Soon, there’ll only be one game in town.
When people ask me where to put their money for the long run, I say property. Every time.
That makes me a property optimist.
But it’s also true to say that I’m a pessimist about nearly every other asset class. That’s actually probably more true, over the long, long run.
And so when I’m backing property, it’s not that I’m saying that it’s going to necessarily create a lot of value. It’s that I see other assets destroying value.
And the real estate singularity (as Dymphna and I call it – make sure you check out her Next 10 event) is not so much about real estate rising to the top of the asset heap. It’s about real estate being the only asset left standing.
Now to understand what the singularity is, I need to slow down and pick up some basic economics so we’re all on the same page.
Ok, so in Economics 101 they talk about three factors of production: Land, Labour and Capital. Everything that gets produced in an economy draws on these three factors.
It’s pretty broad brush obviously. Capital includes machines but also includes entrepreneurial capital, and land includes the things that come from the land, like fish from the sea, or iron ore from the ground.
But let's leave that to the side for the moment.
Each of these factors has an income stream attached to it. Labour receives wages, capital receives profits, and land receives rents.
The singularity in real estate is where the wages and profit streams are destroyed, and rents are the only income stream left standing.
How is that going to happen?
Well, automation and computing, to be more precise.
Think about IBM’s Watson. Watson’s “brain” holds all 5.5 million articles in Wikipedia, growing at 20,000 per month, and each fact contained in it can be “remembered” at any time, more quickly than the human brain can remember what it had for breakfast.
And that’s just one of the things it can do.
Combine huge amounts of data with massive processing capabilities and machine learning (where the computer coordinates it’s own process of trial and error) and you have the potential for an intelligence (even a wisdom) the likes of which the world has never seen before.
And right now in Australia, Watson is helping banks with compliance. It is checking advice documentation and phone recordings for whether advisers have followed the rules (Watson can check every single one, rather than the random samples that are checked now).
Centralise that process and you pretty much don’t need auditors or even APRA.
This is coming for every aspect of our lives.
Soon your house will be reading your facial cues to gauge your mood, and then adjusting the lighting and music accordingly.
It might have also realised that you need a new fridge.
It dispatches an order.
On-demand, solar-powered robots will be trawling over our rubbish tips for scrap metal. Autonomous trucks will take the metal to a factory, also operated by robots, to 3D print you a new fridge, from designs independently developed by a computer.
The fridge will then be delivered to your door by an autonomous truck, or autonomous drone, and your house will let the robots come in and install it.
And not a human hand nor human mind will have been involved.
The implications for wages are pretty clear. Humans are quickly becoming out-dated technology. We’re about to become as valuable as CD players.
Wages are going to zero.
But what about profit income? Well, it’s under huge pressure too.
Think about that fridge story. If all the robots and computers are powered by free energy coming from the sun, and the materials used are harvested for free from rubbish tips, the marginal cost of each product is effectively nothing.
In competitive markets (and markets are going to get more and more competitive as barriers are torn down), then prices are pushed towards marginal cost.
The price of your fridge might only be a few dollars.
How much profit margin can you make on a $2 fridge?
The reality is more likely to be a volumes-based fridge business – that tries to pick up 5c on every 50c fridge, and make money by selling millions of them.
And the 5 people involved in that company, once everything from accountants to sales has been automated, might make a decent wage.
Of course, rents suffer too in this story. If companies can’t make money, they’re not paying for retail or commercial space.
But there’s still a lot of non-economic activity that has to happen somewhere. People need houses to live in, even if they don’t have jobs.
So in time, the economy will be drawn towards a singularity, where the only factor of production generating any income is land.
Land is the last man standing.
We probably won’t get there of course. An economy where wages and profits have been destroyed simply won’t function in the way we understand it. It’d need a complete overhaul.
But every step we take towards the singularity is value positive for real estate. The more wages income and profit income is destroyed, the more valuable, and relatively scare, rental income becomes.
Theoretically, since prices are relative, in the singularity, wages and profit incomes go to zero, and rental income goes to infinity.
As rental income goes to infinity, so does the asset price.
As I said, we won’t ever get there. It’s like trying to enter a black hole.
But there’s a long, long way from here to there. And every step will see the price of land increase.
And that’s why I’m holding property for the long run.
And this is all before I’m touching on the 7 mega-trends Dymphna has identified. If you want to be ready for the future, her Next 10 event is an absolute must!