The Land Value Myth Debunked

What’s going on guys Its Jordan de Jong here and today I want to talk about the old saying that land appreciates in value while buildings depreciate in value, and, fundamentally this makes sense right, but it also commonly leads to a misperception of what “Land” actually represents. Growing up this old adage was distilled in me, I thought I had it all figured out, it’s true, there is only so much land available in this world, and we seem to have unlimited resources, so I imagined it back then, just like my 2005 Honda Civic had depreciated from $6,000 to $5,000 in 1 year, building material must depreciate in the same way. And it does, don’t get me wrong, materials wither away over time, they get discolored by the sun, deteriorate from dampness from the rain and eventually all dwellings will need to be either fixed, completely renovated or knocked down and built again, so this second part of the saying holds true, materials do depreciate over time. So, what’s the point of buying land with a house on it? Why wouldn’t I just buy a much larger block of land further out that’s going to increase in value, well herein lies the problem, not all land is created equally, and this is the common misconception we get caught in. It’s easy to compare the same priced inner-city unit and a free-standing dwelling on a large block of land maybe 20-30 KM out of the city, taking this saying into consideration and presume that the dwelling on a large block of land is a no brainer and a much better investment. Now I’m not saying that in every scenario this is the wrong way of thinking, every property is unique and needs to be analyzed individually, but there is a fundamental reason why they are already priced the same, which leads to a more accurate saying “Its land value not land size”. Also, if your loving this content makes sure you smash that like button. My favorite era for movies and TV shows is the medieval time period, I love battles and war strategies and history, and what history does tell us is that if the war isn’t started over a princess or revenge, it's generally over land, and in theory ownership of that land, so I truly believe this has been distilled in us for hundreds of generations. So why are wars started over the ownership of land, why can’t everyone just be satisfied with the land they already live on? Well, this is why not all land is created equally, some land has better access to the sea to dispatch ships, others are thought to have better views of the landscape and we still see these fundamental concepts being represented in land values today. So how do we differentiate this land value vs land size concept, well I guess we can take a page of the history books, where do people want to live, what makes a piece of land desirable? And ultimately increase the demand for that land, maybe I should turn this into a rap. Make note that Desire and Demand are vastly different things, and I plan to cover this in another blog, so make sure you subscribe and smash the notification bell so you don’t miss it. Well in today’s busy lives we don’t have time in our days to commute 2 hours to work and back, and this contributes heavily to locations with higher demand, specifically being closer to the CBD and working hubs, secondly we like to enjoy any little spare time that we get. This generally means going to the beach or events such as performances, sport, and spending time with our loved ones, and bundled all together, if the content and location of that land allow for accessibility to these activities then it’s generally more valuable due to this increased demand. But how far out is too far, some people are very comfortable with a 30 to 60-minute commute to these activities and would much rather purchase at a lower price point whilst having a larger 600m2 + block of land and cop those commute times on the chin, realistically, it’s only an occasional event anyway. This often leads to the interpretation that house & land estates are ideal investments, I’m not saying that every house & land estate is a bad investment but they are a common offender, it’s a brand new area that generally has a larger block of land with a brand new house built on it for a relatively low price. But think about how much other land is available in the immediate vicinity, often these estates get released in stages, where they slowly release land over time, wouldn’t people buying a property in that area in the next couple of years prefer to buy a brand new house than a second-hand one that’s being sold for the same price? This is where the supply of land also plays its role, when there is large amounts of available land it de-values the size relative to demand, if another person wants to buy a block of land, they simply take another chunk of a subsection, divide it up, put some titles on it, bundle it all up with a bow and it's theirs. Now you may be thinking, well perfect, let's purchase an apartment in the heart of the CBD, that has surely got to be the most desired location to live in with limited land available, and yes, generally be close to a CBD is desirable, however, if you were buying an apartment in the block of 100 other apartments, then your only buying 1/100th of the land below it. And as the saying goes, materials depreciate in value, so when it comes to having to knock the complex down and rebuild, you only own a very small portion of the land that sits underneath the building. Obviously, this can still be favorable in very limited scenarios such as having uninterrupted views of the ocean, but I personally would still consider what land I own when the building is demolished. Again, this is why it is essential to analyze every property individually and fully understanding what it is that you are actually buying, these concepts and ideas are just for your own acknowledgment and education and are not always a one size fit all rule of thumb. One other factor I do want to bring into the mix is generational wealth, obviously what we have been talking about is relative for the short to the medium term being 10-30 years, but when we think about how this plays out over multiple generations, eventually all land increases in value and at a certain point can increase dramatically. Thinking about a location close to where I grew up, Rouse Hill, I remember driving past the vast amounts of land that seemed to go on forever and I could never imagine that it would look like it does today, but in the last 10 years has been so developed that it's unrecognizable. The owners of that land could have been sitting on it for generations, seeing slow growth over time and thinking it would never be worth much, but at one point in time, probably not too long ago, the value of that land would have increased dramatically in what would have almost felt like overnight. So, the vast area of land play is not necessarily a bad investment, but, it may take a number of generations to see a substantial increase, and, in the meantime may not be generating an ideal or any rental income. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

Jordan De Jong

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