At Custodian, we often say the land is the foundation of all wealth. In John Fitzgerald’s bestselling book, 7 Steps to Wealth, it’s on the front cover, the first page, and is step 1 of the 7 steps. It has been since the book was first published in 1998.

There is not a better example of that principle than what we think is likely to go down as a deal of 2021.

The Medich family has sold a 344-hectare parcel of land near Badgerys Creek to a fund management company. It is one of the biggest blocks of land bordering the proposed $5 billion Badgerys Creek Airport in Western Sydney.

The land was bought by the Medich family from the CSIRO for $3.5 million in 1996. They have now on sold it for $499.95 million! That’s an eye-watering return of 22% per annum compounding. Even after you adjust for inflation, it works out to be a return of 19.7% per annum.

To put that in perspective at the same time the S&P/ASX200 index increased by 4.4% per annum compounding and the median house price in Australian capital cities increased by 6.5% per annum compounding.

 

What does it mean?

It means it is important to invest in an asset that will grow and there is no better Australian asset to invest in than land in a fast-growing location which is close to jobs and infrastructure. In the Medich family’s case, the jobs and infrastructure are coming in the way of a $5 billion brand new airport!

This is obviously an extreme example, however even the median sale price of land in capital cities of Australia has tracked at the growth of 7.8% to 9.4% per annum depending on the state and timeframe.

While that’s a great result, it’s equally important to have good cash flow. The problem with just buying land is that you don’t get an income, so you have to fund the holding costs out of your own pocket. The land tax alone on the Medich property was $1.7 million a year!

Therefore, it’s important to buy land and build an efficient home on the land which is going to give you enough income to cover all of your costs. At the end of the day, we want to maximise our land content which is the value of the land as a portion of our cost/spend.

In other property news, auctions have been running at 80% plus clearance rates since the beginning of the year in every capital city of Australia. A balanced market is considered to be one with clearance rates between 60% and 70%, so there are definitely more buyers out there than sellers right now.

CoreLogic produced some data during the week that highlighted that gap. Nationally, the number of homes listed for sale is 24.7% below last year and 27.5% below the five-year average.

In somewhat encouraging news, the number of new property listings over the 28 days ending 7 March was 6.5% higher than 12 months ago, but still 5.7% below the five-year average. If you look into those numbers, you’ll find that new unit listings were 10.2% higher than at the same time last year and level with the five-year average, while the number of fresh house listings was 5.1% higher but still 7.8% below the five-year average.

Until we see the overall supply/demand trend come into balance we are likely to continue to see this rapid pace of high auction clearance rates and appreciation in housing values. Particularly when it comes to houses.

Finally, last week we talked about the Reserve Bank of Australia’s comments that rates will stay low until the end of 2024 and what that means for investors. RBA governor Phil Lowe has been hammering that point home lately. He really wants the country to know they can work out their commitments based on low rates until 2024.

 

But why?

I read a fantastic analysis piece by John Kehoe in the Australian Financial Review during the week. Kehoe talked about the fact that the RBA was wanting inflation at 2%-3% for a while before rates were increased.

He went on to point out “economic history suggests that wages growth is the most likely source of future inflation, barring a supply shock such as an oil price spike (less likely in the US shale oil era) or a big jump in consumer price expectations.”

He said “national wages growth has not hit 3% since 2012,” with 3% considered to be the minimum rate of wage growth we’d need to see to start driving inflation into the 2% -3% range.

“Traditionally, the NAIRU – the rate under which unemployment needs to fall for inflation to rise – in Australia was thought to be around 5%.

Mr Kehoe said pre-COVID the Australian unemployment rate was sitting at 4.5% and we were only experiencing 2.2% wage growth.

“The unemployment rate last fell to 4% in 2008 – during a once-in-a-century mining investment boom and just before the global financial crisis blew up the world economy.” In December 2008, wage growth was running at 4.3%.

But he also pointed out it’s not an exact science. “NSW achieved a 50-year low unemployment rate of 4% in January 2019. Even then, wages grew modestly at about 2.5%.”

 

What does it all mean?

We might need to unemployment go close to 4% before interest rates increase. Unemployment is sitting at 6.4% today, but we’re about to experience the end of Jobkeeper so that number may increase in the short term.

We could even end up with a full decade of low-interest rates.

Before you get too carried away, I don’t think that means it’s going to be sunshine and rainbows for investors. I think it’s very likely we’ll see APRA reintroduced before then as a means to curbing investor demand for housing, as we did in 2018 and 2019.

I’m not sure when. So far it’s been first home buyers and owner-occupiers driving up prices, but investors are starting to come back into the housing market.

If you’ve got borrowing capacity today, don’t assume you’ll still have it in six months’ time. Get in while you can, because, for those who get in, we’re likely to see low rates – and therefore good cash flow – for some time.

 

Interested in knowing more? Check out the weekly podcast we do at  The Double Shot Podcast.

 

James and Alex