The Land Trap: How Property Shapes Power ft. Mike Bird

[00:00:07] Mike

It is extraordinarily difficult once you’ve set the wheels in trade. You can either tell every middleclass 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.

Or you can have a situation in which the house prices go through the roof, the inequality is exacerbated, and also the, you know, the financial system and entrepreneurial activity is warped. And for a lot of Chinese people, 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’re going to leave it empty or not.

[00:00:49] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there is a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:45] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely Kevin Coldiron, to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor.

In the series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. And with that, please welcome Kevin Coldiron.

[00:02:22] Kevin

Okay, thanks Niels. And welcome everyone to the Ideas Lab. 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 Wincott Award for Young Financial Journalist of The Year, in 2016. And in 2020, he was part of the Journalist team that won the Human Rights Press Award for their coverage of the Hong Kong protest.

So, Mike, thanks so much for joining us and welcome to the show.

[00:03:26] Mike

Kevin, very, very happy to be here. Thank you for having me.

[00:03:29] Kevin

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.

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. Could you summarize for us what the trap is?

And I guess I was also curious, you know, 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?

[00:04:18] Mike

Absolutely, I think you can think about the trap in a few different ways. I’ll tell you about the way I thought about it when I was first starting out. I lived in Hong Kong for several years after living in London. And when I lived in London, I’d become a bit obsessed with house prices and housing. This is extraordinarily important in the UK. A huge part of whether you’re considered wealthy secure is about home ownership. And when I moved to Hong Kong, that was true on steroids.

Hong Kong has extraordinarily high house prices, apartment prices, really, and the ownership or non-ownership of housing is really the sort of symbol again (even more than in the UK) 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, a sort of pincer in the sense that when land prices went up, that brought with it a lot of problems; greater inequality, young people who couldn’t afford to move out of their parent’s homes. It’s very common in Hong Kong to live with your parents until you get married and you can afford to buy somewhere. So that was a big problem.

If land prices go up, it exaggerates 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 money that it finances itself with, that it finances a great deal of its capital investment, 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, but mostly through the wealth effects that we would discuss when talking about real estate. People pare back their consumption if they think that their asset wealth is declining.

You know, they might be thinking of their future security and they behave differently in the present if they believe that their wealth is declining, even if it’s only going to be temporary. So, that’s the trap that I was thinking of in writing this book.

And I think, through 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, an important distinction between haves and have nots, and is very closely associated with 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 are 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 retain the value of the land, the property that they own. They would really like it to go up, and they would like it to go up at a decent speed if possible, but that’s impossible to achieve with a goal of widespread land and home ownership as well. You can’t make it affordable for people and at the same time make it a rapidly growing store of wealth.

And I think 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 it’s very difficult to move in either direction. That’s partly because of the sort of special attributes that land has as an asset.

[00:08:13] Kevin

Yeah, and so thanks for that. That’s a very clear explanation. I have to say, The first house that I ever owned was in London a very long time ago. And yeah, I remember thinking that, oh wow, I’m an actual adult now, and I own property. It was a funny feeling, but yeah, property was really deeply embedded in the culture there.

But let’s talk about why land is so valuable as an asset, you give us essentially three characteristics of land that make it so important. I was wondering maybe you could just go over that, explain that and tell us why that makes it so valuable as an asset.

[00:09:01] Mike

Absolutely. So, most of the history within the book contains the last 400 years and. really. I would say the last 300 years. It’s during the period of economic transformation, essentially, the advent of modernity, industrialization, global trade, agglomeration, urbanization. So, this is a strange thing. And at the entry of the book I sort of try and imagine this from the perspective of someone living several millennia ago.

Land was extraordinarily important in a pre-modern economy because it was what you grew crops from. People paid tax, often in the form of grain, and essentially what you could mine from the ground, what you could grow from it was the economy, as we know it. It was the lion’s share of economic activity.

That’s no longer the case. Agriculture is less than 5% of global economic output. In most advanced economies it’s less than 2%. So that can’t be true.

And essentially what has happened, 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 over the last 300 years, let’s say, has given land enormous value. The three facets that I think are most important are the fact that first, unlike every other asset in the world and every other good produced by anyone, you can’t really make more of land that’s not 100% binding. You look at Tokyo or Singapore or the Netherlands, they’ve managed to invent some land, effectively, to create some land with these land redemption schemes. It’s incredibly useful if you can do it. But in most of the world you can’t do it. It’s extraordinarily expensive even when you can. So very worthwhile, but that’s, 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. You can move a business, you can re-domicile it somewhere else. Capital, obviously, almost completely free flowing, as are ideas which you can spread by 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.

There are not many people that move their houses around, but the actual things that it’s built out of can be moved. Land you can’t move. Which is why functionally identical pieces of land, in different parts of the world, are very differently priced. Again, everyone sort of knows this, but the building blocks actually make it extremely different to other assets and worthy, I think, 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. You know, again, to go to ideas. Ideas are replaced by better ideas. Businesses fade and die if they don’t innovate, if they’re producing something that the people stop wanting. Even human beings age and die. Everything built on top of land eventually falls apart. With the land itself, that’s not the case.

Land doesn’t depreciate in accounting terms, 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.

You look at the families in London, let’s say, that have owned portions of central London for large part the last 400 years. These are some of the wealthiest families in Britain today. The economy bears no relation to what it did when their ancestors started building these sort of small land empires. 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 cases, if you had an agricultural land Empire in 1500, it might be worth pennies now. It may well be not worth very much because the economy’s changed so much. But that sort of luck element means that the fact that land doesn’t decay becomes extremely important for a number of different reasons.

[00:13:42] Kevin

When you say land doesn’t appreciate, okay, land in central London obviously hasn’t depreciated. But you know, land in, I don’t know, let’s say central Pennsylvania, where my family is from, you know, kind of coal country, you know, my parents land is worth a lot less now than 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 you distinguish between those two?

[00:14:16] Mike

That’s a great point, and I think you’ve nailed it completely there by thinking about the difference between the economic activity surrounding a piece of land and the actual depreciation. By depreciation, I really mean that it doesn’t decay naturally. There’s no reason, if the economic activity remains for it to decay.

Now you mentioned, you know, central Pennsylvania. One of the examples I draw on in the book, towards the end of the book, is a comparison between Detroit and other cities in the US. If you go back to the middle of the 1950s and you look for, 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 mid-1950s, and it would be somewhere between sort of 25% and 50% more expensive or cheaper than another. But, all in all, really not a significant difference.

You’re talking about in 1955, a few thousand US dollars difference 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 urban Detroit and one that owned land in urban 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. And the people who own the plot in Detroit, obviously they’ll be sitting on something that is, in real terms, probably worth less than it was at the time that it was purchased. 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. Explain to me the economic geography of the early 21st century would have been a ludicrous thing to ask. You know, even entrepreneurs and you know, the smartest lenders don’t understand these things with that sort of distance.

But when land is the biggest part of a household balance sheet, the biggest household asset, that is effectively what you’re asking people to guess, and it exposes them to that one area. So, you know, if you grew up in Detroit, you’re locked into what is both 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 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 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.

[00:17:37] Kevin

I understand that. And I want to also ask about this second feature that you said. Land is immovable. Obviously it is. And that means it’s not substitutable. You can’t swap an acre of land and Manhattan for an acre of land in North Dakota. I wondered, you know, is technology kind of changing that feature to some extent? I mean, we did see that in Covid. You could all sudden move from the Bay Area to somewhere else and essentially do your job for the most part. Do you foresee that kind of second feature changing in any way, or not? I’m curious.

[00:18:17] Mike

It’s a really great question and it’s very difficult to answer. One of the examples I looked at in the book was the rise of communications technology in the 20th century, particularly the second half of the 20th century.

A really, really interesting guy, Arthur C. Clarke, who’s a futurist. It’s a great job title. But he was a public intellectual, and he wrote and thought about the future. He also co-wrote 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 were 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 who’s able to communicate with someone in New York seamlessly.

And it was very, very early for someone to be saying things like this. It is a really profoundly excellent forecast. And what he also said was, of course, this is also going to make the city obsolete. There won’t be any cities. And he worried that we’d all live in sort of giant suburbs, but there’d be no city center, because 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 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, a number of cities in Asia as well.

So, I’m always a little bit nervous about thinking that technological change for communications or information will change 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. So, 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 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 rollout of the subway changed things dramatically.

Suddenly you could work in Manhattan, but you could live in a three-bedroom house in the Bronx. 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, it’s those sort of transformations.

It’s the same with the car, with LA, and a lot of the western cities of the United States where you just expanded, really, what was the reasonable reach of the city, the sort of commutable land. It sort of opened a second American frontier, basically. 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 Covid you could use it as an example of either the sort of the weakness of land as an asset in that you don’t know where the economic activity is going to be sustained or how robust it is.

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. 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 prices have really been reallocated into very nearby leafier areas. So, you might see certain suburbs and really nice outlying areas that have gone up dramatically in price.

Nick Bloom, an economist, has a paper about this where he calls it the donor 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 a lot of the residential areas with a little bit more space, a little bit more family oriented, have gone up dramatically, in the price, in the same cities. So, it’s a tough one. I don’t know where I fall on it. I think that the best thing I can say about it is it’s very, very hard to predict.

[00:23:29] Kevin

So, these three features that we’ve just talked about, fixed supply, immovability, and lack of depreciation, make land an ideal form of collateral for lending. And you say, at one point it essentially is the beating heart of the current system of credit. And I wonder if you could just kind of give us a sense for just how important land is in terms of the banking system, in terms of creating credit right now.

[00:24:02] Mike

Absolutely. So, I think this is something that people often miss when we talk about land. I think there’s a portion of people who know, a very large portion of people know that most countries, especially 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 how we use land. Who’s able to build the regulation around it, the politics around it, which is a little bit less well known. And this is the side of things that I think is least well known, which is land as an asset. Its importance in finance. And the historical angle of the book, I think, I hope, helps to sort of develop this.

You have lots of people throughout the last three or four 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 among the colonists that arrived in North America, English speaking colonists, mostly arriving in North America in the 1600s and 1700s because they arrived in this place that was absolutely enormously wealthy in land, had no tight social structure, as you did at home in England, 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, where the currency would be based on landowners 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 20th and 21st centuries is banks, in particular, have become enormously mortgage oriented.

So, 1900, you look at 14 economies that then were sort of the leading industrializing economies. This is some of The European economies, Japan, America, Britain, Germany, France. About 32% of total bank lending was mortgages.

I think in Britain, at one point, it was actually less than 10% in the early 20th century. And then at the end of the 20th century, or even now, you’re talking about more like 60%, a little bit higher than 60%. So, there has been 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. This is partly because of bank regulation. The Basel Accords have made it relatively easy for banks to lend mortgages, to lend anything that’s collateralized by residential real estate.

There’s a group of economists who call it the great mortgaging. This phenomenon of banks becoming much more engaged in mortgage lending, much less involved in unsecured or even secured business lending. It’s just more risky, whether that’s for regulatory reasons or not.

So, you’ve seen this enormous expansion. Banks, in particular, have become much more mortgage oriented than they used to be.

[00:27:25] Kevin

Yeah, that’s something that I keep bumping up against in a lot of books that I read. And it is kind of extraordinary because, I guess, if you study economics, the standard explanation of the banking system is, hey, banks 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, the credit out there, is essentially a function of the future land rent surpluses. It’s a very odd thing and it doesn’t map at all into the way we’re taught.

And 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 apply technology to lend against non-tangible, non-real estate collateral. And it seemed to me that there would be an opportunity there.

[00:28:31] Mike

That’s not only true, but you have seen sort of attempts to do this. There are Fintechs that are interested in doing these things. Anything you can get a better idea of.

I think where I start with this is there’s a concept in economics literature about lazy banking. And I don’t mean to disparage the bankers who are listening to this, but collateral is just a great way of lending if you don’t know and don’t care to know anything about the person you’re lending to. 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. You’ve got unlimited downside up to the amount that you lend someone, but your upside is capped.

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 just an old company that’s stumbling along like the millions of companies out there. So that is enormously important.

So, I think there is a gap for Fintechs there. And 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, especially in Europe and Asia, it’s actually a little bit better on this front because the sources of more risky, business oriented lending, especially for companies that have some sort of growth story to tell, is just infinitely better in the US. This is why Asian and European companies, British companies wherever, come to the US when they want that sort of investment.

And that’s for sort of a number of reasons, including institutional ones. You know, a large part of the US pension asset system is able to invest in these sort of things which they’re just not able to in Europe and Asia. 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 sort of capital, the potential collateral, the intangible assets that we’re talking about, are heterogeneous. They’re really, really dissimilar to one another. And working out how much you value, you know, the network effect of a new social media site, or the intellectual property around a piece of interesting software, or any number of other intangible 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 land beneath the real estate. They would struggle to run away with the real estate. They’ll definitely struggle to run away with the land. There’s so much more security in doing it that you can see why it has slowly become so important.

But what that does is it binds the financial system just completely to what’s happening to land prices and it also amplifies the sort of regional disparities that we were talking about before.

I think I have a figure in the book unincorporated businesses. So, this is basically the bucket that contains the vast majority of America’s very small firms, single proprietors, and partnerships have $5.6 trillion in loans pledged against real estate collateral. That’s at the end of 2024. It’s 72% of their borrowing. Okay, now, again, for the borrowers, this all makes sense to some degree. I can live in my house while I use it as collateral, I don’t have to pawn it, I don’t have to pledge it. It’s relatively stable. I probably won’t lose it, especially if it’s not a 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 property. I have a much smaller margin, 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.

You know, among the very smallest businesses, again, especially the ones that aren’t just immediately going to go to Silicon Valley, they’re not really businesses. You know, you want to set up anything, any sort of small business. Realistically, venture capital and private equity aren’t for everyone. This is still a major way of borrowing. It’s an even bigger way of borrowing in Europe, and again, large parts of Asia.

So, it’s enormously important from that perspective. And yeah, it has these huge effects. And in the developing world, you have the issue of the difficulty of proving your property rights to something.

The Peruvian economist Hernando de Soto, who wrote extensively about this, and he called it dead capital. 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 have a machine shop on it, or a store, or a farm. They can use it for the normal economic purpose.

What they can’t use it for is its ultimate financial sort of purpose. They can’t borrow against it. They can’t use it in the financial system. And it limits them to an extraordinary degree. But this is true all over the place to some degree or another.

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 get a venture capital investment down the line.

But for a lot of people, they start with this form, and lacking it might mean you go off and do something else where a sort of salaryman type job is a better bet for you. It has all sorts of effects that people don’t think about very often.

[00:35:17] Kevin

Yeah, that’s interesting, and I’m glad you brought that up about the concept of dead capital, because I was thinking about that section of the book. We had Diane Coyle on the show a couple months ago. And she’s written a fascinating book about updating financial statistics and expanding, essentially, the range of balance sheets we produce to include not just the physical capital, but also natural capital, human capital. And it made me think that, you know, in her world, 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 debt assets that they can’t make the most of.

[00:36:24] Mike

I think that’s absolutely true. And I think that there is a possibility… There area really good couple of books by Stan Westlake and Jonathan Haskel about intangibles. Capitalism Without Capital is one of them. They’re really, really good 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 make a balance sheet 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 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 you’re quite right that 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 parts of the world, especially in Asia, one of the big elements of discussion was that once you get more widespread land ownership, the idea, at least, was that people invest more in not particularly 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 returns they made to send their children to school. So, there is a sort of… Yeah, there is a feedback loop there between the human capital side and the financial capital side. And I would say it’s especially true through land as well.

[00:38:20] Kevin

Yeah, that’s interesting. There’s the whole… You have multiple sections in the book on land reform around the world, in particular in Asia, but I hadn’t thought about it from that perspective. That’s kind of unlocking human capital before. That makes a lot of sense.

(Music)

Maybe just sort of in the last 15 minutes here, since you mentioned Asia, I’d like to talk about China. You have 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 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 was driven substantially by that. And 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 early 1990s change in the way 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.

[00:39:37] Mike

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, into a sort of, if not capitalist, then sort of capitalism adjacent economy.

And there were a number of things that were normal in the People’s Republic, after its foundation and up until Deng Xiaoping 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. They were responsible for the administration of local agricultural collectives and local state-owned organizations and all sorts of other things.

So, Chinese local governments experiment in the 1990s with a variety of, should we say, semi legal ways of raising money, administrative fees, all sorts of charges – 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. Basically, leaders of the Chinese government in the 1980s had become interested in the way that Hong Kong had financed itself, which was through land sales.

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, ends up as the emergent system of government financing in a post-communist transitioning, enormous economy.

I don’t think that sort of handover was particularly well understood where this had all come from, but that was how the system went. So, very, very rapidly land sales become, by far, the predominant method of financing for Chinese local governments. And essentially, it means that if you’re a 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 the land’s sort of well distributed and everything, and very efficiently run, 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 twofold. One, there’s a political problem in that the provincial government, the leaders rotate around, they might be very keen 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 gives them a decent return. Having access to real estate, to some, it’s a land lease (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. Bank accounts had steeply negative real returns for a long period of time because of the financial repression.

The Chinese stock market has been an absolutely abysmal long-term investment and it was only just getting started then anyway. The financial products on offer have often sort of blown up or 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 a great bet. It’s gone up absolutely massively in price.

So, you have these two, I would say, push, pull effects, the push coming from the local governments who suddenly need finance, 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 hand over fist, often in ways that are completely, I would say, separated from 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 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. 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 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 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. There are very few places that manage to do these both at once, have both problems, but modern China has managed it.

The government has tried to jump off this roller coaster to one degree or another. But as I discussed at the beginning, this sort of thing is extraordinarily difficult once you’ve set the wheels and trade. You can either tell every middle-class 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.

Or you can have a situation in which the house prices go through the roof. The inequality is exacerbated. And also, the financial system and entrepreneurial activity is warped by the fact that this is the only thing you can invest in and make money in. Why would you set up a company? Why would you fund a young entrepreneurial company if you can do this instead?

And for a lot of Chinese people, 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 whether you were going to leave it empty or not.

[00:46:37] Kevin

That’s just an exceptionally clear explanation. And you know, you talk about the property developers Evergrande being the most important, essentially stepping into the middle between those two. And that really crystallized in my mind how 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 going to buy land from the government and we’re going to sell it to individuals, and they were essentially filling a need. Of course, now, they went bankrupt.

And when they did go bankrupt, there was a lot of people saying, hey, this is China’s “ Lehman moment”. Right? And you know, it hasn’t worked out that way, at least as far as I understand. But like, what is happening there? How is this being resolved or do we not know?

[00:47:39] Mike

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 not even a Western perspective, but if you think about this in terms of mainstream finance, how a sort of capitalist-ish system would work, that would be the answer. 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 bondholders, banks, whether it be the people that have bought houses in pre-sales (which became absolutely enormous in China. That was one of the biggest sources of leverage for the real estate developers) and go bust. There’s a sort of downturn that ripples through the banking system. It was all quite large enough for this to work.

I think what that misses is that finance is still, by far in my view, the most tightly centrally controlled part of the Chinese economy. You know, the state banks are still absolutely enormous. There are still lending targets sent down from the central government to provinces.

This is not something that the Chinese government has ever intended nor currently intends to loosen up its grip on. This is extraordinarily important as a sort of political tool. It will never have quite the dynamics that you have in the west where you see people go bust, and defaults, and bankruptcies, and 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 an Austrian economist. I don’t think you need to sort of flush out or liquidate an economy to purify it in any way. But you do need some form of reallocation to allow for creative destruction of any type. 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 basically, I would say, the refusal by the Chinese government, they pulled the sort of rug out, but they didn’t put anything else there in its place. 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 actual house prices. What you see is a sort of frozen market, and it’s prevented that sort of reallocation. And I think it’s a large part of why you see the capital efficiency of investment in China declining, and declining, and declining over time.

It’s a huge problem. I think it’s one that’s not discussed enough. And it’s a huge benefit of 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 2021 by 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.

And so, the last sort of four years have been static. They’ve been really, really a form of stasis 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.

I wish I had a better answer to that, because if I did, they wouldn’t be in this problem. But once you’re in this position, I don’t know how you resolve it. It’s a sort of ‘I wouldn’t start from here’ problem.

[00:51:39] Kevin

Yeah, well, thanks for that. I appreciate it. There are so many more things I’d like to ask. You have a really fascinating chapter on Singapore as well, as kind of the one country that seems to 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 maybe we could just explain to people, because I think it’s a model that, certainly, I wasn’t familiar with. 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, are there lessons in Singapore that we can apply elsewhere or is that just kind of a one-off exception?

[00:52:28] Mike

Absolutely. So, I lived in Singapore for three years. I was sort of really interested in this system even before then, but I lived there 2022-2024, the end of the year. And the system of housing, I think, it’s fascinating, it does have a lot of online fanboys, but I don’t think it’s extraordinarily well known.

Effectively, Singapore becomes independent in the middle of the 1960s. Lee Kuan Yew, 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 privately owned 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, which, by Western standards, is an extraordinarily punitive regime. For a long time, for several decades, it allowed the Singaporean government to buy land from its owners – compulsory purchases at extraordinarily cut down prices. 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 owned some before, it now owns something in the region of 90% of the country’s land.

[00:54:07] Kevin

The country was allowed it to socialize the land stock. Is that right?

[00:54:14] Mike

Indeed. Indeed. I would say that Singapore is, in general, a very capitalistic country. 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 homeowners as is possible.

So, there’s an organization called the Housing and Development Board. It is essentially responsible for housing Singaporeans and building the estates that most of them live in, a HDB, as it’s known, are these sort of quasi-public/private flats. They’re like social housing, but you purchase them. 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 city has a sort of semi- socialized social insurance system, which means that the mortgage loans you’re able to access to do that are very cheap. If you have a low income, you’re able to access a grant to do it.

You know, the HDB’s 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 homeownership rate is approaching 90%. So, 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 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. It’s trimmed that line in a very interesting way.

I think the lesson is, for 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, 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 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 London. You can’t expropriate those people because they vote. It wouldn’t be right to do it anyway because, you know, you’re abusing property rights that 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, 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 have a problem if you’re one of those countries.

But you also have this huge opportunity to put in a state 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. But you don’t get these sort of iniquities that you see in a land system.

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? It’s much, much more difficult for developed economies, slower growing, less political transformation, to learn something from Singapore, I think.

[00:58:17] Kevin

Yeah, yeah, well, thanks for that. And I think that’s a good place to end. I mean, that basically means that the land trap, as you have written about, is going to be with us for a long time. And so, it’s important, I think, for all of us to understand just what the implications of that are.

So, Mike, I know it’s an incredibly busy time for you with the book launch and your day job as well. So, we appreciate you taking the time to join us today and sharing your ideas and we wish you all the best.

[00:58:51] Mike

Thank you very much. I hope someone can either tell me that I’m completely wrong or that they have the solution to this. I wish I did.

[00:58:59] Kevin

You’ll probably get both.

[00:59:02] Mike

Hopefully, hopefully.

[00:59:04] Kevin

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. 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 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.

[00:59:33] Ending

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