valuation ratios, one of the disadvantages of that is some of those measures impact particular cohorts of buyers more than others such as first home buyers.

“If you are asking us what our preferred measure of implementation is, I would say the floor rate,” Mr Comyn said.

So Comyn is offering the government something here in order to avoid the APRA stick down the track.

Even though moving the floor rate from 5.1% to 5.25% isn’t going to move the dial all that much.

But I do suspect it will be enough.

Banks learnt a tough lesson in 2016. They’ll be very wary of a repeat.

And look, that’s all a good thing.

Stable growth is good. Reckless growth is not.

And so I think this all actually prolongs the life of the current boom. There might be a bit less in the short term, but a bit more in the medium and longer term.

And the less APRA gets involved, the better.

JG.

Are the regions losing their edge?

I know a lot of people who leveraged ‘regional cheapies’ into successful investing careers.

These cheapies could often give people a way to create some quick equity gain, which they could then leverage into another deal.

But is the era of the ‘regional cheapie’ over?

Probably not, but it is true that the regions are losing their edge on pricing.

For instance, the Housing Industry Association’s (HIA) Affordability Index is calculated for each of the eight Australian capital cities and regional areas and takes into account the latest dwelling prices, mortgage interest rates and wage developments.

The latest report to June Quarter 2021 shows that affordability across Australia’s regional property markets has deteriorated at a faster rate than the capitals.

The HIA clocks the change:

“Over the past two decades, housing affordability was a greater challenge in Sydney and Melbourne than the rest of the country. Yet since the pandemic began it is the rest of the country that has seen a faster deterioration in affordability.

“This is not surprising given the rapid exodus of population out of Sydney and Melbourne to other states and regions.

“The number of people who left Sydney and Melbourne in the last year was tens of thousands more than the number of people who arrived. This is not unusual for Sydney but was a uniquely damaging development for Melbourne.

“In addition to this, Sydney and Melbourne suffered disproportionately from the closure of international borders and the associated loss of overseas migrant, student and tourist arrivals.

“This is why the deterioration in housing affordability was most acute outside of Sydney and Melbourne…

Across the regions, regional New South Wales saw the biggest deterioration in affordability in the nation, down by 22.8 per cent over the year. This was followed by regional Tasmania (-13.6 per cent), regional Queensland (-10.3 per cent), regional Northern Territory (-8.6 per cent), regional South Australia (-8.1 per cent), and regional Victoria (-6.5 per cent).

I think we do need to be a little careful here about creating a myth that isn’t quite true.

It is true that population growth has surged in the regions and fallen in the cities.

However, this is not so much about an ‘exodus’ from the capitals. Rather, it’s because nobody is leaving the regions for the capitals. The the regions has stopped, like a blocked pipe, and population is backing up and overflowing.

So it’s not about city people fleeing the capitals. It’s about regional people avoiding the capitals.

But otherwise it’s true. The regions have been outperforming. It’s not often that you see stronger price growth in the regions than you do in the capitals (with Sydney already growing close to 20%pa mind you!) but that’s what we’ve got.

A combined regional growth of 19.6% is epic.

It’s one for the history books.

But then there are just so many things about this boom that make it special.

JG.