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Land Price Bubble: Will You be Hurt? My friend, a target for a con man... When land is not really land... Anatomy of "land", wholesale to retail... How low will land prices fall? When will it happen (tomorrow's headline)? One last thing (you are warned)... My friend, a target for a con man: A friend of mine just finished explaining that he was considering "investing" $500 U.S. with a group to buy a mainland sim at auction from Linden Labs for resale. He seemed like a smart guy, so when he told me I was shocked. There are a few problems here, but the first and most obvious is that there is no contract enforcement in Second Life -- would you in Real Life hand $500 U.S. to a stranger whose face you will never see and whose name you will never know? But there is also another problem: land prices are out of control at this time (January 28, 2007), and will crash no question; I will explain why. The only questions really are: will the burst be like a bubble popping, or will it be a slow leak like a tire on an old car. Hissssss. You hear that? That is the sound of money being sucked out of people in Second Life. So you may think: "but its land, it has intrinsic value -- land does not ever go down in price!" Listen up folks: it is not "land" in the real-life sense. It is a server using about $2500 worth of hardware and running Linux. I have lived in Los Angeles for the past 10 years, and have watched real-estate increase here by several fold. Why wouldn't land in Second Life be the same? Well... In Second Life, Linden Labs can add as much land as they like any time they like by spending $2500 for a new server PC (which in fact makes 4 sims -- dual core machines). In Los Angeles, there is only the land that naturally exists and cannot be added to (ok maybe the Dutch can make land, but no one else does). In fact, Linden Labs makes land all the time: today, as I write this, Linden Labs has 8 new mainland sims whose auction will conclude in a 24 hour period. The top bid is $4052 as we speak, and the range seems to be between $3200 and $4800 per sim (using the completed auctions as a guide). In the past, $1200 US was normal for a completed auction of a sim. So unlike Real Life, Linden Labs makes land anytime they want, and do at an enormous rate. Land speculators seem to have a bottomless appetite for it, spending about $28,000 U.S. per day on it! Anatomy of "land", wholesale to retail: Let's look at the economics of Pudding Hill, a recently purchased sim:
Of course the net margin might be higher reflecting a higher charge for land near water etc., and this is just an approximation based on a reasonable Lindex limit order and so on. For fun I will look at more sims and refine my estimates. So after cutting up the sim, the original investor nets about $160 return. Now the fun begins: JR Unknown, the original Pudding Hill purchaser, now resells the land. To who? Most not end users like you and me, but to other land barons. Jessie Beckham snapped up a bunch, and sells them for L$69362 for 4096m -- a markup from L$15.5/m to L$17/m. If she sells this, she will make a 9% return. So the names and the amounts may vary from place to place, but as a story this seems pretty representative, a good approximation for the business. Now first of all, let us remember that we have a sim in $700 worth of computer hardware. So if I came to you and said "I
will sell you this $700 PC for So now you are getting skeptical -- someone is buying this land, right? So I took a look around: I found several malls, and "coming soon" malls: You might already know how I feel about malls lol! But let's be clear, rental properties are just another form of land speculation. There is a *lot* of mainland land being held by "investors" in Second Life; you just have to open your Map and take a look around to see. Sometimes I think 50% of the land in SL is held for one form of speculation or another. So we have a classic economic bubble of the worst kind: a renewable commodity flooding the market, whose primary holders make fairly thin margins but whose price has increased several times in just a matter of weeks. How low will land prices fall? The market will normalize. Is any sane person going to pay $30 U.S. for a tiny bit of virtual property you can't build any but the most basic structure on? How far will the market normalize? Here is my reasoning, and guess. The land bubble occurred soon after Linden Labs increased Island tier from $195 to $295, a 50% increase. Mainland land meanwhile went from about L$7/m to L$16/m, about a 130% increase (LL stats do not reflect "real" retail prices -- they include sales to alts etc, I'm basing this on my experiences buying land and watching land around me). My guess is the market will re-stabilize at a 50% increase to the L$7/m, or at L$10.5/m. In other words, when it happens, That $3500 server you bought (1/2 a server really) becomes "worth" $2400 wholesale. Your narrow margin profit becomes a sudden giant loss. Furthermore people panic when crashes occur; the worst-case (actually best-case for most of us) is a grid-wide sell-off rush occurs and land price plummet in a few weeks or even days. All that capital investment, my friend's $500 included, gone in just a short time. It might deflate more slowly (if land barons are "lucky"), but a sudden burst is possible. Well, Linden Labs for one. This website is hosted by godaddy.com, a great service provider. I can buy and maintain a (good) dedicated server here for between $80 and $130 U.S. per month with no upfront cost. A server with Linden Labs is $3500 to $4800 with $195/month upkeep. Over a year that is a 7x difference. The money going into land "investment" to a large measure goes to Linden Labs (and not a bad thing, it means more money for development). The other parties that profit will be land baron operations that go for a quick turnover and don't hold much inventory -- which is not the majority of land barons, and certainly not ANY mall owners. Land prices will plummet, but low inventory wholesalers already have their profit. I must stress this, the number who profit will be a small minority. Real-life history is replete with examples of price bubbles crashing and destroying investors. The dot-com bubble in 2000 wiped out numerous financial speculators and innocents -- those investing for retirement. The same motive applied: greed -- how to make money without much work. The crash will happen, and you read it here first. You probably read about Second Life from time to time in various blogs and news media sites. Here is a headline you may read soon: Land Bubble Crash in Second Life: Investors Lose Millions, Lawsuits I don't know when it is coming, or what will trigger a sell off, but here are four possibilites:
I can't know the future, but I'm putting my best thoughts out there to warn you. Anshe Chung may be successful, but her example has brought numerous competitors whose greed is only matched by people's blindness when it comes to money. I want to emphasize this strongly, Linden Labs provides a great service and land tier fees is a pillar of their business model, without it no Second Life. Historically Linden Labs has not done anything to fuel land speculation (besides showcasing Anshe Chung every now and again). The current bubble, and the disaster that will come, is all fueled by short-sighted greed and lack of good judgment on the part of speculators. The victims are people like you, who enter the game and buy land now, not realizing what is going on. Ultimately I think Linden Labs will also be a victim too, because RL press about people losing their shirts in Second Life will hurt them badly.
You will recall that I'm not a fan of recommending island rentals, see my article here, (first land is best), however if you really must rent the cheapest property you can find and sit it out. It might be tempting and seem reasonable now to invest in a private island; rentals will surely increase with mainland prices out of control. Well, when mainland prices fall so will island rentals. Tier is currently cheaper on the mainland, and also keep in mind that a *lot* of land is being held in reserve by "investors", and when that reserve is released, it will mean a surplus of land. Bad news for land barons whether they are island or mainland, good news for ordinary folk. Don't invest in land in SL. Don't do it. It will lead to heartache. Anshe Chung and a few may get rich, but your dream will likely end in tears. Make clothes. Build houses. Become a DJ. Make friends. Sell original art. But the idea that you can become rich by investing in virtual land in Second Life is a big, big mistake. You are warned. |
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Copyright 2006 InfomythTM * The hand logo, Second Life® and Linden Lab® are trademarks or registered trademarks of Linden Research, Inc. All rights reserved. No infringement is intended. |
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$4,800", would you take me seriously? But this is exactly what Linden
Labs is doing. Now I don't blame them, and the server comes with
software (Second Life server) preinstalled. But Linden Labs is making a
killing here, $25000 U.S. or so per day, all fueled by greedy land barons. I
don't blame Linden, it is not planned, but seriously this is way
out of whack.