The Biggest Lie We're Told About About Land - Mike Bird

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1:04Like a good neighbor, State Farm is there. Prices are based on rating plans that vary by state. Coverage options are selected by the customer. Availability, amount of discounts and savings, and eligibility vary by state. Governor DeSantis, the governor of Florida, he says you're always renting the land from the government. And people think of it as ownership, but they can't stay on that land unless they're paying somebody something to stay on the land. So you're always a renter in a weird way. Do I have that right? I always try to think of this as contrasting land to a business. So imagine you have a settler arriving in Manhattan in the 17th century and staking out a piece of land for themselves.

1:40And the local government agrees that that land belongs to Mr. Smith. He could have sat on that land and passed it down from generation to generation. Now, it doesn't require an enormous amount of innovation to keep the sort of the value of that land propped up. It's valuable because there's a lot of economic activity happening around it. If you sort of compare that to a company, you have to innovate as a company constantly. And if you stand still for a minute, it can go badly very quickly. And so the reason I think that contributes to wealth inequality and particularly sort of unmerited wealth inequality is that when you look at very, very wealthy entrepreneurs, they've contributed something.

2:17And if they didn't innovate and they weren't entrepreneurial, they wouldn't manage to stay wealthy. I think that's not true with land and real estate. I think it's a very different form of wealth inequality, a much less merited one. It's got fewer sort of social benefits. Welcome to Open Book. I am your host, Anthony Scaramucci. Joining us today is Mike Bird. Look at this amazing book cover. The title of the book is A Land Trap, A New History of the World's Oldest Asset. And of course, Michael is the Wall Street editor for The Economist. Well, first off, welcome to the show. Before we get into Land Trap, which is a great book, and I appreciate you writing it and sending it to me, tell us about your background.

2:54What drew you to this? Why focus on this role of land in the global economy? Thanks very much for having me. I suppose the very first starting point for me would be I grew up in the UK. I grew up in Northern England at a time when house prices were a big part of the national conversation you had the the uk housing boom really the mirror of the u.s one happening uh when i was a kid the uk mike what part of the uk leeds nice okay so yeah uh and and leeds i i remember in 2007 seeing people queuing up outside of northern rock which was the the first sort of major u.k bank to collapse uh and and then i moved to london after university house prices by this point going through the roof again so i became very interested in that but it wasn't until i moved to hong kong in 2018 that i became particularly interested in in land rather than just housing hong kong has a fascinating unique relationship with land um the government owns the land leases it out to people apartment Land prices are extraordinarily high.

4:05They put, you know, London and New York in the shade. I suppose that was the very root of it, that experience in Hong Kong. But, you know, it's been a big part of my life in general, these huge stories about land and real estate. One thing about land and Governor DeSantis, the governor of Florida has said, and I think it's an interesting thing. And I own some land. I have a house out on Long Island. I have to pay property taxes. He says you're always renting the land from the government. People think of it as ownership. but they can't stay on that land unless they're paying somebody something to stay on the land.

4:37So you're always a renter in a weird way. Do I have that right? You more or less make a case for that in the book. So good element of truth to that. And I think the answer is whether you think that's a good thing or a bad thing, right? That's part of the conversation here. I think in the US, there's a unique attachment to land because of the history of the country. The idea that, you know, it's very much yours. There's no sort of social element to this. You know, it's your castle to some degree. It's very deep in the U.S. experience. U.S. also has very, very high property taxes by the standards of the rich world.

5:12You know, you talk about combined local, state, federal property taxes, I think, make up about 10 percent of U.S. overall government revenue. It's higher than anywhere else in the rich world relative to the rest of the take. So I do think there's an interesting relationship that property is taxed quite highly in the U.S. it's also got this sort of very meaningful close relationship i'm fascinated by this sort of property tax revolt happening you know not just in florida but in a lot of different states there's a push to increase uh the the sort of threshold for people paying property tax to exempt more people from in some places to abolish it entirely i do think it goes to yeah a special relationship that americans have with land it's not so much the case i think in in europe in the uk because maybe they're older countries.

6:01The UK has a leasehold system for some property and certainly has in the past, which is very different and sort of implies that you don't own property. I'm going to stop you there for a second, Mike, because we have a lot of young listeners, thank God. And so when you say leasehold system, that means there's a ground lease, right? And that somebody owns the land and they may issue a 99-year ground lease, a 50-year ground lease. and that gives you the right to sit on top of the land. You pay them something for it, of course, but then you sit on top of the land and you have your ownership perspective there.

6:33Is that correct? That is absolutely right. You are buying something for it. It's often 99 years, sometimes 75. There are land leases out there that are hundreds of years, some in Hong Kong that are 999 years long. So the idea is that you don't own it forever. This is a very good way if you are a government, for example, that owns the land to make money from the land on a repeated basis this is or used to be very common in the uk it's less common today it still exists though um and exists particularly for apartment buildings in hong kong and singapore picking up from the british model this is the overwhelming sort of common system there's very little freehold land obviously in america flip side of that lease holders is basically sort of bordering on non-existent this is something that i i love talking to people in the U.S.

7:21about because I do think it's so alien to them. So when I read the book, and I think of property rights, I feel like property rights are sacrosanct in the U.K. and sacrosanct in the U.S. If you own the property, people can't take it away from you. But flip side, as you're pointing out in the book, there's like a, I don't know how to describe it, it's at the cornerstone of geopolitics property. And so property is used by governments in somewhat of a manipulative way in terms of social engineering and design, et cetera. And you taught me that, frankly. I didn't really see it before I read your book.

8:02So explain that to us. Sure. So for a very long period of human history, probably most of recorded history, land basically gets its value from from agriculture right a bit of mining bit of military use but mostly it's what you can grow out of the ground determines uh who's powerful and who's not if you own that um and it's owned by uh elites aristocrats you look at somewhere like uh the uk you look at most of europe you look at most of asia and those aristocrats have some sort of relationship as an intermediary between what was usually a very weak central government maybe a king but not with a huge expanse of power and the peasantry that the these landlords very large scale landlords they owed some things to you know some sort of extremely primitive welfare systems but they also conscripted people those people worked on the land and owed a certain amount of what they made so the people who owned the land in this period were extraordinarily powerful figures this is the thing that the u.s never had right and lacks through its history and i think that's why it's most interesting to me in the u.s you had colonists arriving from places like england where land ownership is extraordinarily concentrated right only a few aristocratic elites own land and they arrive in a place where in the 17th century onwards for you know a couple of hundred years it's quite common for a very large portion of people to own land and the u.s is sort of alien in this experience and it's really interesting now since the sort of advent of the modern world we've had huge agglomeration and urbanization land has become as you mentioned with the property tax side of things a really really useful way for governments to to raise money and sometimes it's been the source of you know huge windfalls for people who are very lucky in owning land in the right place i do personally think that land property rights and land i think is a little bit different to property rights and things like business.

10:06There's lots of interesting examples of where people have done well and poorly in this that I try to go into in the book, but I do think those things are a little bit different from one another. The holidays are all about connection, not stuff. That's why I'm gifting Aura Frames this year, a simple way to keep the people I love surrounded by the memories we've made together. My family holiday tradition is getting all the kids and the entire family together to celebrate. Pure, beautiful chaos. We get all the kids, and I mean all of them, cousins included, plus aunts, uncles, grandparents, everyone crammed into one house.

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11:15You can't wrap togetherness, but you can frame it for a limited time. Save on the perfect gift by visiting AuraFrames.com to get$35 off AuraFrames best-selling Carver Matt Frames, named number one by Wirecutter, by using promo code OPENBOOK at checkout. That's A-U-R-A frames.com. Promo code OPENBOOK. This deal is exclusive to listeners and frames do sell out fast. So order yours now. Get it in time for the holidays. Support the show by mentioning us at checkout. Terms and conditions apply. I think that the way we have historically held land, owned land, has contributed to income inequality. And if so, how so?

11:59I think it contributes enormously, especially to wealth inequality. And I think to grasp that from my perspective, you have to understand why land is different to other assets. So I always try to think of this as contrasting land to a business. So imagine you have a settler arriving in Manhattan, what was to be Manhattan, in the 17th century and staking out a piece of land for themselves. And the local government agrees that that land belongs to Mr. Smith. He could have sat on that land and passed it down from generation to generation. Now, it doesn't require an enormous amount of innovation to keep the sort of the value of that land propped up.

12:41it's valuable because there's a lot of economic activity happening around it as new york absolutely explodes and you know size and all the economic activity there if you sort of compare that to a company you have to innovate as a company constantly endlessly you have to find new customers you have to make new products you have to go into new lines of business you have to be constantly thinking about these things and if you stand still for a minute then it can go badly very quickly we've seen this with tech company after tech company, you know, you fall behind the curve and you're done. And so the reason I think that contributes to wealth inequality and particularly sort of unmerited wealth inequality is that when you look at very, very wealthy entrepreneurs, people who've been very successful in business, they've contributed something, right?

13:30And if they didn't innovate and they weren't entrepreneurial, they wouldn't manage to keep the place that they have in the stack. They wouldn't manage to stay wealthy. I think that's not true with land and real estate. I think it's a very different form of wealth inequality, a much less merited one. It's got fewer sort of social benefits. So the land trap, I mean, I feel like this is, could refer to other things, but it really does refer to the real estate crisis in China. So what does China reveal about the risk of tying an entire national economy to land? so in in the shortest terms i guess the land trap is once land becomes a really important part of your national wealth you are at huge risk whether land prices go up or go down uh when they go up you see exactly what i was just talking about that sort of unmerited inequality rising when they go down because the financial system is so connected with land because banks are so levered to land because so many people have mortgages you can see financial crises come quite quickly we saw this in 2008 we've seen it dozens and dozens of times through u.s and european history in japan in the 1980s china today is the most interesting current example i think and what has happened is over the last 30 years or so chinese local governments have been selling land they adopted the system from hong kong that i talked about a little bit earlier they've been leasing land they're you know enormous leaseholders sorry lease sellers they've been leasing land and basically at higher and higher prices it has been massively in the interest of these Chinese local governments that land prices go up as much as possible to fund themselves and to fund the massive expansion of their cities that's been an extremely powerful tool it's not always been a bad tool at all but it has left China with this extraordinary situation where both real estate is dramatically overbuilt in some places that people don't really want to live.

15:29One estimate about one in five Chinese properties is vacant because people have just been buying second and third homes, hoping for capital appreciation. At the same time, land is extraordinarily expensive in large parts of China. You see apartments that sell for 20 and 30 times an average income in some of the biggest cities in China. that's you know in contrast like maybe 10 in new york or london is a sort of normal very expensive city level so china has put itself in a position where everything is levered to land prices and if land prices fall you get a situation like the one you've had in the past few years where chinese consumption has been incredibly weak chinese youth unemployment has gone up the economy has not been strong but if you let the land prices keep going up you get that sort of unmerited wealth inequality And you have this problem of how could a young person possibly hope to buy even a fairly modest apartment in one of these cities if it's 30 times an average annual income?

16:30Is there a land crisis or a property crisis in China going on right now? Absolutely. So about five years ago, the Chinese government attempted to end this sort of relentless cycle of increasing land and housing prices. and the way they did that was by going after the real estate developers that sort of enabled it so some people will remember hearing stories about evergrande crazy chinese real estate development firm that was incredibly heavily indebted and needed to expand very very rapidly just to stay ahead of its interest payments basically the chinese government came for all these real estate developers and they halted their ability to refinance their loans they halted their ability to borrow more um and basically it's crushed the housing market the housing market in china has been to some degree or another in a deep freeze ever since sales have collapsed uh in some of the sort of bubbliest areas house prices have gone down quite a bit uh there were a lot of buyers of housing in china that pre-bought their homes it's not an unusual thing internationally it does happen uh you know basically you pay for your home ahead of receiving it.

17:44Now, usually in most of the world, that goes into an escrow account and the developer is forced to build the property with that money. In China, large parts of China, at least, escrow doesn't really exist as a system or certainly didn't five years ago. You had real estate developers taking the pre-sales money from one buyer and building something they promised to build for someone else five years ago. So you've had this extraordinary blow up. It's sort of frozen in that aspect at the moment. And the reason for that is that China's financial system is still so government oriented that they've managed to sort of preserve things where they are.

18:18It hasn't been a full blown housing crisis. It hasn't been a crash sort of 2008 style. But the result of that is that they're still dealing with it. There is no resolution to this. And I think for years to come, they're going to be suffering really from the results of not being able to resolve this. So be my national security advisor for a moment. And I sit with you and I say, so how wary should I be about the economy in China? Is there a trap door in that economy where there could be so much credit pressure, so much banking pressure from the property system that the place unexpectedly implodes and that some of their numbers are artificially stimulated by the government?

18:59Right. So I think the way I always think about China is that's the question I've always had. I used to work in Hong Kong and I used to cover finance there and I wrote about Chinese banks and property companies. And that was always the question that I got. You know, when's the bubble pop? We all agree it's all inflated by government credit and, you know, state-owned banks pumping things up. When does it pop? And the answer is that's a capitalist way of thinking about how financial systems work. because they do that in Western economies, in relatively market-oriented financial systems. China's financial system is more market-oriented than it used to be, but it's still incredibly state-controlled.

19:42So if they want to retain things, if they want to sort of hold things steady, they can do that to a degree, and they've shown that in the last five years. But that, I think, comes at a huge cost, maybe even a bigger cost, which is productivity. if you have credit allocation if you have lending and borrowing that is so distorted by this one preferred sector so much money has gone into such waste right when we talk about 20 of chinese homes being vacant or any number in that region we're talking about you know an ocean of copper and steel and concrete that has gone into building places that weren't necessary to build you can see this in the productivity data when it comes to chinese investment the return on that investment is coming down, I would say, much more rapidly than you would expect for a country that is still on a per capita basis meant to be developing.

20:32It's still not nearly as rich as a European country, let alone the US, on a per capita basis. So I think that's the place to look for it. It's the feeding through. It's the slowing down of growth. It's the sort of stagnation rather than the big blow up. Would you worry? Because it would cause a contagion to the global economy and it would it would really be devastating absolutely and i think you've already seen what to be worried about right you've seen the chinese trade surplus go up quite sharply in the past few years that's not unrelated to what we're talking about now um so the link between the two is that chinese households aren't consuming as much as they would do because they're worried about their real estate investments as anyone would be as happened in the u.s after 2008 and at the same time the government is desperate to do something to prop up economic activity having done so much damage to the real estate by the way by the way we do it too through fanny and freddie mac and these different things that we do to subsidize mortgages and the mortgage tax deduction and all that other stuff so i'm not i'm not picking on one system versus the other i'm just i'm just trying to understand it but let's let's continue in the role playing mike on the national security front so uh i've read your book and i know that uh land shapes geopolitics but there's people in the room with us now that haven't read your book so how does land shape geopolitics mike well i think it's precisely in this way so you've seen the rise in uh the trade surplus in china You've seen Chinese banks aggressively directing credit towards the manufacturing sector.

22:17This has been a deliberate effort to boost manufacturing, to boost exports. And the way in which that's reflected in geopolitics is you can see the American reaction to this. It's extraordinarily similar, in fact, to what happened in Japan in the 1980s. The Japanese relationship with the US, you had these two things happening at once in Japan as well. You had the real estate bubble inflating and also huge tension with the U.S. over exports and over the country's trade surplus. I think that's the main way it reflects itself. And actually, this isn't just China and the U.S. either. You see a lot of Asian countries now where their trade deficit with China has gone through the roof.

23:00You go to Southeast Asia, the trade relationships are extremely unbalanced and it generates the sort of friction that we see now in trade. So I think that's one of the biggest areas where it affects geopolitics. I think to some extent it affects the world in general, just because if you're going to have these sort of land related financial crises, you saw it in the US after 2008, there's the risk of undermining your country's sort of importance on the world stage. Again, Japan, a great example of this in that the Japanese bubble burst right at the beginning of the 1990s. And Japan went from a country that people used to discuss as a country that would be potentially a sort of rival to the United States for, you know, geopolitical supremacy.

23:44That's now a sort of laugh line. Nobody could possibly imagine that being the case. Nobody discusses Japan even in the same sentence as the U.S. and China when it comes to geopolitics. So land can be enormously important to those things. Right now, I think it's mostly because it's driving that trade friction. I'm worried or I'm not worried? You tell me. Should I be worried? I think you should be worried. It depends how you think of it. I'd be interested to know. It depends. If I was a real sort of China bear, if I wanted to see the Chinese economy perform poorly, then I think it's probably not a reason to worry.

24:19It's the opposite in that this is a huge unresolved. The biggest single, in my view, challenge for the Chinese economy is this. And I think if I really wanted China not to succeed, that would be a point of reassurance to me rather than something to worry about. I would worry about it because I think it's destabilizing. I think you don't want to see countries go into sort of stagnant periods because the politics around stagnant periods are very bad. I think that could actually make relations between the US and China worse. I think that's probably unproductive. so it depends what angle you're coming from on this from a national security perspective you could spin it one of two ways one is that the land crisis weakens china to some degree right you could say the chinese economy is weaker that's good or you could look at it from the other direction which is that governments that are suffering economic stagnation at home look for conflicts or enemies abroad to malign, to prop up political support.

25:21So it could go either way. But if you're really, if you were content to see the Chinese economy decline, I think this would be overall a good thing. I think it's a super important book and it's a super important idea. And I appreciate you presenting it to me on Open Book. I've got, I don't know if you've listened to any of our podcasts, but what we do is we go through your book. We take five words uh and we're at the end of the podcast so i need you to give me a one or two sentence punchy i'm going to say a word from your book you tell me what you think okay you ready go on stability stability so what do i think just a line on what i think of stability yeah oh it's from your book basically when you say more or less i guess thinking price stability more than anything else.

26:13I'd say stability should be an overall goal when it comes to land. You've got to worry when the land institutions are fundamentally changing in a way that destabilizes things, whether that's prices rapidly going up or prices going down. Listen, no question, especially if you're, as you point out in the book, a lot of the banking system is tied to land. The collateral that they've used to prop up these banks and use for lending is land. What about inequality? If I say the word inequality, you say what? I think I sometimes have a view on inequality that makes everyone upset. I don't mind inequality if it's based on innovation, if it's based on entrepreneurship, if it's directing resources to people who are using them well.

27:00I'm not against inequality. It's inequality that's based on randomness, on luck, on who your grandparents were. That doesn't sit right with me. And I think that's mostly engendered by land and real estate. I think it's actually very rare to see that in business on a really large scale. I say the word asset. You say what? Immediately, you say asset. I say liability. I always think of this from the land perspective because when you see those land assets rise in value, when you see real estate rise in value, there is almost always someone trying to peg some sort of credit to that. There is almost always the risk there in every boom.

27:45That's what I think of immediately. What about markets? Markets, I think of, I mean, I work for The Economist, overwhelmingly positively. the first thing that comes to mind with markets is, yeah, productive exchange, supply and demand. Supply and demand are a thing that doesn't always work very well with land. It's very difficult to increase the volume of it. So markets, I think of, yeah, very, very positively. But you want it to be liquid, right? I mean, ultimately, right? You want the markets to be liquid, right? I think that's another big lesson. You know what I mean? Absolutely. Yeah. And I think especially, you know, capital markets, you want them to be as productive as possible.

28:28One of the big problems in somewhere like China is the capital markets don't function very well. This is why people lean on land. Last word, and I'm going to give you the last word. I say the word land. Trap. It's got to be trap. I think it's a system. It's an asset that causes all sorts of problems when it's not managed well. I hope I've conveyed that in the book. and I hope you enjoyed it. Listen, I love the book. The book was a little scary. I'm not going to say otherwise because it made me think about land very differently. You know, the more prosaic way, I got to buy a house, I'm going to put land, I own it, I'm going to give it to my kids.

29:07But you write about the intricacies of it and you write about the governmental policies that influences behavior and you write about that proverbial trap. And so that's why I think the book is such an important read. The title of the book is The Land Trap and it is a new history of the world's oldest asset. It is by Mike Bird and I love reading it. I want people to go out and buy it and thank you for joining us today on Open Book, Mike. Thank you very much for having me. It's been a pleasure.