A 47% Gain For Those ‘Lucky’ Few in the Right Area

Real property or insurance concept

As we march into the future that 2016 will bring, remember one thing.

There’s little new about the economy we live in.

The game remains the same, as we keep telling our subscribers over at Cycles, Trends and Forecasts.

It’s pretty simple: find the best location, borrow as much as you can, and get someone else to pay off the interest.

You can run with that basic strategy for a long time to come.

You only have to read the latest stats out of Western Sydney to see why…

Thanks to the public: money for nothin’

On Wednesday this week the NSW Valuer-General released his latest figures.

What do we find?

The Australian Financial Review reported last week:

Residential land in Sydney’s west has topped the growth chart for the state, driven by a massive surge in infrastructure construction.

Blacktown, 42 kilometres west of the CBD, posted the highest growth in land values at 47 per cent in 2014-15, followed by Holroyd and Parramatta at growth rates of 38 per cent and 35.9 per cent, respectively.’

The land price takes the gain of the improvements put in around it. Great if you happen to own a home in the area.

Too bad for those of us slaving away for wages and profits each day. We get stuck with the tax bill that pays for the infrastructure which is driving these land values through the roof.

And we can include in the bill the interest from the debt repayments from the government deficits.

And, of course, as the article notes, all this is ‘exacerbating the affordability problem in Sydney.’

Oh, well, there’s little you and I can do about it. But if might pay for you to pay careful attention to see where the government plans to build infrastructure.

Land values in the area will rise accordingly.

Australia’s insane tax system gifts windfalls like this to homeowners for doing precisely nothing, and taxes people who actually work and create wealth.

I’m sure you don’t need reminding that the ASX 200 finished down for the year in 2015.

But rising house prices keep the voters happy and compliant and — most importantly for a politician — spending.

Australia leading the world in Ferraris, Porsches and Mercedes Benzes

Bloomberg reports that luxury car sales in Australia are booming. Sales of the Ferrari NV, for one, were up 48% in 2015.

Take a look at how the premium brands are fared last year…

Perhaps it’s all those cashed up real estate agents in NSW and Victoria?

I’m being facetious. It has to be broader than that.

Consider that a couple of notable auto-related stocks popping in and out of the new high list lately are Carsales.com.au [ASX: CAR] and Automotive Holdings Group [ASX: AHG].

These companies are growing earnings because people are happy to spend on cars. This doesn’t suggest an imminent downturn to me.

In fact, this is consistent with what’s happening in the US, too. Car sales hit an all-time high last year in America. That’s mostly been attributed it to cheap petrol, strong employment and low interest rates.

They might have mentioned a strengthening property market, too. The Wall Street Journal reported yesterday that rents rose at their fastest pace in the US since 2009 last year.

That’s six consecutive years of growth. It’s almost inconceivable that trend will change in the US anytime soon.

Before Christmas most of the financial coverage centered on the effect of the Fed raising rates. They did. Did the world collapse? No.

Here’s something that few noticed, but which is far more important. Bloomberg reported before Christmas that US President Obama signed to law a measure easing a 35 year old tax on foreign investment in US real estate.

That opens the door for overseas investors to invest more money into US property. That will translate to higher prices. This is the real estate cycle at work.

Most analysts will miss the importance of this because they do not factor in the macro effect of rising land prices.

But this cycle is nothing new. You can see the same dynamic playing out in a book written in 1933 called 100 Years of Land Values in Chicago, written by a man called Homer Hoyt.

Next comes the expansion in credit as more people have to take out bigger loans to buy their way in to the market. That’s expansionary for the economy, as I mentioned yesterday.

Of course, anyone’s who has read Hoyt’s book knows those that get in the earliest make the most from the appreciating property values.

It’s the latecomers who turn out to be the suckers when the inevitable happens and property goes down.

To make sure you know when to be in and out of the market, go here.

Best wishes,

Callum Newman

Associate Editor, Cycles, Trends and Forecasts

Ed Note: This article was first published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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