Is property the best store of generational wealth?

Posted by Gavin Chau

With the passing of Queen Elizabeth II. King Charles III inherited his mother’s wealth worth a combined £17billion. The vast majority of this wealth has been passed down over nearly 1000 years rather than being created by the current generation. It consists almost entirely of centuries-long ownership of land and property across the country and even the seabed around the British Isles. With the ownership dating back to at least 1066 during the Norman conquest of Britain.

In the UK’s former colony of America, the new elites have been doing something similar with Bill Gates, Jeff Bezos, Ray Dalio, Ted Turner, and the like quietly buying up huge swathes of farmland. It’s not just billionaires that are doing it Wall Street has been buying up land as well. A lot of this is to do with food security as the world increasingly moves away from agrarian societies and towards urbanisation but land has also been an excellent hedge against monetary debasement and inflation.

The accumulation of land as a form of generational wealth has also been reflected in pop culture with shows such as Yellowstone. At its core, Yellowstone is really about a land battle. It’s a western set in the modern day about a 150-year-old ranching dynasty in Montana with the Patriarch John Dutton fighting to retain control of one of the largest ranches in America. The ranch is land passed down from six generations of Dutton’s but is now sought after by developers and the neighboring Native Americans wanting to settle a historical score.

Let’s have a look at some other assets as a store of generational wealth.

Stocks can be a great way to generate wealth, but it is hard to think of many companies that are 100 years old and still relevant today. Businesses live in a world of constant innovation and change, with the top 10 companies in the world changing over time. The old guard of banking and finance has recently given way to tech stocks such as Amazon, Apple, and Google. Holding onto a portfolio of stocks without at least some form of knowledge and management is likely to result in declining returns.

Precious metals – in particular, gold has a 5000-year history as a monetary metal and store of value. This is increasingly being bought up by the sovereign wealth funds India, China, and Russia as trust in the USD declines. While effectively remaining flat over the last ten years, gold is a legitimate store of wealth with a high stock-to-flow ratio. In other words, the global supply of gold inflates relatively slowly at around 2% compared to around 15% for fiat currency. The only issue is that it doesn’t generate any retirement income and may be of limited use for individuals. You also run into problems with storage and verification should you ever need to use it for an emergency.

The problem with the fiat currency system is that money is no longer a store of wealth. The ability of the central bankers to print endless amounts erodes its value of it over time. This is clear in America, where the economy currently makes up around 25% of the global GDP. This has fallen from 40% in 1960. But US dollars are still used in 80% of global trade. Given a long enough timeline, global reserve currencies have always failed, lasting, on average, about 100 years. The USD has been the reserve currency for around 80 years old now and getting long in the tooth.

In Australia, the money supply has been increasing at around 9.5% per annum. If we were to divide stocks, gold, or property by M3, it would surprise most to find that the value of all these hasn’t grown over the long term. The one exception is property when purchased with leverage – the use of leverage has been one of the easiest ways to circumvent this problem. Well-selected property has traditionally been and continues to be one of the best ways for Australians to build wealth.

Posted by Gavin Chau, on 25th Oct 2022