Real Estate and positional goods

By skepticlawyer

Most of our regulars will be familiar with acute commenter Lorenzo’s short essays and book reviews on medieval history and culture, but today I’d like to draw your attention to something else he does: write about urban planning and infrastructure provision.

These two pieces (do read them in order, you will get a great deal more out of them) contain–apart from anything else–the best discussion of ‘positional goods’ as applied to real property I’ve ever read. The estate agent’s mantra of ‘location, location, location’ will make a great deal more sense contextually once you’ve digested Lorenzo’s research.

For my part, I know I was shocked when my financial management lecturer (way back in 2002) suggested that investing vast sums in a single, non-producing asset was a very bad idea, so schooled was I that ‘property, property, property’ was the only way to wealth. Lorenzo explains why I was wrong, why my lecturer was right, and why any wealth I thought I was accruing was largely chimerical. Even better, Lorenzo’s footnotes have been included in a nice clickable format, which means you can follow up his sources at your leisure.

I should perhaps point out that I also did wonder why (on a trip to Germany a few years ago) Germans seemed to have a great deal more cash to spend than I did, despite earning lower wages and paying more tax. I learnt (after chatting to a few people) that this is to do with the German constitution (the ‘Basic Law’), which enshrines a ‘right to build’ clause. There is no such thing as environmental and planning law when it comes to land law in Germany; people build what they want, where they want, and live where they want as well.

As anyone who has ever been to Germany knows, the country isn’t overbuilt (in fact, it has excellent green credentials), while Germans devote far less of their incomes to servicing mortgages (housing is much, much cheaper than it is in the UK or Australia). Lorenzo’s pieces explain why this is the case, although he doesn’t tell you that the German ‘right to build’ constitutional provision was borne of the country’s experience before the Second World War, where Nazi planners used what we would recognise as ‘zoning laws’ in order to stop ‘undesirables’ (usually disabled, but sometimes Jews as well; in the 30s the disabled were wearing it more than the Jews, a situation that flipped after September 3, 1939) from moving into a given area.

The pieces may also make Melbournites feel smug at Sydneysiders’ expense, although–as you’ll see–that’s a function of geography, not good planning. Melbourne is fortunate, it would seem, to be mostly flat.

Now go read.


  1. Patrick
    Posted March 15, 2011 at 3:25 pm | Permalink

    KVD – it is, but it works because of the ‘Defence’ bit in it – I’d rent to soldiers anyday!

    I still have a much more fundamental objection to the ‘own-your-own-home’ mantr, as spelt out in my earlier comments. The biggest part of it is the structural effects – renters can move more easily and chase jobs more easily, which is highly relevant to the least-paid who are the most likely to have borderline mortgages. Also, I’m not sure that anyone with a balanced portfolio would have been worse off than someone who owned only their own home even during the GFC, anywhere except perhaps Australia where we didn’t really have a GFC, certainly not in residential property!

    And if heaven forbid that hypothetical person did lose their job, then I’d suggest they were probably a lot worse off than a renter.

  2. kvd
    Posted March 15, 2011 at 4:02 pm | Permalink

    Yes Patrick – you are right about the Defence bit, no argument here, but I’m thinking maybe the principal of government developed, then privately owned, investment property is at least something to look at. Maybe BHP and Woolworths and the banks could take up the idea – who knows? There is something to be said for a loyal, committed workforce. Not all of us are hares, some of us are happy to build into an investment, recognising that it takes some time and some commitment.

    As to your fundamental objection, I’d suggest that if singles wish to maintain manouverability, then they should factor in a rental premium; if DINKs want to relocate, then they have to factor in two jobs – not just one; if you have a preschooler, then you’ve got to factor in childcare; if a schoolager – is moving schools the ideal?

    In a country which escaped the worst effects of the GFC, and is “blessed with only” 5% unemployed, we still face the the basic needs of clean water, food, clothing, and shelter. Personally I’d rather any government intervention of any sort kept those four needs foremost.

  3. kvd
    Posted March 15, 2011 at 4:17 pm | Permalink

    principle not principal. I hate it when my fingers do that. Maybe was thinking about borrowing some more money – or something…

    And also I don’t think the idea of a highly mobile workforce is attractive at all to said workforce. Moving is an absolute pain in the proverbial.

  4. Posted March 15, 2011 at 4:25 pm | Permalink

    [email protected] said “renters can move more easily and chase jobs which is highly relevant to the least-paid who are the most likely to have borderline mortgages.”

    Ummm…. Well, yes, assuming they’ve got the readies for bond, month rent in advance, truck hire, even with the good fortune not to have much overlapping rent needs, and the problems with moving kids from one spot to another kvd mentions.

  5. Patrick
    Posted March 15, 2011 at 5:26 pm | Permalink

    Well, DB, you’ll be pleased to know that that is where the balanced portfolio comes in – you can liquidate a part of it to pay for all that, something which is notoriously difficult to do with a house 🙂

    kvd, you are correct about the highly mobile workforce being in many ways less pleasant for the workforce concerned. I’ve only moved house once every few years since I was born, so I share the pain. Not ideal for school kids either, in many ways I think I would have had a ‘happier’ childhood had I not tried 7 different schools!

    Unfortunately, it is also a real consequence of the incredible pace of technological change we have been blessed with. Along with the trendy focus on retraining and ‘permanent training’ etc, we need a focus on moving to where the jobs are. The highly skilled have done it for a long time now, with the increasing dearth of ‘low skilled’ jobs it is now everyone’s fate.

    On the upside, not having a job is reputedly quite a pain in the everywhere…

    I confess that most of your comments are aimed at the middle class whilst I usually approach policy from the following perspectives:
    1 what incentives does this create?
    2 how does this interact with human nature?
    3 what is the impact of this on the poor and marginalised?

    The middle classes are only relevant insofar as they are humans and respond to incentives 🙂

  6. Posted March 15, 2011 at 5:41 pm | Permalink

    [email protected] I should point out I am not suggesting controlling prices in any way, just limiting how much debt you can run up against a property. So it does not matter how many folk are involved, or legal entities. How much the property is borrowed against is what counts and applies regardless of purpose. I am happy to apply it across the board, so you do not have to worry about definitions between different properties. I am in favour of the KISS principle in these things.

    All that leaves is assessing rental value. Since, again, I am not after perfection I suggest some fudge factor is not so important — we manage with unimproved capital value after all.

    [email protected] I am not sure much turns on the difference between NPV of rental return and the capitalised rental value. Whichever works. My objection is solely to the systemic effects of lots of folk borrowing money to bet on expected capital gain.

    [email protected] I don’t think there is any inherent problem with providing affordable housing, if governments would stop artificially restricting the supply of land and in other ways driving up the price of land.

  7. Tim Quilty
    Posted March 15, 2011 at 5:54 pm | Permalink

    Maybe what we could use is some hybrid buy/rent product – A not-for-profit (or profit) company that invests in rental property and only/mainly rents to shareholders? Allowing mobility while maintaining a sense of ownership? Just a stray idea.

  8. kvd
    Posted March 15, 2011 at 6:07 pm | Permalink

    Patrick that’s a terrific answer; would have been even better had it addressed even part of the present discussion. I would gently disagree that our focus should be “where the jobs are”; they are where they have always been. Different jobs involving retraining, possibly, but geographically unmoved – as far as I can tell. Hence not the need for any romantic dashing about the place pursuing various opportunities to rent somewhere new.

    I also don’t think there is an “increasing dearth of low skilled jobs”; the dearth might be of a different flavour, and different skillset, but those dearthly jobs are still out there. Perhaps down in the hollows, removed from the view atop your diversified portfolio?

    And please leave us middle class humans alone. Our part of the Bell curve largely pays for your desired “approach to policy” 🙂

  9. kvd
    Posted March 15, 2011 at 6:24 pm | Permalink

    [email protected] the NPV of ten year’s worth of my example rent of $26000 p.a. Would a) be a lot less than a realistic property replacement cost; b) assume continuity ownership intention to have relevance; c) involve far more fuzzy forecasting than anything based on capitalization of present market return.

    Apart from that, agree with the objective.

  10. Posted March 15, 2011 at 7:48 pm | Permalink

    Would a first step of removing subdivisional restrictions have the benefits of;
    a) putting more residents in reach of existing infrastructure
    b) providing existing tradies with rebuilding/renovation/subdivision work
    c) reducing the desirability of housing stock in the outer areas.. bringing down prices but without a bubble burst and
    d)reducing the wasteful gaps that force us to get in the car wherever we want to go.

    Not necessarily, Henry. There is still private market sentiment to take into consideration. For example, the well established ‘Jacobs-ian’ understanding is that having mixed use/mixed ownership communities (more likely to achieved in the village model by historic development) provide the most stable communities which are the most pleasant to live in. My apartment block is like that – it’s a jumble of owner occupied, privately rented, social rented and sheltered flats. Theory suggests that if you put this model in place in new developments you’d get the same effect unfortunately private prejudices can get in the way. For example there is a massive development underway at the Quartermile in Edinburgh – the university sold a chunk of land and buildings fronting The Meadows (a big park) onto developers and it’s being redeveloped for residential use. In order to get planning permission Scottish law requires the developer to have 20% social housing in the scheme, but they don’t want us riff-raff mixed in with their nice private tenants and purchasers so my housing association is going to have a single large apartment block for social housing at the edge of the ‘proper’ development rather than mixed in with it. In England, developers have negotiated to have social housing imposed only when they build x number of units and then deliberately built five less than that threshold, which is also less than were ‘planned for’ in the original application.

    [email protected]: The idea of a superannuation offset-account for a first-time mortgage is inspired.

    Likewise Tim Quilty. In the UK we’re starting to see more “Shared Ownership” schemes. Basically you purchase 40-60% of the property while the Housing Association owns the rest and charges you rent on their proportion (so you still end up paying a combination of rent and mortgage which adds up to the appropriate commercial rent for a property of your size). You have a stake in the property as an owner and can increase your stake at a later date/s, eventually owning it outright. If not, you can sell your proportion on the open market and someone else can take your place.

  11. Posted March 15, 2011 at 8:01 pm | Permalink

    [email protected] Actually that is what I originally had in mind, I just did not express it well and then took my accountant brother’s advice. (Well, he is an IT manager nowadays, but originally he was an accountant.)

  12. kvd
    Posted March 16, 2011 at 2:07 pm | Permalink

    [email protected] never rely upon an accountant for anything remotely requiring imagination. We exist by Act of God solely to make dentists appear more palatable.

  13. Posted March 16, 2011 at 7:24 pm | Permalink

    [email protected] ROFL

  14. Posted March 17, 2011 at 12:37 am | Permalink

    Lawyers, surely KVD?

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