WHAT HAPPENED TO PROPERTY DURING THE GFC? Most people know US property prices crashed during the Global Financial Crisis, but very few understand what actually happened beneath the surface. When you buy a property, you're buying two things. The land and the dwelling sitting on it. What's fascinating is how the relationship between these two changes throughout major property cycles. Research published by the Federal Reserve Bank of St. Louis examined US residential land and building values from 1975 to 2012. In 1998, land accounted for approximately 30% of total residential property values. But by late 2005, that ratio had climbed to a staggering 48.5%! Almost HALF the value of residential property was now attributed to the land. So what happened when the property cycle reversed? Between 2006 and 2012: 🏡 Land values COLLAPSED approximately 69% 🏗️ Aggregate building values actually ROSE approximately 3% 📉 Total residential property values fell approximately 31% Following the crash, the land-to-property value ratio had fallen all the way back to 21.3%. From almost 50% to just over 20%! The buildings themselves hadn't experienced the same collapse in aggregate value. It was the land that absorbed most of the correction. And this is why understanding property cycles is so important. Did it crash or did it just return to the historical average? Land can become extremely expensive during a boom, particularly when cheap credit, speculation and strong buyer demand push valuations higher. But when those conditions reverse, land values can experience enormous corrections. It raises a very interesting question. What proportion of Australian property values today is actually land, and how does that compare with historical levels? Because understanding what happened in previous property cycles might tell us far more than simply looking at house prices. I'll share tomorrow.