Why Land Still Runs the World’s Financial System | Ideas Lab | Ep.43

Summary

In today’s episode we talk about the world’s oldest, and still most important asset: land. Our guest is the Economist’s Wall Street …

Transcript

thing is extraordinarily difficult once you've [music] set the wheels and train. You can either tell every middle-ass Chinese household that actually they're being functionally expropriated. [music] You were told that housing would always go up in value and now it's not. Sucks to be you. Um or you can have uh a situation in [music] which the sort of the house prices go through the roof, the inequality is exacerbated and also the you know the financial [music] system and entrepreneurial activity is warped and and for a lot of Chinese people they've they've come to [music] what I think for a very long time was the rational decision that housing was the right asset to [music] invest in regardless of you know whether you were going to leave it empty or not. Imagine [snorts] spending [music] an hour with the world's greatest traders. Imagine learning from their experiences, [music] their successes, and their failures. Imagine no more. Welcome to [music] Top Traders Unplugged, the place where you can learn from the best hedge fund managers in [music] the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's [music] conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future [music] performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment [music] manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Castro Larson. [music] For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary [music] people from all around the world. In this series, I have invited one of them, namely Kevin Coldine, to host a series of in-depth conversations to help uncover and explain new ideas [music] to make you a better investor. In the series, Kevin will be speaking to authors of new books and [music] research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within [music] it. And with that, please welcome Kevin Cold Iron. [music] Okay, thanks Neils and welcome everyone to the ideas lab. Um, I'm going to start today with a quote. Before the existence of investment funds, pensions, stocks, bonds, or international currency markets, even before human history was recorded in any meaningful way, land was the original asset. The ability to own and control territory was the first means of turning power into wealth. Now, that quote comes from a new book just out this month called The Land Trap, a new history of the world's oldest asset. The author and today's guest is Mike Bird. Mike is the economist Wall Street editor and co-host of the financial podcast Money Talks. He previously worked at the Wall Street Journal where he won the Harold Windcott Award for young financial journalist of the year in 2016 and in 2020 he was part of the journals team that won the Human Rights Press Award for their coverage of the Hong Kong protest. So Mike, thanks so much for uh joining us and uh welcome to the show. >> Kevin, very very happy to be here. Thank you for having me. >> Okay. So, this is a book that includes a lot of history as the title suggests, but it's history that remains extremely relevant to understanding the modern financial system. You say that today the market in land is about twice as valuable as all the listed companies on every stock exchange in the world. Uh, and we're going to dig into why land remains so central. But before that, I guess I was curious to ask you about the title of the book, The Land Trap. Um, could you summarize for us what the trap is? And I guess I was also curious, you know, in was your motivation in writing the book because you sort of saw the trap and wanted to explain it to people or was it something that kind of emerged from your research? >> Absolutely. I think you can think about the trap in a few different ways. I'll tell you about the the way I thought about it when I was first starting out. Um I lived in Hong Kong for several years uh after living in London. And when I lived in London, I become a bit obsessed with house prices and housing. Um extraordinarily important in the UK. Huge part of of whether you're considered wealthy, secure, is is about home ownership. And when I moved to Hong Kong, that was true on steroids. Um, Hong Kong has extraordinarily high house prices, uh, apartment prices really. Um, and the ownership or non-ownership of of housing is really uh the sort of symbol again even more than in the UK of of sort of entry to the secure middle classes. And in Hong Kong, the government owns all the land. And a huge amount of the way the government finances itself is through land sales. And this jumped out to me and I became very very interested in it. And it seemed to me over time that there was an issue here uh a sort of pinser in the sense that when land prices went up that brought with it a lot of problems. Um greater inequality, young people who couldn't afford to move out of their parents' homes. Very common in Hong Kong to live with your parents until you get married and and you can afford to buy somewhere. Um so that was a big problem. If land prices go up, it exaggerates uh that part of inequality which is very very visible in Hong Kong. But if land prices go down, that brings its own really really significant problems, especially in a place like Hong Kong again because the government loses uh money that it finances itself with that it finances a great deal of its capital investment in in Hong Kong in Hong Kong's case, but also the largest single asset that most households have is falling in value. you get the trickle through effects of that in every way. Uh but mostly through through the wealth effects that we would uh you know discuss when talking about real estate. People pair back their consumption if they think that their asset wealth is declining. You know that they might be thinking of uh their future security um and they behave differently in the present if they if they believe that their wealth is declining even if it's only uh going to be temporary. So that's the trap that I was thinking of in in writing this book and I think through the the process of research and writing it almost became a more expansive thing in that the trap is once you get into this position where land wealth is a really really important part of the economy um an important distinction between you know halves and have nots very closely associated with the the health of the financial system as well. It's very very difficult to move in any direction. It's very difficult to do anything about it politically. There's lots of governments all over the world that are pinned between these really really difficult to reconcile goals when it comes to land and housing. And those are especially between, for example, the existing homeowners want to uh retain the value of of the land, the property that they own. Um they would really like it to go up and they would like it to go up at a decent speed if possible. Uh but that's impossible to achieve with a goal of widespread land and home ownership as well. You can't make it affordable uh affordable for people and at the same time uh make it a a rapidly growing store of wealth and I think th those are the main two elements of it. This crops up again and again and again through history. These political conflicts, these financial issues, but the nature of the trap is that uh it's very difficult to move in in either direction. That's partly because of the sort of the special attributes that land has as an asset. >> Yeah. And that so thanks for that that uh that's a very clear explanation. I have to say I, you know, the first house that I ever owned was was in London and uh a very long time ago and uh yeah, I remember thinking that, oh wow, like I'm I'm an actual adult now. I own I own property. Um it was it was kind of a it was a it was a funny feeling, but yeah, property was is really deeply embedded in the in the culture there. Um but let let's talk about um why land is so valuable as an asset. Um you give us essentially three characteristics of land that make it so important. I was wondering maybe you could just you know go over that, explain that and you know tell us why that makes it so you know so valuable as an asset. >> Absolutely. So most of the history within the book contains the it's the last 400 years and really I would say the last 300 years. uh it's during the period of economic transformation essentially the the advent of modernity industrialization global trade um elomeration urbanization so this is a strange thing and and at the entry of the book I sort of try and imagine this from the perspective of someone uh living several millennia ago um land was extraordinarily important in a in a preodern economy because it was what you grew crops from. Um people paid tax often in the form of of grain and essentially what you could mine from the ground, what you could grow from it um was the economy as we'd know it. It was the the lion share of economic activity. That's no longer the case. Um agriculture is is less than 5% of global economic output. In in most advanced economies, it's it's less than 2%. Um so that can't be true. And essentially what has happened um this will come as no surprise to anyone but the economic activity around these urban centers that have absolutely exploded especially in the last century but but over the last 300 years let's say um has given land enormous value. The three facets that I think are are most important are the fact that first unlike every other asset in the world and every other good produced by anyone um you can't really make more of land that's not 100% binding. You look at Tokyo or Singapore or the Netherlands, they managed to to invent some land effectively to uh to create some land with these land redemption schemes. incredibly useful if you can do it, but in most of the world you can't do it. Um, it's extraordinarily expensive even when you can. Um, so very worthwhile, but sort of that's a I would say a sort of 98 99% binding factor of land. The second factor very closely related is you can't move it either. Every other part of an economy is to some degree movable. You can move people, they can move themselves. Um you can move uh a business, you can redoicile it somewhere else. Capital obviously almost completely free flowing as are ideas which you can spread by, you know, word of mouth or writing about them or anything like that. And even the things that get built on top of land are to some degree movable. You can recycle them. Uh there's not many people that move their their houses around, but the actual things that it's built out of uh can be moved. land you can't move which is why functionally identical pieces of land in different parts of the world very differently priced again everyone sort of knows this but the the building blocks actually make it extremely different to other assets and uh worthy I think of of this sort of singular focus the third factor that I think people sometimes forget about when we talk about land and real estate and housing is that land doesn't decay everything else decays um you know again to go to ideas. Ideas are replaced by better ideas. Um businesses fade and die if they don't innovate. If they're producing something that the people stop wanting, um even human beings uh age and die. Everything built on top of land eventually falls apart. The land itself, that's not the case. Um land doesn't depreciate in accounting terms. um which makes it very interesting because if you happen to own it in the right place, there's no reason to expect the value to ever fall. It doesn't require intervention of any kind, innovation, leadership, entrepreneurship, anything like that. Um you look at the families in London, let's say, um that have owned portions of central London for large part of the last 400 years. These are some of the wealthiest families in Britain today, right? The economy bears no relation to what it did when their ancestors started um building these sort of small land empires. Um but they've been very fortunate because they did so in a place that happens to have boomed. This is not the case in a lot of a lot of cases. You know, if you had an agricultural land empire in 1500, it might be worth pennies now. You know, it may well be not worth very much because the economyy's changed so much. But that sort of luck element uh means that the fact that land doesn't decay becomes extremely important um for a number of different reasons. When we say land doesn't appreciate, okay, land in central London obviously hasn't appreciated, but you know, land in, I don't know, let's say central Pennsylvania where my family is from or old, you know, kind of coal country, um, you know, my parents' land is worth a lot less uh, now than when they when they bought it. So, is that not depreciation or am I mixing that up with the change in the kind of I don't know the economic value of the stuff going on around it? Like, how do we distinguish between those two? >> That's a great point and I think you've you've nailed it completely there by thinking about the the difference between the economic activity surrounding a piece of land and the the actual depreciation. By depreciation, I really mean that it doesn't decay naturally. there's no reason if the economic activity remains uh for it to decay. Right now you mention you know central Pennsylvania. One of the examples I draw on in the book [clears throat] towards the end of the book is uh a comparison between Detroit and other cities in the US. You you go back to the middle of the 1950s and you look for uh the Census Bureau used to publish these sort of median house prices before we had good private data aggregating those sort of things. You could buy an ordinary home in basically any city in the United States in the mid1 1950s and it would be somewhere between sort of 25 and 50% more expensive or cheaper than another. Right? But all in all really not a significant difference. you're talking about in in $ 1955 a few thousand US dollars difference uh between a house in San Francisco, Detroit, Cleveland, New York, Chicago, wherever you wanted. Some would be a little bit bigger, some would be a little bit smaller, but it was essentially much of a muchness. That obviously isn't the case today. So if I owned land, you know, you take your two families, one that owned land in in urban Detroit and one that owned land in urban uh Manhattan, those two families might not have been all that different in the middle of the 1950s. The result of them keeping that land within the family is that one now has millions, potentially tens of millions of dollars in land wealth, all the security that buys them, all the access to credit that buys them, all of the options that it buys them for living anywhere else in the country, the people who own the plot in Detroit, obviously, you know, they they'll be sitting on something that is in real terms probably worth less than it was at the time that it was purchased. Um, so you have these astounding differences. Now, it would be completely unreasonable to have asked someone in the middle of the 1950s to predict any of this, right? Explain to me the economic geography of the early 21st century would have been a ludicrous thing to ask. Um, you know, even entrepreneurs and uh uh you know, the the smartest lenders don't understand these things with that sort of distance. But when land is the biggest part of a household uh balance sheet, the biggest household asset, that is effectively what you're asking people to guess um and it exposes them to that one area. So, you know, if you grew up in in Detroit, you're locked into what is both a uh a terrible labor market and your wealth is all locked away in something that's massively exposed to that local economy. So yeah, when we talk about it not depreciating, I really mean in, you know, absolute it doesn't decay terms, but the the value will change enormously based on the economic activity around it. I think the important thing is that it's nothing other than the economic activity around it. You know, I can't really make that that land in Detroit much more valuable on my own. There's nothing entrepreneurial or innovative I can do. It's either there or it's not. >> I I understand that. And I want to also ask about this second feature that you said land is immovable and obviously it is and that means it's not substitutable. You can't swap an acre of land in Manhattan for an acre of land in North Dakota. But I wondered, you know, is technology kind of changing that feature to some extent, right? I mean, we did see that in CO, right? You could all a sudden move from the Bay Area to somewhere else and um you know, essentially do your job for the most part. Do you do you see foresee that kind of second feature changing in any way or do you or or not? I'm curious. It's a really great question and it's very difficult to answer. One of the one of the examples I looked at in the book was the rise of uh communications technology in the 20th century particularly the the second half of the 20th century. a really really interesting guy, Arthur C. Clark, who's a futurist. It's a great job title, but he, you know, um he was a public intellectual and he he wrote and thought about the future. He also uh co-wrote uh 2001, a space odyssey. So, he had a pretty nice life. Now, he had these incredibly prophetic thoughts in the early mid 1960s about the future of communications technology. and he basically nailed the phenomenon that the invention and dissemination of transistors and semiconductors would cause for communications. And he said things like, we're going to be able to communicate cheaply and easily and seamlessly on different sides of the world. And you know, you're going to have someone doing their job in Tahiti um who's able to communicate with someone in in New York seamlessly. Um and it was very very early for someone to be saying things like this is really um profoundly excellent uh forecast. And what he also said was of course this is also going to make the city obsolete, right? There won't be any cities and he worried that we'd all live in sort of giant suburbs. Um but there'll be no city center cuz why would you need it? Now, that obviously didn't happen in the latter half of the 20th century or the early part of the 21st century. And in fact, what you saw was this exaggeration of the benefits of of city life. You saw the emergence of these superstar cities. So, exactly what we're talking about in terms of the flip side of what happened in Detroit was a handful of extraordinarily expensive global cities becoming even more expensive. London became dramatically more expensive. New York, San Francisco, LA, number of cities in Asia as well. Um, so I'm always a little bit nervous about thinking that technological change for communications or information will change that that much. I think there's probably a big part of the sort of knowledge worker world that wants to live near other similar people and we've seen that sort of repeat itself. What I'd say is slightly different and I don't have any predictions on this but transportation technology is very different. Um so the the times in which we've seen the sort of grip of land and the reduction of its importance as an asset have often been when major technological transformations for transport have occurred. I'm thinking if you look at New York from the sort of uh 1910s, 1920s, it was transformed from a place where land was supremely important and the conditions in lower Manhattan were absolutely squalid and terrible and then the roll out of the subway um changed things dramatically. Suddenly you could work in Manhattan, but you could live in a in a three-bedroom house in the Bronx, right? It changed things completely and it really changed the relationship that people have with land and the financial importance of land for quite a long time. So those sort of transformations you know same with a car um with LA and a lot of the western cities of the United States uh where you just expanded really what was the reasonable reach of the city the sort of commutable land. Um it sort of opened a second American frontier basically. Um so transport technology can change it. I'm a little bit cautious about information technology changing it but you never know and I think during uh co you could use it as an example of either the sort of the weakness of uh land as an asset in that you don't know where the economic activity is going to be sustained or how robust it is. you know, if if you look at the cities we really think about as the really expensive ones, it's changed at the margin, but they're not cheap. They're not cheap. You know, San Francisco, real house prices have gone down. I don't know anyone who thinks that's cheap. And often what has happened is the uh the prices have really been reallocated into very nearby leafier areas. So, you might see certain suburbs and and really nice outlying areas that have gone up dramatically in price. Um, uh, Nick Bloom, an economist, has a paper about this where he calls it the donut effect. The inner city centers in places have changed in value. Often that's, you know, central business districts, offices have dropped in value, but uh, a lot of the residential areas with a little bit more space, a little bit more uh, family oriented have gone up dramatically in the price in the same cities. So, it's a tough one. Um, I don't know where I fall on it. I think that the the best thing I can say about it is it's very very hard to predict. Um, so these three features that that we've just talked about, fixed supply, immovability, and lack of depreciation, make land an ideal form of collateral for lending. And um, you know, you you say at one point it essentially is the beating heart of the current system of credit. And I I wondered if you could just kind of give us a sense for you know just how important land is in terms of you know the banking system in terms of creating credit right now. >> Absolutely. Absolutely. So I think this is something that people often miss um when we talk about land. I think there's a there's a portion of people who know a very large portion of people know that most countries especially the the advanced economies of the world don't build enough homes. I think that's a fairly common sentiment. It's fairly well understood. Then there's a discussion about sort of how we use land, who's able to build the regulation around it, the politics around it, which is a little bit less wellknown. And this is the side of things that I think is least wellknown, which is, you know, land as an asset, uh, its importance in finance. And the historical angle of the book, I think, um, I hope helps to sort of develop this. You have lots of people throughout the last three or 4 hundred years of history sort of independently discovering that you can use land as a financial asset and create really enormous amounts of money. you had this discovery uh among the uh colonists that arrived in North America uh English speaking colonists mostly uh arriving in North America in the 1600s and 1700s because they arrived in this place that was absolutely enormously wealthy in land um had no tight social structure as you did at home in England um and was also enormously short on cash. So you had all of these efforts, these public and private land banks where people tried to invent new currencies really uh where the currency would be based on land owners mortgaging their property. An institution would issue bills of credit, effectively banknotes, and you'd be able to transact in these things. People like Benjamin Franklin thought about this and they were basically inventing a version of the modern banking system because what has happened in the the 20th and 21st centuries is banks in particular have become enormously mortgageoriented. So 1900 you look at 14 uh economies that then were sort of the leading industrializing economies. This is some of the European economies uh Japan, America, uh Britain, Germany, France. About 32% of total bank lending was was mortgages. I think in Britain at one point it was actually less than 10% in the early 20th centuries. In the early 20th century and then at the end of the 20th century or even now you're talking about uh more like 60% a little bit higher than 60%. Um so there has been this this significant change. You would expect perhaps that banks are sort of less dependent on something as simple as land collateral in the past but in fact they become more so. Uh this is partly because of bank regulation. You know that the Basel Accords have uh made it relatively easy for banks to uh lend mortgages to lend anything that's collateralized by residential real estate. Uh there's a a group of economists uh who call it the great mortgaging. this phenomenon of banks becoming much more um engaged in mortgage lending and much less involved in unsecured or even secured business lending. It's just more risky whether that's for regulatory reasons or not. Um so you've seen this enormous expansion. Banks in particular yeah have become much more mortgage oriented than they used to be. Um yeah that that's uh that's something that I keep bumping up against and and and a lot of books that I read and it is kind of extraordinary because I guess if you if you study economics the the standard explanation of the banking system is hey banks um banks channel channel savings to businesses so they can invest and really that's not what they do. Banks create money when they make loans and most of their loans as you said are against real estate. So really what's happening is the money supply that you know the credit out there is essentially a function of the future you know land rent surpluses. It's a it's a very odd thing. It doesn't map at all into the way the way we're taught. And I I wondered you know I was thinking about that. Wouldn't that create an opportunity for like a fintech type of lender, a new lender that could come in and say, "Hey, we can, you know, we can apply technology to to lend against non-tangible uh non-real estate collateral." Um, and it seemed to me that there would be an opportunity there. >> That's that's not only true, but you have seen uh sort of attempts to do this. Um there are fintexs that are interested in doing these things. Um anything you can get a better idea of. I I I think where I start with this is there's a uh there's a concept in in economics literature about lazy banking, right? And I don't I don't mean to disparage the the bankers who are listening to this. Um, but collateral is a is just a great way of lending if you don't know and don't care to know anything about uh the person you're lending to. Um, it's really really much easier. And it especially makes sense because when you're lending money, if you're not taking an equity stake, your upside is capped, right? You've got unlimited downside up to the amount that you lend someone. Uh, but but your upside is capped, right? you know, they may have the best idea, the best company in the world, but you don't make any more money lending to them than you do to, you know, just an old company that's stumbling along uh like like the millions of companies out there. Um, so that is enormously important. So I think there is a gap for fintex there and I I would note a part of the later part of the book talks about the fact that because the US financial system is much more capital market oriented than most financial systems um especially in Europe um and Asia it's actually a little bit better on this front because the sources of more risky businessoriented lending especially for companies that have some sort of growth story to tell is just infinitely better in the US. This is why uh Asian and European companies, British companies, wherever come to the US when they when they want that sort of investment and that's for sort of a number of reasons including institutional ones, you know, large part of the US uh pension asset system is able to invest in these sort of things which they're just not in uh Europe and Asia. Um, so those are much more bank oriented systems that I think are much more connected to land. I think the difficulty is always going to be that that sort of capital uh the potential collateral, the intangible assets that we're talking about are uh heterogeneous. They're really really dissimilar to one another. and working out how much you value, you know, the network effect of a news social media site or the intellectual property around a piece of interesting software or any number of other uh intangible or intellectual property assets is always going to be really really difficult. Whereas valuing the piece of real estate, the land usually isn't that difficult. You know where it is. Nobody can run away with the the land beneath the real estate. You know, they would struggle to run away with the real estate. They'll definitely struggle to run away with the land. Um there's so much more security in doing it that you can see why it's slowly become so important. But what that does is is it binds the financial system just completely to what's happening to land prices. And it it also amplifies the sort of regional disparities that we were talking about before. Um I think I have a a figure in the book uh unincorporated businesses. So this is basically the the bucket that contains uh the vast majority of America's very small firms uh single proprietors and partnerships have $5.6 trillion in loans pledged against real estate collateral. That's the the end of 2024. it's 72% of their borrowing. Okay. Now, again, for the for the borrowers, this all makes sense to some degree, right? Um I can live in my house while I use it as collateral, right? Don't have to pawn it. I don't have to pledge it. Um it's relatively stable. I probably won't lose it. Um especially if, you know, it's not the loan that's the entire value of the property. But what that means is that again, if I'm in Detroit or Cleveland or somewhere where house prices haven't gone up in the same way, I'm much less able to borrow against uh property. I have a much smaller margin in which I could do that if I own property at all. Whereas, if you're living in a place where the value of the property, the land behind it has gone up significantly, you're much more able to tap into that credit. I think everyone knows to some degree, you know, that house prices are higher in some places than others, but that ability to access credit when you want to set up a business is a huge thing. Um, you know, among the very smallest businesses, again, especially the ones that aren't just immediately going to go to uh Silicon Valley, they're not really businesses. You know, you want to set up uh uh anything um any sort of small business. Realistically, venture capital and and private equity aren't for everyone. um this is still a major way of borrowing. It's an even bigger way of borrowing in in Europe and again large parts of Asia. So it's enormously important from that perspective. Um and yeah, it it has these huge effects and and in the developing world you have the issue of the difficulty of proving your property rights to something. There's a Peruvian economist uh Hernando Dotto who wrote extensively about this. called it dead capital. You know, a business or someone might own an asset in every meaningful sense. You know, everyone around them accepts that they own it. They use it for its sort of standard economic purpose. They might uh have a machine shop on it or a store or a farm. They can use it for the the normal economic purpose. What they can't use it for is its ultimate financial sort of purpose. They can't borrow against it. Uh they can't use it in the financial system. and it limits them uh to an extraordinary degree. Uh but this is true all over the place to some degree or another. Um so what you own in terms of property does give you huge access to credit when it comes to the formation of small businesses. Relatively low-level financial activity, but often the sort of financial activity that is the first step that someone has on the way to something much bigger. You might access all sorts of different financial products down the line. you might, you know, get a venture capital investment down the line, but for a lot of people, they start with this form. Um, and lacking it might mean you go off and do something else that a sort of uh salary man type job is a better bet for you. Um, it has all sorts of effects that people don't think about very often. >> Yeah, that's interesting. And I'm glad you brought that up about the the concept of of dead capital because it I was thinking about that section of the book. We had Diane Coyle on the show a couple months ago and um you know she's written a fascinating book about um you know kind of updating financial statistics and and expanding essentially the range of balance sheets we produce to to include not just you know um the physical capital but also natural capital, human capital. And it made me think that you know you in her in her uh world you know the value of human capital is many times that of physical capital. And you know your notion of dead capital made me think well there's actually a lot of human capital that's kind of dead capital in some sense. If you if you have these kind of ideas and you can't get financing to back them because you don't own land, then you're really not making the most of your human capital in the same way that you were talking about those businesses in Peru who have these kind of dead assets that they can't make the most of. >> I think that's absolutely true and I think that the there is a possibility. There's a really good uh couple of books by uh Steen Westlake and uh Jonathan Haskell about um intangibles um uh you know capital without capital uh capitalism without capital is one of them. They're really really good books and they're all about the sort of boom in intangible assets in the world. And I always think of intangible assets as a sort of version of trying to trying to make a balance sheet I out of human capital in one way or another. You're trying to sort of condense what is often a sort of direct reflection of human capital um into an asset because those are very very difficult to finance and borrow against because they're very heterogeneous. I do think people rely on land and and you're quite right that it's it's a limit to human capital as well. One of the big things in the discussion in the middle of the 20th century during the land reform movements in various part of the world uh parts of the world especially in Asia. One of the big elements of discussion was that um once you get more widespread land ownership, the idea at least was that people invest more in not typically their own human capital but their children's human capital that the boom in education in various parts of Asia in the middle of the 20th century was down to precisely this. Once people could invest directly in their own land, they received the return on that rather than some landlord often an absentee landlord receiving the benefit of that. They would use the the returns they made to send their children to school. Um so there is a sort of yeah there is a feedback loop there between the human capital side and the the financial capital side and I I would say especially true through land as well. >> Yeah, that's interesting. I I I mean there there's the whole you have multiple sections in the book on land reform around the world in particular in Asia. Um but I hadn't thought about it from that perspective as kind of unlocking human capital before that that makes a lot of sense. [music] Maybe just in you know in the last sort of 15 minutes here since you since you mentioned Asia I'd like to talk about China. um that's uh you know you have a chapter on the role of land in the Chinese financial system and it's called the biggest bubble in history that's the chapter title I believe and you say that no country is caught in a bigger land trap than China so I I I want to talk about that and it seemed in your explanation to maybe not have completely stemmed from a kind of change in the tax system but but was driven uh substantially buy that and uh that that was really interesting to me and I thought you did a great job of kind of making clear how that works. I thought perhaps you could kind of start with that uh early 1990s change in the way the the tax system worked in China and then talk us through how that's led to the kind of land trap that they're in. >> Absolutely. So in the 1980s and 1990s in China in particular, there was a huge amount of work to be done transitioning from a command economy in which price signals played an extremely limited role um into a sort of if not capitalist than then sort of capitalism adjacent economy. Um, and there are a number of things that were normal in the people's republic after its foundation and up until uh, Deng Xiaoping uh, became paramount leader that wouldn't really work afterwards. And one of them was that most Chinese sort of fiscal activity was done through local and provincial level governments. They raised most of the money and they spent most of the money. um they were responsible for the administration of local agricultural collectives and um local state-owned organizations and and all sorts of other things. So, Chinese local governments experiment in the 1990s with a variety of uh should we say semi-legal ways of raising money, uh administrative fees, all sorts of charges. Um, these are wildly unpopular and basically they all land back on something that had been imported to China from Hong Kong in the late 1980s as a relatively small experiment then in Shenzhen. Um, basically uh leaders of the Chinese government in the 1980s had become interested in the way that Hong Kong financed itself uh which was through land sales. Um, so you had this amazing situation in that a system that originated in Hong Kong because it was a useful financing model for the British Empire running a very very distant colony that it didn't want to subsidize from London. Um, ends up as the emergent system of government financing in a postcommunist, you know, transitioning enormous economy. um I don't think that sort of handover was particularly well understood where this had all come from but that that was how the the the system went. So very very rapidly land sales become by far the predominant method of financing for Chinese local governments. Um and essentially it means that if you're provincial government you have an interest in land prices being as high as they can possibly be. Now that in itself isn't necessarily always a bad thing. you know, high land prices if if the land's sort of well distributed and everything and and very efficiently run um can be a really really useful financing tool and it has been in many other different parts of the world. You know, property taxes work in all sorts of useful ways. The main problem in China, I think, is is twofold. One, there's a political problem in that the provincial government sort of the leaders rotate around. they might be very keen to to boost land prices very very rapidly while they're in office because what happens 10 years down the line is really none of their business. They'll be long gone. And the second thing is that in China unlike in the vast majority of more open economies in the world, Chinese households don't have much else to invest in or certainly not much else that uh gives them a decent return. having access to real estate to some uh it's a land lease, you know, but an extended long-term land lease is a way of benefiting from the very very rapid growth of the Chinese economy in a way that nothing else really gave them. You know, bank accounts uh had steeply negative real returns for a long period of time because of the financial repression. You know, the Chinese stock market's been an absolutely abysmal long-term investment, right? uh you know and it was only just getting started then. Anyway, the financial products on offer uh have often sort of blown up or you know they've secretly been attached to real estate loans in some way or another and they've been a terrible bet. Housing and land has been has been a great bet. It's gone up absolutely massively in price. So you have these two I would say pushpull effects. the push coming from the local governments who suddenly need finance um and they need it now and they're massively incentivized to drive land prices higher and higher and the households who have nothing else to invest in who will buy land handoverfist often in ways that is completely I would say separated from the uh the real sort of economic use of the land. You have Chinese households who if they have the savings to do it will buy a second flat and a third flat or a fourth flat. These aren't to rent out. They're not rental properties. The rental yield is often you know sub 2% tiny tiny returns to be made through these. It's just in the expectation of capital appreciation and the expectation of security. Um, so this dynamic, that push and pull has led to what I think is, yeah, I would call it, I don't know whether it's going to pop and and I get into in the book a little bit about what the consequences are if it doesn't pop, but this enormous housing problem in China that comes from this land sale issue where China has both some of the symptoms of a massive housing shortage um in in the prices and also some of the symptoms of an enormous glut in housing in that there is a huge portion of Chinese urban housing that is unoccupied. Um there are very few places that manage to do these both at once. They're both problems. Um but but modern China has managed it. The government has tried to jump off this roller coaster to one degree or another. Um but as I discussed at the beginning, this sort of thing is extraordinarily difficult once you've set the wheels and train. You can either tell every middle-ass Chinese household that actually they're being functionally expropriated. You were told that housing would always go up in value and now it's not. Sucks to be you. Um or you can have a situation in which the sort of the house prices go through the roof, the the inequality is exacerbated and also the you know the financial system and entrepreneurial activity is warped by the fact that this is the only thing you can invest in, make money in. um you know why would you set up a company? Why would you fund a young entrepreneurial company um if you can do this instead? And and for a lot of Chinese people, they've they've come to what I think for a very long time was the rational decision that housing was the right asset to invest in regardless of, you know, whether you were going to leave it empty or not. >> That's just exceptionally clear explanation. And you know, you um you know, you talk about the property developers, Everrand being the the most important, essentially stepping into the middle between those two. Um and I thought that that really crystallized in my mind how, you know, you they were essentially the intermediary that's going to solve that problem. Government needs to sell land, individual savers need to buy land. Okay, we're going to step in and we're just going to, you know, we're going to buy land um from the government and we're going to sell it to um we're going to sell it to individuals and they essentially filling a need. And of course now, you know, there they they went bankrupt. And when they did go bankrupt, there was a lot of people saying, "Hey, this is China's quote unquote Leman moment, right?" Um, and you know, I don't think it's what's hasn't worked out that way, at least um, as far as I understand. But like where what is happening there? Like what is how is this being resolved or do we not know? It's a great question and I think there's a natural instinct to see this that way from a sort of western perspective or or or not even a western perspective but the sort of if you think about this in terms of mainstream finance how a sort of capitalistish system would work that would be the answer right the debt has become excessive the returns are too low to service the debt in the case of the real estate developers it all goes bust the people who've lent to the real estate developers, whether that be bond holders, banks, whether it be the uh people that have bought houses in pre-sales, which became absolutely enormous in China. That's one of the biggest sources of of leverage for the real estate developers. Um go bust, there's a sort of downturn, ripples through the banking system. It was all quite large enough for this to to work. I think what that misses is that finance is still by far in my view the the most tightly centrally controlled part of the Chinese economy. You know that the state banks are still absolutely enormous. There are still lending targets sent down from the central government to to provinces. This is not something that the Chinese government has ever intended nor currently intends to loosen up its grip on. Right. Um this is extraordinarily important as a sort of political tool and it will never have quite the dynamics that you have in the west where you see people go bust and defaults and bankruptcies and uh resources being reallocated. But that's the crux of it for me. It's the reallocation of resources which is enormously important. Now I'm not I'm not a sort of um not an Austrian economist. I don't think you need to sort of flush out or liquidate an economy uh to to purify it in any way. But there is, you know, you do need some form of reallocation to allow for creative destruction of any type. Um and what's happened in China is you've prevented a lot of that activity. And you see this misallocation, this absolutely gargantuan investment into the real estate market. and the basically the I would say the refusal by the Chinese government. They pulled the the sort of rug out. Um but they didn't put anything else there in its place. Right? If you look at house price indexes in China, they're all astonishingly stable. You haven't seen, you know, 20% 30% 40% whatever decline in in actual house prices. What you see is a sort of frozen market. Um and it's prevented that sort of reallocation. And I think it's a large part of why you see the uh the capital efficiency of investment in China declining and declining and declining over time. Um it's a huge problem. I think it's one that's not discussed enough and it's a huge benefit of um a somewhat more volatile American or Western system that it does this. And as I say, the Chinese government has tried to address this. It tried to address it in in 2021 by uh you know essentially cutting off the party for the property developers but it didn't replace it with anything. Chinese households don't have anything better to invest in now than they did then. The capital controls are still in place. Local governments have a huge problem that they don't really have a better way of raising money. Right. Um and so the last sort of four years have been static. they've been really really a form of stasis um rather than a sort of significant bust, a reallocation, a depression, anything like that in the real estate market. But it means there's still something to be done unless it just remains in this period of stagnation. Um I wish I had a better answer to that because uh you know if [laughter] if I did they wouldn't be in this problem. Um, but once you're in this position, I I don't know how you resolve it. It's a sort of I wouldn't start from here problem, >> right? Yeah. Well, well, thanks for that. Uh, I appreciate it. And, um, I mean, there's so many more things I' I'd like to ask. I mean, you have a you have a really fascinating chapter on Singapore as well as kind of the one country that seems to avoid have avoided the land trap. I mean, you say they've got very high ownership rates, something like 90%. But housing is still affordable. And um maybe we could just kind of just explain to people because I think it's a model that certainly I wasn't familiar with. I think it'd be interesting for people to hear what Singapore has done that the kind of the rest of us haven't and then maybe just we can finish with you saying is you know are there lessons in Singapore that we can apply elsewhere or is that just kind of a one-off exception? Absolutely. So I I lived in Singapore for for three years. I was sort of really interested in this system even before then, but I I lived there uh from 2022 to uh 2024, the end of the year. Um and the system of housing, I think, is is fascinating. It does have a lot of online fanboys. Um but I don't think it's extraordinarily wellknown. effectively uh Singapore becomes independent in the middle of the 1960s. Uh Lie Kuanu then the prime minister of Singapore had a very very strong view that he wanted to invest in Singapore. He wanted the government to invest. He wanted private investors to invest. But he was very very keen that the benefits of the investment didn't simply spill over into privatelyowned land. He didn't want the existing landlord class in Singapore to simply mop all of this up. most people didn't own homes. He thought this would be a sort of unjust way of doing things. And there was a moment effectively in the reset of how Singapore is governed as it became independent where this became possible. They passed something called the Land Acquisition Act. Um which by Western standards is an extraordinarily punitive regime. um for for a long time, for several decades, it allowed the Singaporean government to buy land uh from its owners, compulsory purchases at extraordinarily cut down prices. You know, the the system is considerably more generous today, but it allowed the Singaporean government to accumulate a very large portion of the country's land. It owns some before. It it now owns something in the region of of 90% of the country's land. somewhere allowed it to socialize the the land the land the land stock. Is that right? >> Indeed. Indeed. I I would say that Singapore is in general a very capitalistic country. Um but when it comes to land, the Singaporean government takes a very very sort of collective attitude and essentially the target as such as it exists is to make as many Singaporeans as homeowners as is possible. So there's a a organization called the Housing and Development Board. um it is essentially responsible for housing Singaporeans um and building the estates that most of them live in. A HDB as it's known uh are these sort of quasi public private flats. They're they're like social housing but you purchase them. They're not um they're not just handed out and they're not generally rented. There are some rented ones but they're generally owned. The restrictions on that are as a Singaporean, as a Singaporean family, a household, you can own one. You can't own two and rent the other one out. Owning one property is made relatively easy. The the city has a sort of semisocialized uh social insurance system. Uh which means that the mortgage loans you're able to access to do that very cheap. If you have a low income, you're able to access a grant to do it. you know, the the HTBs in different parts of the city vary in price, but they're all extraordinarily cheap really relative to any other sort of big international financial center. And the home ownership rate is is approaching 90%. Um, so I I think I describe it as a city that's made home ownership easier than it is almost anywhere else, but a city that's made uh being a landlord or making a lot of money from being a landlord much more difficult than it is in most parts of the world. Um it's it's from that line in a very interesting way. I think the lessons the rest of the world from Singapore again it's a tough one. I became more pessimistic as I was writing the book about our ability to fix these things which I wish I hadn't. Uh but I did and I think Singapore went through a very sharp change in the middle of the 1960s. And I think those periods of very sudden political and technological transformation come up again and again through the book as these moments in flux where something is released the ball comes loose from the scrum and the action starts again. You know you can have a resetting for better or worse when you have these moments of transformation. Unless you do have the moment of transformation it's quite difficult. I don't know how you jump from a system where say take Britain sort of 60%ish households own their own homes. It's much lower in the most expensive part of the country in in London. You can't expropriate those people because they vote. It wouldn't be right to do it anyway because you know you're you're abusing property rights that they they believe that they had. But it's very difficult to make everything more affordable if you don't do some version of that. It's a really really tough problem and it's it's yeah I think no surprise that Singapore managed to do it when it did. The only exception to that is the countries that we talked about earlier when we talked about dead capital. If you are talking about a country that doesn't have secure land and property rights already, you're you have a problem if you're one of those countries, but you also have the huge opportunity to put in status system that's much more stable, much more egalitarian, and you can have a very dynamic capitalist, relatively low tax economy on top of that. Um, but you don't get these sort of inequities that you see in the land system. Um so yeah I think there's a lot of opportunities there for developing countries to look at the model and say what can we take from this um it's much much more difficult for developed economies slower growing less political transformation uh to learn something from Singapore I think. >> Yeah. Yeah. Well well thanks for that and um I I think that's a good place to end. I mean that basically means that the the land trap as you have written about um is going to be with us um for a long time and so it's it's important I think for all of us to to understand um just what the implications of that are. So um Mike I know it's an incredibly busy time for you with the book launch and uh and your day job as well. So we appreciate you taking the time to join us today and sharing your ideas and uh we wish you all the best. >> No, thank you very much. I hope someone can either tell me that I'm completely wrong or that they have the solution to this. Uh I I wish I did. Um >> you'll probably get both. Um >> hopefully hopefully fingers crossed. >> Okay, so the book is called The Land Trap, a new history of the world's oldest asset. Please make sure to get a copy. Um I can guarantee you that we've only just scratched the surface of the ideas in the book. and make sure to follow Mike's work because I think you can tell from our conversation that not only are the ideas important, but they're not uh yet being discussed enough on mainstream media. So, for all of us here at Top Traders Unplugged, thanks for listening and we'll see you next time. Thanks for listening to Top Traders Unplugged. If [music] you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe [music] to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing [music] guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. [music] It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. >> [music]