Raw Land: The Hunt is On

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Land is the scarcest commodity that we have here in inner-city Melbourne.’

So says a real estate guy quoted in The Age on the weekend.

Indeed. It seems the housing party is beginning again.

But it’s never really about houses. It’s about land — and the return you can get from owning it.

The name of the game — if you can afford it — is to get your hands on the biggest block you can find. But only if it can be subdivided into smaller parcels.

That way, you can sell four townhouses or three units. You better get going before all those blocks are gone.

Where to look?

Here’s one idea. Follow the infrastructure plans of the state government of where you’re thinking of buying.

Any investment in new roads and rail will show up in the local property prices.

Today, The Australian Financial Review expresses some angst around all this…

The housing boom is back

Is the RBA’s low interest rate policy inflating another housing boom?

Naturally. And the farce continues…

We’re all led to believe that there’s this terrible trade-off for us as a society. Central bankers lower interest rates to ‘support’ and ‘stimulate’ the economy.

There’s no evidence this works as stated, but we’ll go with the flow for today…

But oh dear! That same action makes debt even cheaper to acquire, which Australians dutifully plough into the property market.

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Oh, nuts!

The consequences of this aren’t benign.

Inflating the real estate market indebts the average consumer, weakens the general economy and makes asset markets ever more fragile.

And there the RBA lies wedged. All those PhDs and highly paid bureaucrats have no other option. Oh well…

Wrong!

The central banks love nothing more than to convey the idea that there are passive bystanders to this system.

That they only have one lever — interest rates — to pull. There’s nothing they can do when it stops working.

It’s all hogwash from start to finish.

You only realise this when you appreciate how banking works. The most important variable is not the price of money — interest rates.

It’s the quantity. An expanding money supply will natural inflate whichever area it flows into.

We could, as a society, use this credit to fund new technologies, innovation and environmental protection.

The RBA could orchestrate this. How? Easy! Give each bank loan quotas to fulfil this mandate.

Alternatively, abolish the RBA and populate Australia with small community banks that lend to productive businesses.

That would be far more beneficial than our useless central bank…

Banks inflate property prices

Let’s do one other thing: Ban commercial banks from making real estate loans. All mortgages could be financed from the non-bank sector.

Why? Because this means banks cannot inflate the property market beyond the economy’s ability to sustain it.

Please don’t bore me with the old ‘supply and demand’ drivel around Australia’s high house prices.

Credit is the most powerful force in property.

In a different world, banks would finance productive growth with low inflation.

But I guess the top bankers would have to take a pay cut.

For example, former bank CEO Mike Smith earned $88 million from his eight years at ANZ.

To achieve what?

Did he cure cancer or something?

Certainly, ANZ shareholders are still wondering.

You might be surprised to hear all this.

Most people assume that banks lend existing savings. But they do not do this. They create the credit from nothing.

That means the banking system can inflate asset markets with their lending. History shows these always end in asset busts — at great cost to the economy.

2008 was the last example…and America is still living with that bitter legacy.

The Wall Street Journal reports[1] that the ‘historic boom’ of the last decade has done little for the bottom 50% of American households.

The top 1% of households have twice as much wealth as they did in 2003. What gives?

The WSJ says…

The Fed kept interest rates near zero and bought bonds in the years after the crisis to revive the economy, in the process amplifying the run-up in asset prices. “Who owns that stuff? Rich people,” said Karen Petrou, managing partner at Federal Financial Analytics.

Indeed. Note the absurdity that the Fed is, quite happily, free to use money created from nothing to buy bonds (to ‘revive the economy’).

But, it doesn’t use that money to ‘revive the economy’ by, say, building a hospital or replacing one of America’s crumbling bridges.

Of course, the Fed is not designed to improve the economy, but to protect the banks and keep the current system in place.

And so this foolish game of Monopoly continues.

Oh well! There’s nothing you and I can do about it today.

Instead, it’s best to recognise that the system is designed to protect asset markets first and foremost.

That means the path to wealth remains the same: Acquire assets and avoid living off wages.

We’ve come full circle. Those blocks of land in metro areas are the things to hunt down.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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