I constantly ponder this as I look around my home town. We're in Cornwall and so house prices have gone fairly batshit to the extent that local teachers (in fact, local GPs too) can't afford rents or house purchases.
Meanwhile, a patch of land sold a few years back for £1m. On it, the developer built a block of retirement flats. There are maybe 30 of them. They each sold for north of £500k. The property owner also charges £20k per property per year for "maintenance".
It's simplistic but he's basically printing money. Out of his £15m turnover he had to spend £1m on the land, maybe £1m on building the flats - so £13m clear profit, and an annual of £600k.
So then he goes on and buys the next piece of land for £2m, this time makes a clear £30m, annual of £1.5 etc etc.
So, yeh, success to the successful. Who needs teachers or GPs anyway, right?
If I understand your back of the envelope estimate, you believe he had a 650% return on investment. It seems far more likely that some of your assumptions are wrong.
Regardless, assume this guy had couple of million pounds — building the flats is a productive use of the capital. We know that because he sold them at a profit. That means buyers valued the output more than the cost of the inputs. That is good.
(I understand that markets are not perfect, and monopolists, monopsonists and rent seekers can make profits without creating value, and I agree that is bad. But the fact that an enterprise is profitable is not a bad thing.)
> We know that because he sold them at a profit. That means buyers valued the output more than the cost of the inputs. That is good.
This is a very naive interpretation. Perhaps (maybe even more likely) the value of the land skyrocketed according to rising demand, regardless of the capital invested in building flats. They could have built single-family homes, or a parking lot, or even nothing at all and still profited handsomely.
> So, yeh, success to the successful. Who needs teachers or GPs anyway, right?
You are wrongly framing the builder as the bad guy, and not the homeowners that lobby for SFZ that causes a scarcity of flats which then causes the possibility for abnormal profits. Study the causality and place the blame at the correct place if you want to enact real change instead of just making people angry.
> It's simplistic but he's basically printing money.
Upvoted you, but I disagree. This is classic survivorship bias. You see the 10% of cases where this works, and you don't see the 90% of cases where the owner goes into crippling debt, can't sell the land, can't sell the condos, or vacancies are at 50%+. There's no such thing as "printing money" in capitalistic markets and it's naïve to think there is. I'm not an efficient market hypothesis guy, but markets tend to be efficient.
There are cases of problematic monopolies (e.g. telecom companies, energy distribution, steel, Google advertising, "too big to fail" banks, etc.) and maybe you could argue those actually do print money, but, imo, that's far and few in between.
The analysis is not looking at the probability of the situation occurring (where survivorship would apply). The formula is applied, where it can be. The observation is pointing out the Success driving success paradigm in action.
But there's plenty of cases where success drives failure (look at Bezos' Fire Phone as a low hanging fruit example, or more recently at Branson's Virgin Orbit), so, again, it's classic survivorship bias, as there are plenty of counter-examples.
Bezos' Fire phone is an example of success drives success. Amazon is a success even after Fire phone failed because he could afford to do many things, have some of them fail and some work out well.
It is perhaps classic survivorship bias if you look at Amazon initially, but after it got into a money printing machine the expansion shows how one success can lead to many mores even if some of them fail.
> But there's plenty of cases where success drives failure
That's a separate issue, under different conditions. Land development is the most common way to grow wealth, historically. It's mostly a matter of probability consideration and access to capital. It's not no-risk, but it's low risk until you start building.
> It's not no-risk, but it's low risk until you start building.
Building is kind of.. the whole point. And risk profiles vary. For example, I'd rather build/invest in a startup rather than buying land where I may or may not be able to build anything profitable over the long term. Development also has a very long horizon, tying up liquidity in the process.
Saying "just buy land bro, making money is ez" seems like a very TikTok Investor kind of take.
Land development is not limited to "build anywhere you can". Purchases of land for later resale, when armed with knowledge about likely events, is a common strategy. In cities, you often have to deal with municipal pressures to do more. Parking lots filled empty plots in southern california 1980s and since 2015ish the number of Car Washes in Fargo, ND has grown to 80... a cash business with minimal overhead and a flimsy construction, which does not have to cover the entirety of the plot.
> Saying "just buy land bro, making money is ez" seems like a very TikTok Investor kind of take
Just like interest on large amounts of liquidity, land ownership generates a meaningful passive income, over time. There's nothing trivial about it...unless you buy wasteland in Arizona (which many people hold).
It is odd to point out the relatively minor failures of massively successful people.
It is only because they are successful that they are able to afford to take these risks and the fact that these failures did not materially diminish their wealth speaks to the truth of the archetype.
The archetype claims that success breeds success, and this is categorically false, apart from a few exceptions (e.g. monopolies, collusion, etc.). The fact that even literally the richest person on the planet couldn't make a cellphone project (that he himself spearheaded) successful is a clear counter-example to the archetype. Your point that he didn't go broke afterwards is imo unrelated. I will agree that success definitely lowers risk profiles, but does not necessarily impact future success.
I disagree. Having wealth lets you spread risk. That’s one of the big reasons that success breeds success. At least when success is measured in dollars, not projects.
This is why so many wealthy people are VCs.
The failure of the fire phone, Blue Origin (TBD), Virgin Galactic etc simply reinforce the notion that successful people aren’t necessarily smarter than anyone else. But if they only make $10 billion from every billion they invest in crazy schemes… well they are still some way ahead of most of us.
Where are you getting 90% failure rate for those with access to enough wealth to easily sweep up $1m land + development costs for several buildings?
I can buy that for average folk, as they often do not have the expertise (nor the wealth to access the expertise) necessary to make better decisions for their business. For those substantially wealthier, it doesn't really make sense but maybe you're privy to more sources here that I would love to dive into.
Even when you own the land it's hard to get anything built. Planning permission, legal disputes, nimbys, nimbys, nimbys. Developers take on a lot of risk when they do this; they might end up owning a very pretty parcel of land that is a pile of shit in business terms, because they effectively aren't allowed to do anything profitable with it. Therefore, in the cases where it does work out, the profit is high. It has to be, to justify the whole thing. That's what "risk-adjusted rate of return" means.
Btw this is why it's always "big developers" in the first place; they have to be big, because they have to spread out this risk over a large number of ventures, and have easier access to credit. Planning restrictions drives consolidation in the construction/real estate industry because it raises the level of risk above what smaller companies can endure.
That's why it's so maddening to hear nimbys say they're opposed to profiteering big developers, and that loosening of planning regulations would be some kind of handout to them. Precisely the opposite is the case. They're unwitting agents of regulatory capture.
I think to be clear - firstly it's a hot topic in Cornwall not because of nimby-ism but because the developments are all pitched at hyper wealthy individuals, whether retirement individuals with £500k to spunk on a 1-bed per my example or people from outside the region who are buying holiday homes at similarly inflated values. I don't think anyone locally would say "don't build", instead it's "please build for locals" (where "local" = normal locally employed person).
Secondly, my point is kind of more general. I think if anyone with reasonable intelligence were given £1m they could make fairly reasonable profits in fairly short time, possibly from land or maybe from other investments. Of course there are risky investment strategies that could easily see them losing the lot but in general I think you'd be hard pushed to not find some level of success given this initial starting point.
>the developments are all pitched at hyper wealthy individuals, whether retirement individuals with £500k to spunk on a 1-bed per my example or people from outside the region who are buying holiday homes at similarly inflated values. I don't think anyone locally would say "don't build", instead it's "please build for locals" (where "local" = normal locally employed person).
They really do say "don't build". Or rather, their actions (revealed preference) say "don't build", regardless of what comes out of their mouths. Housing developments that would be affordable to normal people get blocked all the time. There are too many people with veto power, and someone can almost always find an excuse to say "no".
So what does get built is biased towards the luxury end, by necessity. Developers have to make up in margin what they lose in volume. There's no way around this.
Think about it: if you make it illegal to build holiday homes, that doesn't get rid of the demand for holiday homes, does it? Those same wealthy people will be competing over a smaller stock of possible housing, i.e. the very same housing that local people want to live in. So the prices will still go up! What you're proposing cannot possibly work, unless you want to make it literally illegal for outsiders to move in.
When you artificially restrict supply, you get a shortage. It's not rocket science.
Fairly basic flats cost more like £400k each to build. The developer isn’t making all that much profit. That’s one reason why all you see are luxury flats nowadays.
The builder in this case is a good example of what the article mentions. One way to deal with it in this case is to lower the barrier to entry for construction - every landowner should be able to build more a small apartment building on their property, leading to profits shared more broadly among those who own land, and more housing units available for sale and/or rent for people who don't currently own land.
People often have tales like this. For instance, in Denver, they tell tales of developers who greedily sell homes for high prices. But the local Democratic Socialists of America lobbied hard with many other people to preserve a local golf course over allowing someone to build a home. It is a natural characteristic that the demand curve takes effect with fixed supply.
Some folks like to lament greed or profit, while adamantly refusing policy that makes markets efficient and erodes margins. It is an interesting dynamic.
Meanwhile, a patch of land sold a few years back for £1m. On it, the developer built a block of retirement flats. There are maybe 30 of them. They each sold for north of £500k. The property owner also charges £20k per property per year for "maintenance".
It's simplistic but he's basically printing money. Out of his £15m turnover he had to spend £1m on the land, maybe £1m on building the flats - so £13m clear profit, and an annual of £600k.
So then he goes on and buys the next piece of land for £2m, this time makes a clear £30m, annual of £1.5 etc etc.
So, yeh, success to the successful. Who needs teachers or GPs anyway, right?