A couple of weeks ago and for the second time in 12 months I travelled back to Rome, Florence and Sienna. In between engorging myself with kilograms of pasta, gallons of wine and litres of gelato, I did a little research and lots of contemplation. The oldest bank still in existence is Banca Monte dei Paschi di Siena, headquartered in Siena, which has been operating continuously since 1472 – but you probably already knew that. It wasn’t the first, that honour goes to a bank established by the Medici family in Florence in 1397.
For thousands of years prior we managed without banks. How did we survive?
All this history and contemplation in 40 degree summer heat made me very hungry so we stopped at a bar in the old town not very far from where I snapped this photo and I found myself contemplating a EUR20 note. The note itself is printed on a piece of paper as most bank notes are. The value of the paper and the ink combined would be a few cents. So why do I think it’s worth EUR20 (or around A$30)? It’s worth that much because we all believe it’s worth that much. At least that’s what the waitress who served us our drinks thought it was worth.
As my Parpadelle Maiale was being served I thought that in every country around the world the printing of bank notes is carefully controlled. They’re usually printed by a country’s central bank (RBA in Australia) or some trusted banks critical to the country’s economy. The notes are then distributed by the nation’s banks into the wider economy. This apparently is now considered old school…and it is.
I sipped my Vernaccia whilst waiting for the waitress to return. I began to extrapolate from the value of money to the value of assets in general. Like houses in Sydney.
By now the waitress was shaving some black truffles over my pasta and I began to think why is a house that was worth $500,000 five or six years ago worth $1.4 million in 2016 and now worth $1.1million? Actually I was really thinking why it only costs EUR2 to have black truffles over your food in Italy and probably 20 times that in Sydney but I digress.
The answer came to me as the waitress insisted I have red wine with the wild boar pasta…Because buyers (we) say it is. Something is only worth what someone else will pay for it. Anyway, it was too hot to be drinking red.
Of course, there are plenty of people who think it’s not worth that (I’m talking about property again now…please try and keep up). But it only takes one person to pay the asking price to determine the value of an asset. That is the ultimate test.
Right now, there are many buyers getting their hopes up about a crash in property prices. I have news for you, the crash (if it is a crash) is already underway. Indeed, it may have already happened. We won’t know for sure until the market plays itself out, the numbers start filtering in and makes fools of many predictors of house prices and economists.
There aren’t as many sellers as there were a year ago. Talking to local real estate agents it appears as though potential vendors have been scared off by the headlines as have potential buyers. Of course, those that can wait will wait. Which means that buyers have less choice but don’t have the pressure of making a quick bid. Many auctions are being well attended without a single bid being offered. This strategy is not a bad one for the buyer. Infuriating for the seller but that’s where we are now.
Here’s the real issue. The EUR20 note or any other bank note will not appreciate in value. In fact, the basket of goods it will buy in fifty years time will be far less than what it can purchase now – It’s cash. By then it will be worth exactly the same: EUR20. Other asset classes tend to appreciate in value over time (well, not most cars or cryptocurrency…but you know what I mean). If you look at the equity and property markets you would’ve done very well had you invested a few thousand dollars in either back in 1968. That’s why people invest.
Every few years more and more people form a profound mistrust of the equity markets – usually around the same time as an equity market crash – and pour their money into bricks and mortar. When you ask them why, they usually provide one or both of two answers. I can’t touch shares (they’re intangible) and/or I don’t understand shares.
One property investor told me this: “Every 7 years or so Sydney property prices double. The share market hasn’t done that in quite a long time.”
While I think the doubling of Sydney property prices may be at an end (for now at least) you can understand (with that kind of sentiment) why the property market behaves the way it does. Like the EUR20 note it’s all about perception. If we all didn’t believe the lie it just wouldn’t work.
At each meal I would giggle when I got a restaurant bill in Italy. It is just ridiculously cheap when compared to Sydney and especially when you factor in the quality of the food. It makes up for all the thieves and touts who are continually trying to part you with cash at every turn.
As I sipped on another glass of Vernaccia with my sons, our driver appeared to take us to Chianti for a wine tasting. I was way ahead of him.
C’mon, it’s Italy.