Bursting with excitement, she told me ‘I’ve just bought ten hectares of land for each of my five grandchildren!’
‘How very thoughtful – what did that set you back?’ I asked.
‘Just $20 a hectare, and each block has unbelievable views!’
This seemed an incredible bargain, so I asked her, ‘Wow! Where did you find such a fantastic investment?’
‘On the moon.’ she replied.
It was true.
Buying land on the moon!
She showed me the title deeds she had received from the vendor, an Internet based company called Lunar Embassy whose business is selling lunar land.
Each impressive looking title document detailed the exact location of her grandchild’s plot of lunar land.
‘They’re certainly very innovative property marketers.’ I said.
‘What an ideal gift for my grandchildren, as one day, who knows how much moon land could be worth!’
The value of land
The notion that land has intrinsic value no matter where it is located is rooted deep in our past, beginning when we ceased being hunter-gatherers and settled into farming communities.
The control of land enabled us to house, feed and raise families in peace.
Land ownership is synonymous with security and this explains why property is fundamentally different to other forms of investment.
While you can buy shares, savings, bonds or commodities without any guarantee of a return, everyone needs a place to live and every home requires land, so wherever there are people, property has some value.
The lunar land venture shows us that this concept is so thoroughly entrenched in our psyche that people will even buy land on the moon in the hope that it will have value sometime in the future.
Taken to extremes, this belief can create land booms driven by speculation, where the demand is fuelled purely by buyers who believe there will more demand from other buyers and prices will rise as a result.
Such price rises have nothing to do with the use to which the land is put (representing its real value), but are about the notion that demand alone is sufficient to make a good investment.
Lessons from past land booms
The most graphic example of such a land boom contains valuable lessons for all investors today even though it occurred well over a hundred years ago.
It was back in the 1870s and 1880s, when people were flush with money from the gold rush years and our population was increasing rapidly.
Formerly small settlements such as Sydney, Melbourne and Brisbane were becoming prosperous cities and wealth was generated from wool, wheat, timber and mineral exports as the hinterland was opened up, new ports constructed and railways spread outwards to new rural markets.
One of the proposed railway routes was across the Blue Mountains in New South Wales, where one acre (nearly half a Hectare) of land in the 1870s was worth $2 in today’s money.
When the railway plans were made public, a frenzy of land subdivisions and sales ensued, with speculators buying blocks in the expectation that they would be near the railway line, or even better, near one of the proposed stations, such as Katoomba.
Newly subdivided land prices quickly rose from $100 each in 1883 to $800 in 1886, sold off the plan in auctioneer’s rooms in Sydney, undeveloped and unserviced, then sold and resold again to other investors until by 1889 land prices topped $1,600 per block – more than two year’s average income at the time and mostly on borrowed money.
In 1890 the British banks cut lending to the Australian colonies and their economies crashed.
The demand for land stopped, everyone tried to sell at once and prices quickly collapsed.
The graph shows what happened to Katoomba’s land prices when the crash occurred.
Disappointment quickly turned to panic as everyone tried to get out at the same time and by 1892 the price of a block of land had dropped back to the 1883 pre-boom level of $100.
Prices continued to slide further to just $50 per block in 1901 and then didn’t rise for another twenty years.
The 2 reasons land values increase
The lesson for us all from the Katoomba land boom is that land value can arise from two different types of demand.
If the need for housing in a suburb or town is growing and leads to a shortage, then prices or rents are likely to rise in response to the demand and because this represents the real value of land, prices are unlikely to fall again when the demand subsides.
Housing investments made in such areas are low risk and highly secure.
When however, demand is pushed along by speculative investment, prices will rise only for as long as the number of investors trying to buy exceeds the number who want to sell.
Reading such markets is tricky and can result in heavy losses by investors who mistime their move and buy towards the end of the boom, or try to sell after the bubble has burst.
To avoid such disasters, investors should look at the underlying demand dynamics of any housing market where they are thinking of investing.
These are the number of new households moving into a suburb or locality, whether they are likely to be renters or buyers and the shortage or surplus of the type of dwellings they will prefer.
Never justify an investment purchase just because others are investing there – you may as well buy land on the moon.