Propped Up Property: The Rules Have Changed…Did You Get the Memo?
In 1904 Elizabeth Magie patented a clever board game of her own creation. She called it The Landlord’s Game.
The game pretty much mimicked life. There was money, banks, deeds, jail…you could even make a wage.
Yep, you probably guessed it. Her game later turned into what we know today as Monopoly.
The point of the game was to teach children basic economics and show them the dangers of concentrating land in the hands of a few.
If you’ve ever played it, there are a few ways to make money.
You can get a ‘salary’ every time you go around the board.
Like real life, there’s also luck involved. Through the chance cards you may get money by winning the lottery or receive an inheritance.
Or, you could invest your wages and savings into buying land and infrastructure and develop it by building homes and hotels. You can then charge rent to any other player that lands on your property.
Property and rent is where the big bucks are. As Magie herself noted in The Single Tax Review:
‘Children of nine or ten years and who possess average intelligence can easily understand the game and they get a good deal of hearty enjoyment out of it. They like to handle the make-believe money, deeds, etc., and the little landlords take a general delight in demanding the payment of their rent. They learn that the quickest way to accumulate wealth and gain power is to get all the land they can in the best localities and hold on to it.’
Those were the rules of the game back then. But they’ve changed since.
Last week I wrote about the value of time, and how your time doesn’t get you as much anymore. You can read it here.
Propped Up Stocks and Property Market
The stock market and property have both been propped up artificially. It’s why money is moving into real things, like gold.
But the fact that your time doesn’t buy you as much has become quite clear when it comes to property. The argument is that house price increases have been fuelled by high immigration and low supply.
Property prices have been rising quicker than salaries for decades now. Real home prices across the country have increased 150% since 2000, while real wages increased by less than a third, notes a new paper from the University of Sydney.
There’s been low interest rates, easy credit, and tax policies like negative gearing. That is, getting a tax break when your property loses money.
This pushes investors to make money from property appreciation instead of rent. That is to wait for prices to appreciate with the goal of selling for a profit later on.
We’ve seen a boom of investors getting into property with the goal of holding for a couple of years and then selling at a profit from price increases.
It’s also created a sort of wealth effect for those who have property.
But properties appreciating faster than salaries forces people into more debt just to buy a home. Saving for a deposit has been a huge hurdle for young families.
People have been making most of their money from property appreciation and not from salary growth.
The problem with this new game is that as soon as appreciation and debt availability stops, prices collapse, much like they did in Spain or the US in 2008.
And then there’s the banks.
A good chunk of Australian bank balance sheets are made up by mortgages.
Westpac this week cancelled their dividend with stress increasing along with mortgage delinquencies. Mind you, this is with JobKeeper and mortgage relief measures.
The rules of the game are changing again and the way to make money from property will not be from appreciation but from generating income through rent. Price appreciation, if it happens, will be a perk.
It was already reaching the end of the line but the pandemic has accelerated this.
And, in my opinion, that’s the way we should look at assets anyway. Not only as something that will appreciate over time, but as something that will generate regular income.
The best assets to have, always, are income generating assets. Assets that will do the work for you, not cost you a loss.
For The Daily Reckoning Australia
PS: Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself. Learn More Now.