Here’s an important idea if you buy or sell luxury goods: The “only-the-best” economy. Just got back from a week in Aspen, Colorado, which may be the most expensive ski resort in the country. (A couple of years ago Forbes Magazine had a list of the most expensive ski homes in the country, and it was heavily dominated by Aspen.) Naturally, the talk in the bar turned to real estate prices, and how “absurdly” high they were in Aspen.
But whether Aspen prices are absurd depends on the future. If you buy a house or a condo today and put it in the rental market, your cash return will be tiny. (Tiny if you’re all equity; negative if you have to finance your purchase.) The point of buying is betting on the future, not current income.
For a top-drawer location in a top-drawer resort town, the price outlook depends on the income at the highest level of the income distribution. That’s because the top properties are far, far overpriced compared to next-to-top properties. Imagine this: you have been visiting a second-tier location in a second-tier resort. Your overall experience would be maybe 10 percent better at a top location at the top resort. How much more will you pay for a slightly better experience?
Before answering the question, suppose that you’ve just made $100 million as a Web 2.0 entrepreneur or as a corporate CEO. You’ve got far more money than you’ll ever spend yourself, and your children already have far more money than you think is good for them. So anything you have left over when you die will go to charity. Now answer the question: how much more will you pay for a slightly better experience? Well, whatever it takes. So million-dollar homes become ten-million-dollar homes.
How long will this trend continue? It depends on how long rapid income growth at the top of the income distribution continues. I’ll be talking about this in the July issue of the Businomics Audio Magazine, when I discuss the business implications of the change in income distribution.