Not Making Any More Land?

by Mr. Cheap

I’ve written before about quotes being twisted for various purposes and being misleading.  One witticism for real estate investing which means what it says is “Buy land!  They aren’t making any more of it”.  The wisdom that’s supposedly encapsulated in this saying is that there is a finite amount of space on planet Earth and by staking your claim to some of it you stand a good chance of getting higher returns in the future (as scarcity drives up the price).  I think this is the wrong perspective for a great many reasons.

They *ARE* making more of it

A variety of artificial islands have been created.  These can be made using sand dredged up from the sea.  Cost is certainly a consideration, with some construction being estimated at a billion dollars.  However, if land started to get scarce this is an option.  As more islands are created, the techniques and technologies supporting it would become better understood and it would get cheaper to make more.

Beyond making more, we are continually getting better at supporting a higher population density.  While a person with modest needs might live in a 600 sq ft living space, if they live in a 6 story apartment building, 6 times as many people are using that same plot of land.  A 44 story building has just allowed the land below it to be utilized 44 times over.  Construction techniques are also always improving to allow higher and larger buildings.

If for some reason we hit a limit on going up, there’s always the possibility to dig down.  With 101 floors above ground and 7 floors below ground Taipei 101 is the tallest habitable building in the world.  This allows 108 times the usage of every square foot of land where this building is located.

Demand isn’t uniform

In some ways it might seem odd that we’re devoting billions of dollars of resources to make islands and 44 story apartment buildings when there’s so much land going unused.  With 3.3 people / sq. km Canada has a crazy low population density.  We could cram TONS of people into the Northwest Territories (which currently has a roomy density of 0.02 people / sq. km – I wonder if anyone up there ever sees anyone else? ;-) ).

The unfortunately reality is that people want to live in the areas where they’re making islands and skyscrapers, not in the Canadian wilderness.  If someone is blindly buying land “because they aren’t making any more of it” they’re going to be sadly disappointed when developers keep focusing on maximizing the usage of high demand areas (instead of blindly buying all land for sale).

Heck, during the recent run up in oil prices people started talking about the death of the suburb.  Even the well known idea of buying a big plot of land on the edge of town, then selling it decades later when the city has grown around it may or may not work in the future, it all depends where people want to live.

The father of one of my dad’s friends moved into a retirement home a couple of years ago.  His house in the small town he came from is STILL sitting unsold.  Everyone who lives there already has a place to live and no one is buying.

Rate of demand growth is slowing

While the human population is definitely growing, that rate of growth is slowing and has been for some time.  We’re moving towards a point where births will equal deaths and we’ll have a stable population number.  People used to talk a lot about over-population, but the math just isn’t there to support it.  Already Japan has a negative population growth (if it wasn’t for immigrants their population would be shrinking).  Other countries are following this trend.  This doesn’t say much about other resource demands, as more of the world is leading an increasingly affluent lifestyle.  Slower (or no) population growth certainly won’t allow the whole world to live a Western lifestyle, but land isn’t going to be the limiting element.

What if it IS true?

Even if this statement was true and if eventually people would be standing back-to-back covering the globe, I’m still not sure it would mean that pouring all your money into real estate is the way to go.

All sorts of finite resources exist, and the market finds efficient ways to price them.  We’re running low on oil, but I think putting all your money into an oil stockpile and hoping to massively profit in the future is a mistake.  The current reserves, as well as usage and growth in usage, are all very well known factors and are incorporated into the price.  New refining technologies and gaining access to previously unattainable fields (such as Alberta’s oil sands or underwater oil wells) are also factored into the price and could limit the gains your oil stockpile could make.  Alternative energy technologies would also threaten it.

Similar considerations are there for other finite resources.

What to do from an investment perspective

My view is to treat real estate investing like any other investment,  look at the deal in and of itself (or the allocation of REITs if you’re more of a passive investor).  Future scarcity of specific land is going to be VERY hard to predict, so unless you have some special skill in this area you’re just speculating.  Giving real estate investments preference because of some imagined inevitable payoff is a strategy that I think is very likely to disappoint.

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