April 2026
“It’s not whether you’re right or wrong but how much money you make when you’re right and how much you lose when you’re wrong.”
– George Soros, Soros Funds Management
“You will come to know that what appears today to be a sacrifice will prove instead to be the greatest investment that you will ever make.”
– Gordon B. Hickey
For as long as they’ve been people, they’ve had to live somewhere. Those places are called homes. Today a persons home is almost the most important and most valuable single thing a person has. But this wasn’t always the case. Civilisations dating back far enough were predominantly nomadic. They didn’t live in one set place. They went wherever was most plentiful for food and water. Their home was wherever they were at that time and they were constantly moving so the concept of home was a fluid one.
Fast forward to today and most people would find the nomadic lifestyle quite unpleasant. We like our televisions and our beds and fridges and internet connections. We like to be close to schools and hospitals and restaurants. And most importantly our homes are usually our biggest assets. In Australia, the average net worth of an individual is $220,000 with most of that value being tied to the worth of their home and the equity they have in it net of debt. For the majority of people, it is the single most valuable thing that person will ever own in fact as in they will never own anything worth more than their house in their entire life.
But the price of a home fluctuates. Lots of people buy and sell homes. And when lots of people are buying and selling something, what that creates is a market. Suddenly the laws of economics start applying to homes. Supply and demand. Which means a home isn’t just somewhere to live anymore, it has become an asset which you can trade like stocks and invest in like a savings account. And as home prices have gone up and down, they’ve made people lots of money and lost people lots of money.
When people started making money buying and selling homes and market economics started applying to them, people stopped calling them homes. They started calling them property instead or real estate. There was this very subtle shift where people stopped buying homes primarily to live in themselves and more as a safe investment for their capital and as an asset that can generate growth and rent and make them even more money.
Today it is estimated that 1 in 3 properties is owned as an investment where the owner has no intention of living in it. There also exist large hedge funds and companies and trusts that pool investment capital with the primary goal to buy, sell and hold real estate by the hundreds or thousands of properties. Somewhere along the line homes stopped just being somewhere to live but became an asset to invest in.
This is because the returns from property started to become attractive. Capital follows returns. Wherever there seems a strong incentive to compound capital, it will go. This was an axiom taught to me in business school that I always liked. Because it implies that capital is pretty mindless, it chases wherever it can get the best returns so there’s no malice behind it. The capital is not trying to price out regular people from homes, it’s just going where it gets the best returns.
If something else performs better it’ll just go there. I sometimes think about this as an irrational fix for the housing crises, just make assets that perform way better than houses with a similar amount of risk and all the money will leave housing and go into whatever that is. It just hasn’t been invented yet. Until then real estate is just about the safest and best performing thing you can do and is why 99% of the millionaires in the world have made their money from property. I think it’s especially telling when wealthy business people after selling their business instead of pouring all their money back into business instead pour it into real estate.
This is kind of a good thing in disguise but doesn’t seem like it at face value. Because lots of capital is driving into homes as an asset class, it creates the incentive for builders and developers to create more homes to generate returns and profits. As populations grow, we need these builders and developers to build as many homes as they can and make money doing so. If they make money they’ll then build even more, ideally enough for everyone to buy.
Plus who is going to perform the act of building houses if not the builders? Society needs this function and they’re the only ones who can do it. But property developers are most often depicted in media as the evil corporate villain but I’d say, all bias disclaimed, that in fact they’re the good guys in the story. Creating houses needs lots of capital and take a very long time to build and society needs people who will create lots of houses.
So that eventually most people can buy one. So there’s a house for most of society at different price points along the curve. Society needs predictable and affordable shelter for people at attainable price points to function properly. We know what happens when the majority of people don’t have shelter, it creates social unrest, violence and revolutions. So property developers are an important function in society even though they seem like greedy villains.
In the past it used to only be aristocracy or monarchy that owned property but the profit motive behind markets created the purchasing demand that in turn let builders and developers safely borrow money to build and develop more houses to then sell to the public. Over many many decades this reduced the price of a house from only something that kings and queens could afford to buy to something most people will be able to afford to buy eventually in their lives.
Whenever people complain about how expensive housing is to buy you only have to look back in history and you’ll see that at least right now you can buy it. In the near past it was so expensive that nobody could buy a house, it was reserved for monarchy levels of wealth to afford. That’s also why historically speaking you would have a dozen people living in a 3 bedroom house and that was normal because that’s all they could afford.
So it sounds unintuitive but right now is actually some of the most affordable houses relative to historical standards. What people frequently compare house prices too though is the decades right after World War 2 where simultaneously governments spent fortunes building houses in abundance so soldiers had homes to come back to after fighting for their country. But also globally like 10% of the whole world died in that war. If you add up that another 10% of the world died in World War 1 and another 10% died in the Spanish influenza, just a few decades earlier. You have this crazy thing between 1910 and 1950 where 20% of the whole world dies.
That’s the main reason that house prices are cheap for the few decades after 1950 because a quarter of the people who need those houses cease to be alive and all the descendants who would have existed as the offspring of those people are also not born. It was very good for house prices that 1 in every 5 people died in that period of time. Talk about reducing demand from the housing market. That was a very dark joke but it illustrates an important point.
Without people you don’t need houses. If you remove people, you reduce house prices. I think that’s something to important to keep in the back of our minds. House price growth is a lagging indicator of our species flourishing. When we have expensive house prices, we are flourishing as people. It’s almost a good thing as an economic indicator because it means babies are being born and people are living a long time.
Whenever in history we have cheap housing it’s usually because something really dark and bad is happening to our species like a global war or pandemic. The act of creating housing and ascribing value to a house as an asset is fundamentally an optimistic one, it is the belief that the future is going to be better than the past. But how did we end up that way? Let’s find out. And to find out why property has value we need to go back in time.
Because the history of property is intertwined with the history of countries and cities which is intertwined with the history of people. Most countries have not always existed. They were created. Usually by a bigger country. Through colonisation. Or a war. Or a revolution. Or a number of circumstances that led to the creation of a nation. The first thing after the creation of any new city was settlers would arrive there. The primary way they arrived was by foot because they were nomadic. Eventually this became by boat and today this is primarily by plane. Here we go.
Cities
The earliest known city is Çatalhöyük, a settlement of some 10,000 people in southern Anatolia that existed from approximately 7100 BC to 5700 BC. Hunting, agriculture and animal domestication all played a role in the society of Çatalhöyük. This was the first time in recorded history where a large group of people decided to stop being nomadic and to establish a permanent shelter somewhere.
Why? It’s because this region of Anatolia had fertile soil, plenty of animals, a water source and most importantly, calm weather. They had all the makings of what a human society would need to flourish. The calm weather was required so as not to undo all of the progress they would make. This already tells the first lesson about property. Even before cities and housing existed, the location was a desirable place to live before people decided to move there. It wasn’t that people decided to live somewhere and then made that place habitable. The place was already habitable and people recognised that their lives would be made easier by existing there. Housing is perhaps the first ever tailwind that humanity has ever had. We pick a place to live where we think we’ll have the best and easiest life.
I can almost imagine a conversation between members of that ancient Mesopotamian tribe debating the merits of staying there or moving to a new location. And they came to the conclusion that this would be it for them. The other important thing about this city is that it was near a river. People need water to survive. And a common thread of the major cities in the world is they begin near a large water source. Even though the water isn’t drinkable necessarily by humans without boiling first, large bodies of water attract animals which early societies would hunt and domesticate for food. The other reason locating cities around rivers is important is because it enables trade by the time we as a species invent ships.
Early versions of ships were basically small canoes and were invented around 6,000BC, around the same time as our first cities are being created. Ships are about the most important invention in human prosperity because it facilitated trade. A ship naturally can carry large quantities of items up and down rivers. A hack we created as a society was creating all of our cities near rivers and creating ports that ships could dock in, so that essentially all cities were accessible by ships up and down the same rivers. This meant we could shuttle cargo from one city to another. This is a template that we still use as a society today where ships represent how the bulk of our commerce is transported globally. But instead of looking like small canoes, today they are large freighters carrying thousands of heavy containers.
That is why in the history of a lot of nations, cities developed around ports and rivers and oceans, to facilitate this trade. It is a sort of hedge as a species. If one part of the world would for example catch fire which would kill a grain farming crop, you could just buy those same grains from elsewhere and have it shipped over. Thus ensuring your population’s survival whereas before cities, that population would likely experience famine and perish. This is why cities became so important for the survival of humans. You can see a steep curve upwards in our species flourishing from the beginnings of the creation and growth of cities.
After cities were created, they would grow outwards. Because it is boxed in on one side by water, you obviously can’t build in that direction. So you build outwards away from the water and every single city follows that pattern. As more and more people arrived, the city would develop outwards further in proportion to this increase in people. Homes would be built to accommodate them and then they would rent the homes until they could afford to buy them. This phenomena plays out over thousands of years until eventually you have modern day major cities like New York and London and Sydney. London famously was started by the Romans in 40AD, about 2,000 years ago.
This is why almost universally major cities exist near oceans while desserts have relatively few cities. Because the way cities developed was around ocean ports to facilitate trade, where that trade happened becomes the epicentre of a brand new nations economy. The buying and selling. All of the trade associated with that port becomes the bedrock for economic prosperity for that city. Creating things in that location and then selling it elsewhere in the word.
If we now hold the mental model that cities begin near water and then grow outwards, you start to develop a historically accurate framework for how property values work. The land nearest to the water is the most valuable and as the city grows outwards, the further away you get from the water the worse the property value becomes. This still plays out today where water fronted property is the most valuable and property furthest from water is the least valuable. Water is the most important thing for our species survival and as a direct extension of that we create our cities near water. Since housing is shelter, proximity to water confers value to real estate. Your proximity to water is a direct causation to its value as an asset.
As these port cities grew more and more prosperous. They created better jobs and crafts. And more people wanted to live there. More people would move and so those cities would spread outwards at a faster rate as more people would move there. With suburbs being created around the city and the environment terraformed into suburban areas. Swamps and forests and empty bushes demolished and rebuilt to create houses and roads and suburbs. This would happen almost non stop until many many suburbs are created near major cities.
The prospect of living in a city is an enticing one versus the prospects of living rurally. The reason is with all the trade comes employment and security. With employment comes capital which allows you to buy better things, purchase medicine to heal illness and provide for your family. Fundamental human motivations. Just through the literal constraints of the physical world. If for example a shipment of meat and grain and medicine arrives into a city in 2,000 BC. That meat and grain is going to get sold first to all the local people living in the city, being a physical good that has to be transported.
What’s left over will then slowly make it’s way outward till eventually you get to the rural areas, by which point there may be nothing leftover to sell. So proximity to the city literally conferred better quality goods and services and higher probability of survival if you could get access to it. That’s why people en masse choose to move towards major cities. If you didn’t live close to a city, you’d be at the mercy of nature and what you could cultivate yourself.
You’d be rolling the gambit against the elements instead of the best that society itself had to offer. This still proves true today, the bulk of employment and commerce exists in major cities and people move there to participate in the best that society has to offer. The expansionary force of a high volume of people in a concentrated area buying from each other and businesses for hundreds of years creates large companies that themselves have to hire more and more people to meet the demand of their customers, who in turn shop from those same businesses.
As there are more people, so to comes all the business and service needs of people, things like medicine and education and clothing and so all of these businesses start and grow in these cities too. As technology become better and cities grow rapidly, governments realise that you couldn’t just have houses spread out without any consistency or standards. You needed to have important services connecting them. You need to have roads and water pipes and electricity and sewerage running to all of these houses. Or else the lives of the people living there would be worse off and it would wreck their health and there would be no order. These cities would turn to chaos if everyone could take up any place they wanted.
And so an ingenious concept was developed. A government would centrally plan how a city would develop and plan where all the roads and suburbs and land would go and be released. They would chart corridors of growth for a city to accommodate the influx of new people who’d move there for a better life. And then we, the people, would simply pay the government to run all of these things for us. We would pay the government a set amount of money each month to manage all of the water, electricity, telecommunications, sewerage, rubbish collection and other utilities for us. We called that taxes and we paid these taxes to the government to allow them to handle all of this for us.
Suddenly, homes no longer had to worry about all of that. If the person who owned the home just paid their taxes, they never had to worry about connecting their home to water and power ever again. They just paid for the amount they used and as cities started to grow ever larger Governments started to introduce other services they thought people needed. They started creating a police force in case there was violence and fights. A fire fighting group in case there were fires because if there was a fire, it would destroy many homes instead of just the one because of how close these houses and buildings are to each other.
But possibly most importantly, they created hospitals and medical service in case people got hurt and injured. Then as technology became better, they started introducing copper networks so people could make phone calls. And then building airports so people could travel and fly as airplanes were invented. And cables for internet connections. And bigger ports so larger goods could be bought and brought into the country. And as cars were invented, roads needed to be created and flattened to stop being for horses and carts but instead for these cars that would be shipped from overseas. And as trains were created, railway lines needed to be laid. And as cities became very big, public transport systems were needed to be built for people to more easily move around the city.
All the while increasing taxes slowly to pay for all of this. It still is an ingenious system. Whenever I hear people bemoaning government involvement in their daily lives, I like to think about this. How worse off my life would be if the government weren’t involved. Taxes can be a beautiful thing when applied correctly and if we don’t like how they are applied, there are elections where we can change who the government is. If we don’t like them or they’re wasting our tax money, we can try and get rid of them at the next election. Or you can just leave to a different country and live under their government instead.
There are many countries out there whose governments are corrupt and they don’t care about their people. In those places, homes may not have clean running water or adequate hygiene and sanitation. You will see in the data how worse off they are in the earnings per person and the life expectancy and death rates. The intrusion of an altruistic government into the lives of its people is one of the single biggest indicators of human prosperity. It is why people in Australia will live consistently to the average age of 85 but people in Nigeria will only live to an average age of 42 still in the 21st century. That difference is good government acting in the benefit and interest of its own people. That government is prosperous because of the development of its cities.
We’ve now done a bit of a time jump from many 1,000s BC to the last couple of hundred years. I read a book once about urban development in the 1500s and when the idea of government controlled irrigation was created, there was huge backlash. The public didn’t want a government to control their water and power and people didn’t want to pay taxes for this. It seems almost funny to think about it now. Seeing first hand what a great system it turned out to be despite the public complaints. But maybe the public just likes to complain about the government even when they’re doing a great job.
As people settled in places by the thousands and tens of thousands, they built cities which created trade which developed economies which made areas desirable. As a city became desirable to live in, so to does the housing of that city become desirable and so as a direct result of the flourishing of a city, the housing prices become expensive. There’s a reason that the most expensive real estate in the world is also in the most desirable or popular cities in the world and it’s as simple as it’s because people want to live there. It has shops and commerce and a lifestyle that people want so they’re prepared to bid up the price of the finite amount of space in that area.
This axiom explains why many cities have very expensive real estate. It’s as simple as for thousands of years people have been moving there. But the space itself is finite, you can’t physically create more land. Space can’t be created it can only be altered. You can take 1,000 square metres of ground and make it a 2 story house or a 10 story apartment building. Both will be able to house different numbers of people. But the original 1,000 square metres cannot suddenly become 3,000 square metres. The space doesn’t increase unless you build up.
Why did our cities feature dominant CBDs in the first place? As our economy transitioned from manufacturing towards knowledge work, office jobs made up an ever-growing share of the workforce. But why did these jobs cluster in the CBD? Why weren’t they spread out evenly across the city?
To some degree zoning practices are responsible but mostly it was the nature of these new office jobs that led to the clustering effect. A knowledge job benefits from being collocated with other knowledge jobs. While beneficial for employers, this led to a few problems for the workers. Workers commuted to and from the CBD at the same time and house prices near the CBD went up dramatically as workers were willing to pay for the privilege of a shorter commute.
Houses
We’ve now covered cities which is the first principle concept to understand before we can understand houses. Cities come first and once a city is established and growing, that becomes the forcing function for lots of houses to be built in and around that city as people move to it. There’s no point building houses in areas where there are no cities because there’s none of the economy and trade to support the living of large numbers of people.
Here’s something I’ve always thought was interesting, people move to a city in droves via their individual agency. Nothing is forcing them to do it. It’s literally people moving en masse of their own accord in search of a better life and better future for their family and children. A similar concept plays out in a micro way when a person buys a house. They purchase aspirationally with the view to bettering their own existence.
What is a house? It’s a word our species uses for the end product of taking natural materials and then creating shelter out of it. That shelter is where a person lives and everyone needs one of these house things to live their lives inside of. Primarily because humans need a safe place to cook food and sleep that is safe from the elements and danger. It’s why I like houses so much because it’s the most important single thing a person can own and they literally can’t survive without one. People will be fine without 99% of the products in their life but not their house, they need that.
For most of human history dating back thousands of years, houses were built with clay and mud as a binder. By the time you get to a couple thousand years ago we realized that timber and wood along with straw was a better material to build houses with. When you get to a thousand years ago we realised that bricks and stone was the better material to build houses with and we started doing that. In the last few hundred years we discovered how to make steel and concrete and those became the best materials because they were stronger and could support weight which allowed us to build up vertically.
Then in the last hundred years we brought timber and bricks back along with concrete and steel and those became the 4 predominant materials we build all houses out of now. And because we’ve figured out how to build vertically, we can take those 4 materials and build 50 storey skyscrapers with them. Why did we decide they were the best materials? A combination of cost, availability and flexibility. They’re materials that are cheap to find, globally available and are easy to cut and shape into whatever form you want your house to look like. But also good at protecting people from the weather and insulating them from extreme heat and cold.
We also discovered ways to put them together in ways that allowed the invention of other things like roof trusses made out of timber and steel that allowed high rise construction and us to build floors going upward. It’s funny to think that for most of human history we didn’t know how to build upwards and it’s only in the last few hundred years that we suddenly could build upwards and today we literally can build 50 storey skyscrapers. There are newspaper essays from the 1800s outlining a housing crisis because the writers couldn’t fathom a technology that would allow them to build up, so they thought they were running out of flat land in places like London and New York, islands surrounded by water with finite land.
The same essays were written again outlining a housing crisis in the 1900s when they couldn’t fathom a technology that could allow you to build up beyond 4 storeys. These same essays are being written now in the 2000s as well when we’re building 50 storey towers and often houses themselves go underground too in the form of a basement. I think every time we’re running out of space to build houses in, we’ll invent a technology that will unlock a whole bunch of more built space.
A large number of homes as a category becomes property or real estate to keep the semantics consistent. Creating large numbers of houses is property development. What property development is is the act of buying land and buying materials then hiring skilled labour to assemble those materials into the shape of a house that meets the demands of what people want out of their house. Then selling that house to the public who live in it. The styles of house and shapes are heavily susceptible to fashion and design trends. A good developer has to be in tune with what they believe people want.
How many bedrooms, how large the bedrooms should be, the kitchen size and dimensions and layout. How many bathrooms, the layout of the bathrooms and so on. This is reflected by demographics for example how many children people are having and what is socially acceptable and wanted. What people are prepared to buy is what gets built because the developers are responding to market wants. When people complain about what gets built they’re secretly complaining about themselves because they’re the buyers. The developers only build what buyers want to buy.
In Australia in the 1900s the most popular house type and design was a single storey 3 bedroom house with 1 bathroom that was 150 square metres. All the bedrooms would come off a large corridor that would go into a large living room that was connected to a large kitchen with an external brick and terrace facade. That was all the rage and if you put more bedrooms or bathrooms than that, you wouldn’t have buyers because they thought the house was too big for their needs. Sometimes the bathroom wasn’t even in the house, it was an outhouse and people would have to go outside to use it.
Preferences have now changed a lot where in the 2000s the most common house type and design is a 2 storey, 4 bedroom, 3 bathroom house that is 250sqm with an open plan kitchen, living and dining concept. The bedrooms are generally upstairs and all bedrooms have an ensuite that comes attached to it. There are generally multiple retreats to separate out the parents living room from the children’s one which is an adaptive concept to children having more devices and multiple televisions. So multiple people can watch different TV shows or play video games at the same time without being within hearing distance of each other. The facade is brick or render.
Some of the data that shows housing getting more expensive is just preference inflation where the houses are literally just getting larger. The most common house today is literally close to double the size of the most common house from the past. I wouldn’t be surprised if in another hundred years as multi generational living becomes more common if house sizes nearly double again as people want enough space for their parents as well as their kids all to live in the same house. People also try to buy houses close to where the things they want to do are. For kids that’s near schools, for adults that’s near restaurants and shopping centres. Centres of activity.
The act of building a house is an exercise in fixing the cost in time. You are purchasing land and the accumulation of materials and labour in the house in that given moment in time to remove it from price volatility and inflation. When people complain about house prices going up what is often actually happening is the city is growing around the house and the house isn’t changing at all. The land value is increasing and the cost to replace the house in the form of labour and materials is increasing. When you add both increases together, you have the generalised growth in the value of a house.
An interesting element of development is that the price is never the same. If you go to two different builders they’ll give you two very different prices, even for the same thing. This is because the price of raw materials and cost of labour changes daily and is effected by each builders supply chain. The price of iron and steel and concrete can change a few times a day in fact. Because these can change so rapidly, construction is an act of fixing costs in time and is why it’s always better to build or buy earlier. Because costs only ever go upwards, they never come downwards. This is because inflation is always increasing upward, it is hardly ever going backwards.
But how does a person get enough money to buy one of these horrifically expensive house things? They borrow it from a bank. A person will literally borrow their entire future of working life worth of income to purchase a house today. They will take from the future all the money they will ever earn in their whole life, via a bank loan, and bring it forward in time to today to transact on this house right now. That’s the level of optimism and capital required we are talking about when we discuss housing as a product. There is no other product in existence which costs a person everything they have and everything they can ever make to purchase it.
Development
So now we understand how a city works and how a house works. We understand why houses have value and how the closer you are to activity and water, essential building blocks of human flourishing, the more asset value a house has. We understand that the more vibrant a city is, the more people want to move there and thus the faster the value of house prices will grow. We understand that house prices are tied to our future as a species because they’re the most important single asset that a person has and they will spend a lifetime of money buying one to ensure their families shelter and future.
Now let’s understand the business of development because they’re the people who develop these house products that everyone is buying and living in. What a developer does is they try to buy the most valuable land they can afford to buy, purchase the most valuable materials they can afford and then create the largest home with the most up to date design trends and technology that people want to buy and can afford to buy. They put that all together and sell that home to the market, charging as much as they possibly can so as to make a profit so they can do this again.
This is why I think that development companies are fundamentally technology companies. Because they incorporate all of the up to date physical world technology to then create the most upto date home they can build. Housing companies are physical world technology companies but they’re so omnipresent that we don’t think of them as such. We often think of physical world businesses as not technology but infrastructure businesses.
Whatever it costs to sell the house minus what it cost to make it is their profit margin. But since a house takes years to design and build, the role of a developer is pricing the future today. But also being in touch with the design preferences and market wants of the future, today. Because you’re only going to deliver a product you start building today years in the future, you need to be in sync with that future and what your product will be worth then.
Because houses are a product whose end value is always in flux and you’re never 100% sure what it will be worth, some of this is educated guesswork. If you’re wrong you can lose a crazy amount of money because you’re delivering houses that are worth less than what you need to make a profit and there’s nothing you can do about it except crystalise those losses because you still have to pay off your bank loans.
The levers you can pull to change the cost of a house are the design which changes the construction cost, what you buy the land for and what you sell the house for. Those are the primary things that effect your margin and there are tricks to doing each of these. You can for example put all your bathrooms and kitchens next to each other or above each other, that minimises how many water access points you need and how much plumbing pipes you need, lowering costs. You can buy flat sites instead of sloped sites which reduces the amount of earthworks and concrete retaining walls you need.
If for example you can buy land that is worth X for less than X, that difference goes onto your margin or if you can buy land that will grow to being worth Z but you can buy it for less than Z and it grows faster than people think it will, that delta goes onto your margin. If you can build with volume and thus negotiate materials like bricks or timber or steel for cheaper than other people can buy bricks or timber or steel for, the delta goes onto your margin. If you can hire labour for less than the market can hire labour for, without reducing the overall quality of the house or introducing defects, becomes part of your margin.
Figuring out how to buy land for less than what it is worth or trying to identify land that will grow faster than people think it will grow is an exercise in being an investment company. Trying to speculate on future pricing today but if you get really good at it makes you feel sort of like a wizard where you can buy $2 of value in the world for $1, that extra $1 becomes this profit that seemingly materialised out of thin air. Sometimes this is as simple as taking advantage of someone else’s unfortunate circumstances like a divorce or bankruptcy.
Other times it’s as simple as coming to the market with your homework already done so you can be aggressive and offer all cash no finance 30 day settlements, a deal so good that the seller wants to take your offer over someone elses that needs it to be subject to finance. A personal favourite is making aggressive offers on sites that aren’t even on the market, becoming friends with all the local agents in a place you want to buy in so you hear about sites before they even come onto the market. You can even hire town planners to read multi thousand page government documents that are public to figure out where the growth corridors and planned upzonings are.
The public can do this too but nobody has the patience for reading 10,000 pages of dense boring government documents. In property markets, insider trading is allowed because it isn’t really insider trading, it’s public information that most of the public completely ignores. So a lot of being very good at this is knowing what to look for. You also need to know what to avoid, sites with big easements on them or sites next to a main road or with single storey neighbours with solar panels on their roofs or that have infrastructure like trees or power lines on the nature strip.
Land acquisition is a core skill in development and you can’t have a development business without that core competency. It’s also a skill that everyone thinks they’re good at but very few people are very good at it. The patience is the key, you might look at 100 good enough sites but only 1 of them is truly exceptional and will produce the kind of wizard like super profits you’re looking for to create a sustainable business. Personally I like north facing corner blocks for ease of access and maximising sunlight with mature trees and no power lines on the nature strip and rear easements.
The other skillset apart from the investing wizardry is cashflow management. A property development is an exercise in spending all the money you have and borrowing an ungodly amount of money and then spending all of it in a contained amount of time, usually 12 to 24 months, with no guarantee that you will make any of it back until you are 100% completed and can sell the finished development. You will never feel as broke as when you are nearing the end of a construction project that has major cost blowouts and is overbudget and you’re scrambling for funds.
This is a bad time and is difficult for your mental health and you should never make any big decisions in the tail end of a construction project because you will feel the pressure of for example spending $5 million dollars in 12 months. That’s with only 1 project, you might have multiple projects. That is an amount of spending that is difficult to comprehend and warps your comprehension of money and how the world works. But that’s the whole development industry. They’re all built this way. If you had to graph it it’s a steep diagonal downward line during the development that suddenly shoots vertically upward when you’re done and the equity materialises.
You have to balance the cashflow and not go broke, you need to get to completion at all costs because you haven’t materialised any equity until the development is finished. Managing that cashflow and spending is as important as acquiring land. The way development companies go broke is they don’t manage spending well or they buy the wrong block of land. So these are the two mistakes you have to avoid at all costs. It’s better to do a smaller project than run out of money midway through. If you run out of money halfway through a build, there is no one that will save you, no lender will take a mortgage or security over something half built.
This is why development companies are like 50% construction companies and 50% investment companies where the spending management and land acquisition is actually the most important pieces of the puzzle. If you don’t buy the right block of land or you run out of money, it doesn’t matter how good you are at building you can’t make any money. The real upside then comes from pairing the perfect land site with the perfect end construction product that the market wants to materialise an upswing of demand and purchases for what you’ve built. If you miss the mark on either side, you’ll be making something nobody wants.
My personal favourite way to do this is to look at land that is due for upzoning where you can buy 2 storey land that pretty quickly after buying it can get upzoned to 3 storeys. You get a free land upflift by doing that because often land prices take a while to move to respond to what you can now build on it. But actually land prices are a function of what the maximum end value of what you can build on it is. Land for example in the city that you can build a 50 storey building on is worth some function of a 50 storey building vs outer suburb land that you can build a 2 storey house on is worth a function of a 2 storey house.
I also have this dumb idea where I like to purchase nearby to someone spending a billion dollars. Often multiple people spending a billion dollars. I believe capital expenditure forcefully gentrifies an area and makes it more livable which makes it more desirable and therefore a better place for me to develop in. This can be massive government infrastructure projects, large shopping centre upgrades, big council park or sport facilities, one off singular developments like a high rise tower. I think that capital can waterfall and if a major project is being built somewhere that is injecting a billion dollars into a specific location, all the areas next door experience some of the uplift from the waterfall and you can buy around it.
Ideally you can do all of this at the same time. Buy a north facing corner block with mature trees nearby to good schools and public transport that is getting upzoned while also next to people spending billions of dollars but also to buy it off market before anyone realises any of that is happening so you get to materialise the uplift before the market realises. Then buy as many of those sites as you can afford because they’re basically unicorns. Never buy a site that isn’t a unicorn because you never have to transact.
Then on the building side you can create value out of thin air by making houses that everyone wants to own and live in. My personal favourite is building on the frontiers of technology, building a house that contains all the newest and best technology, things that no other house even has in it means buyers will pay more for my houses than they will pay for other houses. Because my houses have technology in it that is not even possible for other houses to have. Alongside focusing on quality and space and creating houses that scream quality with the thesis that buyers will pay more for and can sense quality when they see it.
This is how developers differentiate between themselves. Some will build lower quality but they can sell cheaply and rely on volume to lower their costs. Others build high quality that they can sell for higher prices so they can purchase higher quality but more expensive items and labour. The universe of labour is wide. Construction is a craft and the practitioners are artisanal craftsmen. The cost difference between the best carpenters and your average carpenters is akin to the cost difference between the best software engineers and average software engineers.
I think that land acquisition is where you want to try to lowball and acquire land for less than it’s worth but you never want to do this in construction because you’ll completely ruin a home by cutting corners. If for example you try to save money on a roof by buying a subpar roof that roof will leak water into the house forever and it will be so full of defects that it will scare away buyers forever. Even the people who do own that house, if it leaks on them they’ll be unhappy with your product and ruin your reputation as a house developer.
So being a high quality construction company is akin to paying top dollar for materials, paying top dollar for labour and then taking your time to build well. From Brad Pitt’s character in the movie F1, “Slow is smooth, smooth is fast.” That’s how high quality construction works. You want to take your time and get each individual component of a house right and built to a high quality standard but you want to line it up concurrently so you can deliver quickly. So each component of a house is getting the time and craftsmenship and artistry and attention it deserves. But by lining it up in succession, the build process runs smoothly and quickly.
People try to rush through construction because they don’t understand the artistry involved in high quality building. They think of tradespeople like factory workers or a sort of human robot doing repetitive tasks but miss that trades by definition is a craft and so it’s more akin to sculpting. Yes a sculpture requires repetitive actions but the end sculpture is a work of art. A house or a building is a collaborative art project with hundreds of such trades making their art together while working through and solving the 100s of problems that need to be solved on site.
Reading that you may have picked up on a problem of where do you find these artists and high quality trades? Here you have stumbled on probably the biggest problem of construction, finding and hiring the best people you can find. If you ever find a 10X tradesperson you have to engage them and build that relationship quickly. Thankfully this is easy to do, high quality tradespeople are used to being rushed, nickel and dimed and having their work dismissed by builders and taken for granted.
So you have only to do the opposite of this. Treat them and their work with respect, pay them above market and quickly and give them the time appropriate to complete their work. If you do that, trades will be loyal to you and produce excellent quality work. I have a rule in my business to pay trades quickly which by itself is surprising and creates loyalty because most trades are used to builders dragging out payments as long as possible. If their invoice says 90 days and you pay it in 48 hours and if they quoted you 7 days to complete the job and you gave them 14 days, that tradesperson will love you and do their best work for you. You have to give enough time for the kind of care and precision that a genius trade needs to think about the works they’re making.
Tradespeople are physical world craftsmen and they’re a type of artist but that artistry got lost in volume construction work. If you rush artists, they create crap work but that’s what volume builders do, they rush all their trades which produces houses that are fundamentally sick on the inside. It might look finished but behind those plaster walls are structural beams that don’t line up and holes that leak water and all sorts of defects that the person living in the home will have to deal with forever. You can premptively solve all of this by hiring artist trades and then giving them enough time to work properly and not rushing anyone.
The facets of construction like all things are speed, quality and cost. Normally you can only ever have 2 of them but I think a really excellent construction company can have all 3. You can build quickly to a high quality standard for a reasonable cost, it’s just all about managing it and doing it correctly and managing your expectations accordingly. Don’t try to build a house that needs 18 months of time in 12 months of time. Don’t rush art. That’s the mental model of a great construction company, it’s the same mental model of creating a company that produces great art. That’s the mindset to go into it with and that’s the mindset that will allow you to flourish. An investment and operational company that creates high quality art that are houses that people live in forever. But houses are better than art because they have high utility.
Make sure to focus on creating an end product that can sell for such a high amount because it’s such a unique product that even while paying top dollar for construction, the sale amount contains enough profit to absorb all that cost. But above all focus on quality and creating quality because that’s the only thing that people will get emotional and pay top dollar for. Because quality is the scarcest thing on the market and not enough people focus on it. Creating scarcity is the way to creating super profits because you’re the only person selling something that everyone wants. That’s the way to win in this business and create a successful development company.