Not Making Any More Land?

by Mr. Cheap

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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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{ 7 comments… read them below or add one }

1 James Miller

I have felt this very same way about that saying for some time. Man has been reclaiming land for quite some time. As an example, in the Netherlands the Dutch have been working for over 2000 years to reclaim land from the north sea.

I also think that despite some of our densely populated cities, there is a lot of land still available. As technologies improve for moving and improving the quality of water we could very well see communities taking root in desert areas. This was actually the case with one troubled real estate development I have looked into across from Needles AZ in the Mojave Desert.
The company has a long term agreement with the local native American tribe to deliver water to there gated community. Besides irrigating the plant life and providing drinking water, the water is used to create a man made lake in the middle of the desert.

2 Four Pillars

Yah, “no more land” is just another one of those stupid rationalizations people use to buy their dream house they can’t afford.

You could use the same argument to invest in oil companies (as you mentioned), mining companies, buggy whips etc.

3 Mr. GoTo

I agree with your critique of the generalization. On the other hand, there are certain types of land that they are not making any more of – waterfront comes to mind. (I don’t count those island builders in the mid-east.) I own some and I can assure you it has held its value quite well.

4 Mr. Cheap

Mr. Goto: You might enjoy watching the first Superman movie (with Christopher Reed) and seeing Lex Luthor’s solution to this limit.

A case could easily be made that waterfront property (or any specific class of property) *can’t* consistently appreciate faster than the market as a whole (otherwise it would eventually cost too much for anyone to purchase).

BTW – I love your username. All of us in computer science *HATE* you! ;-)

[if you're not a programmer, goto statements led to really awful program structures in the past and have been pretty well banned in most civilized development groups]

5 Traciatim

I’ve been shopping for prices on land around my province as I would really like to own over 10 acres of good land that could be cleared and farmed. I think of it more of as a contingency plan in case I need somewhere to go that I could theoretically sustain my family off of my land if I need to. There are some pretty good deals on land within a couple hours drive of cities.

I would prefer it on water somewhere for the recreational purposes, but it isn’t a requirement. Beyond the contingency plan it would be more of a recreation spot for friends to be able to set up a tent and all having a camping weekend.

I will not buy it for an investment, and considering how much land Canada has I am certainly not buying it because there may not be any left in the future.

6 jesse

Love the article. What the “running out of land” argument boils down to is convincing one’s self that it is acceptable to pay a speculative premium to own a property when income from rents is sub-par.

Hogwash. The only two ways property can have a premium (a price higher than what is expected from a series of discounted cash flows from net rents) is by: future development that will make the land more productive, or rising incomes. Based upon population growth rates and roughly flat real wages, the absolute MOST this premium can be is about 1-2%. This would be for undensified properties. In practice densified properties will have significantly less premium because of the high capital costs involved in densifying further.

We hear the “running out of land” argument every boom but when you look at it more closely, it’s as simple as discounting future cash flows, including risk and future utility, that determines fundamental price, not an increasing scarcity as the “running out of land” argument implies.

Also, in the long term, city centres change so an area once considered “prime” real estate eventually must compete with other newer areas that have gentrified because of high prices in other locales. This is a long process, typically decades, but it really does cap prices to incomes in the long run, even with future densification potential.

You may luck out and buy in a “desirable” area and have incomes increase to drive up prices but with every desirable area you pay a premium for comes another area that must absorb the discount to keep with average incomes. Either way you are speculating, not on lack of land but on future incomes. You are speculating on increased separation between rich and poor and the next 20 years may just as easily see a reversion as it could a continuation of this trend.

7 G.T.M.T.T.P

What we all need to worry about is the rapid Over population of the world. It is not just a question land….it is a question of natural resources, water, food, and wealth to support all these people. This is not even addressing the pollution problems of the air, water and land fills, as well as overfishing the ocean and pollution killing off fish or causing mercury poisoning.
What jobs will be available for all these people. Many jobs are disappearing or going to countries that pay slave wages. We really don’t have plagues anymore, so war or birth control seem to be the only way to reduce these ballooning numbers. In my family, I chose to have only one child….my two sister had no children and are really happy with their decision. I think having kids is over rated and everytime I am with adults that have children, they are always lamenting that their kids don’t respect them, are contantly out of work or in debt and borrowing money or have moved back in with their families. With the tax deduction for having MORE kids, it seems like the poorest and least educated people are reproducing the most. This has to stop or we will have a even larger ‘dumbed down’ and poorer population of people, who can’t support themselves because there just aren’t that many unskilled labor jobs out there.

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