Saturday, June 13, 2020

Why Are The Wealthy So Keen To Snap Up Unused Land?

When the vast majority of people think about what it means to be wealthy in the modern economy, stocks and bonds are the first assets that come to mind. But when you study the portfolios of the wealthiest people, you find a different story. The vast majority of them plow a good chunk of their money into land. 


Why Land Is A Source Of Wealth


Land doesn’t sound like a significant source of wealth. And when it sits there doing nothing, it isn’t. Land, though, is still a substantial chunk of the economy and represents a vast amount of the total wealth it contains. 


When investors think about the economy, they typically believe there are two sources of returns: labor and capital. You can either sell your time directly for cash. Or you can store it up in the form of savings and then spend that on assets that you hope will generate returns.


People tend to forget, though, that land is a separate asset class with the potential to generate returns all by itself. What’s more, the returns to land are higher than you might imagine. It, like other resources in the economy, is scarce. We don’t have infinite space on the Earth's surface to construct new developments or provide space for agriculture. The room that we have is limited. 


Furthermore, land is becoming increasingly scarce as populations grow. It is highly likely that it will become a significant source of wealth in the future as pressures increase. 


The Returns To Land


When you look at the long-term returns to land versus equity, you find some fascinating patterns. In most countries, the returns to property are mostly the same as they are for investments. There are some exceptions, like the UK, but, in general, there’s virtually no difference. In the US, for instance, historical returns to both housing and equities are identical. 


Even so, homes with land for sale tend to be undervalued. The vast majority of non-wealthy people don’t understand the real value that lies in land, and so they tend to ignore it. This behavior means that people who do understand the returns that it offers can snap it up on the cheap. 


Next time you do a property search, take a look at the cost of properties with land compared to similar examples without. Ask yourself whether the price difference between the two reflects the value of land or not. Usually, it doesn’t. 


While there are some technical issues in buying property, the critical point here is that it offers similar appreciation over the long-term. Property taxes are a problem in some cases. And the market is rife with friction. But many researchers have shown that the primary driver of wealth inequality is land. People who own more of it tend to remain wealthy, compared to those who own less. 


That’s what primarily drivers the wealthy into snapping up unused land. They know that the market underappreciated the returns that it offers. So they invest heavily in it, taking advantage of whatever opportunities that they can.


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