I’ve been reading Piketty’s Capital this week.
One of the many interesting observations therein notes how while in 1770 the value of agricultural land typically accounted for a very significant share of total land values, over time and through industrialisation housing has instead come to account for an ever greater share of the pie.
In Britain, there have been few better investments than farmland over the past two decades, but this has largely been a function of the favourable inheritance tax treatment.
In Australia, the growth in land values has been all about residential use over the last three decades.
Australian land values
During the past week the ABS released its System of National Accounts for 2015 which as always revealed a plethora of interesting trends, not least that the decline of mining capital expenditure has a long way to run yet.
One of the most striking data sets showed how the total value of Australian land has surged to more than $4.7 trillion as at June 2015.
Perhaps predictably, more than 97 per cent of the increase over the financial year was accounted for by residential land use.
The total value of residential land soared by more than half a trillion dollars ($509.2 billion) or 15.1 per cent over the financial year.
Since 1989 the total value of land in Australia has surged by well over $4 trillion, with residential use accounting for nearly $3.5 trillion or more than 85 per cent of the increase.
Capital cities drive land values
Since dwelling prices over the long run are ultimately a derivative of the land value which sits underneath, I always recommend capital city properties as those with the greatest potential for price growth.
Particularly I look at those located within easy commuting distance of the Central Business District and with a high percentage land value content, which typically means steering well clear of high rise tower blocks.
Since 2012, the biggest paper gains for property speculators have been seen in Sydney, with the total value of residential land in New South Wales spiralling by more than 53 per cent in just three financial years.
Victoria has also seen land values increase by 35 per cent over the same time period, with broadly similar gains in land values across the next three most populous states in the 20 -22 per cent range.
Of course, population growth accounts for some of the increase in residential land value, and so too does the prosperity of the local economy, the lower cost of capital, and the relative scarcity or availability of the land in question.
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