20181106 What property will be most affected during a downturn? Part 1

20181106 (Tue)

What property will be most affected during a downturn? Part 1.

Again this refer to my encounter in a road show. The learned salesperson claimed that when there is downturn, the effect will be the reverse of an explosion. I was curious, what is the reverse of an explosion?

Imagine when a bomb explodes, it radiates out. So, what he meant was during property bubble burst, it converges to the central business district (CBD). The worst hit will be the fringes and the most preserved is the core. This is the reverse of an explosion. Is that true?

I guess that is partly true. The CBD is always the centre of the business activities. No matter what, the properties in city center is concentrated with commercial activities, financial centers and government offices. Using Ricardo’s Rent Theory perfected by Thunen and later developed further by Alonso as Centric Land Use Theory*, it is the distance away from the CBD that would decide on land value as transportation will limit agricultural produce to be sold. The further away from CBD, the less viable is the agriculture produce because transportation will cost more and produce cannot reach CBD to be sold in time.

Similarly, that is the basis of why CBD is packed with people and land cost is high. People converge to do business, and that will mean space is limited. Higher demand for space will result in land cost to shoot up. BUT, that is for BUSINESS! NOT for residential!

So, if you hear the sales pitch that condo in the middle of the city would have the best capital preservation. Well, that might not be entirely true. People refer to this phenomenon as reverse of Ricardo’s Bid Rent Theory for residential use. Rich housing estates are located outside the CBD. Why? This is because people prefer peace and be able to sleep in a quiet environment. Nobody in the right mind would want to stay in a noisy city when they can have the serene of the countryside. That is why you see big bungalows with golf course located outside the city, not within the city.

So, don’t be fooled by the sales pitch that it is preservation of luxury condo in the middle of a city!


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