image by BP Miller

How often have you heard the following statement while out and about, in the queue at the coffee shop or even sat at the dinner table with friends and family “can you believe the insane appreciation in property values”?

I often find myself leaning in to have a listen to the replies and you’ll be surprised to hear what’s listed as the reason:

• The builders aren’t building enough so we have a supply issue

• The demand from foreign investors is crowding out local families and is pushing up price

• Safe as houses, property always goes up in this or that key city

• Mortgages are so easy to get these days anyone can buy, massively increasing demand

• the new golf course, railway or shopping centre has done the trick in this area

There are many more of the above reasons but I’d like to give you another way to look at this and then hopefully next time you hear the statement you’ll be able to give a slight better reason that’s far closer to the truth than the other reasons.

I’ll use the game of monopoly as an aid. Just think back through the last time you played the game, at the start everyone gets the same amount of money and the prices of the property on the board are all fixed. The streets become more expensive as you move through the different colours, each player must decide if they are going down the quality or quantity route with their purchases. Now suppose one player gets 4 times the cash at the start of the game and 4 times the cash after going through begin each time. What price do you think he/she will be willing to bid up prices to if they went to auction? If you guessed 4x, you’d be correct. Having 4 times the firepower as the player next to you gives you a great advantage, you won’t necessarily always bid 4x to beat your rival to a purchase but the option is there.

Now let us suppose that the everyone in the game gets 4 times the cash at the start of the game and 4 times the amount after going through begin, everyone will be prepared to pay 4 times the value of the properties on the board and over time this is what will happen. At this point it would be prudent to take out a permanent ink marker and adjust all the prices in the game by a factor of 4.

By adding extra money to the game you can change the value of the property even if there are no changes made to them.

Now, back to the original statement, if governments have added 3-4 times the money in the system since the GFC, are you still surprised to see asset price’s like property increase 3-4x. I’m not and I’d say there are some isolated cases where some assets have only increased by a factor of 2 times since 2008. This makes these cheap relative to others like the stock market which have mirrored the money printing programs.