Why value accrues to verifiably rare and desirable assets in exponential fashion.
Most people assume that pricing dynamics for rare/desired assets follow a straight line with regards to their rarity as a percentage of the whole supply. In reality, pricing scales exponentially.
Take for example this house on the Peak in Hong Kong. It is a beautiful manor occupying approx 1600 square meters, which can be considered to be a large property in many western countries but not uncommon.
It’s price tag? $445 million USD. Representing $278,125 per square meter.
Now HK is an insanely expensive place due to its high density and high GDP per capita. We should normalize the numbers for comparison sake.
Let’s compare this to the median PSM in HK city center, which is $31,475.
This comparison represents 9x median city price!
Why does rarity/price scale in an exponential way? Does that relative pricing make sense intuitively? Maybe this is a confined or anomalous example?
Let’s consider pricing of rare diamonds and consider this in a market with established price discovery mechanisms.
Most people know the 4Cs of diamonds; which are cut, color, clarity and carat (size). However, diamond dealers know that another metric can add far more value than the 4 Cs combined, all things being equal.
This being the type of diamond in question.
There are Type I and Type IIa diamonds. Type I diamonds are the most common. These diamonds contain nitrogen as their main impurity, while Type IIa diamonds do not have measurable nitrogen impurities.
All things being equal, Type IIa diamonds command a MULTIPLE over Type I.
Type IIa diamonds compared side by side under a loupe with Type I have imperceptible differences except with the aid of a special fluorescence detector. Yet these diamonds go for 10s of millions of dollars in auction year after year.
The Pink Legacy diamond is a 18.96 carat fancy vivid pink diamond. This Type IIa diamond sold for $50.4 million USD in 2018.
These examples show that in both high end luxury real estate as well as luxury goods, there are multiples accorded to the ultra rare when compared to the lower tiers of rare and desired goods.
How about for consumables with continued supply? Perhaps this exponential pricing will break in that scenario?
Domaine de la Romanée-Conti is a renowned red wine, produced in limited quantity, roughly 450 cases annually, making it ultra rare, and the collection value high. In fact, the most expensive bottles of DRC sell for over $500,000!
Utilizing tiny land parcels in Vosne Romanee, yields for DRC wines are tiny, making these wines challenging to acquire.
When compared to Haut Brion, which also is an incredibly rare wine, but produced in a greater quantity to DRC, the price multiple again appears.
All this of course is impacted by desirability and capital flows. However, the psychology of humans to price rare and desirable items far exceeds the utility and intrinsic value that can be given to these items with traditional valuation methodology.
If price is on the Y axis and increasing rarity is on the X, the graph can be shown to be like this, a gradual but increasing price slope. An exponential line.
The purpose of this thread is to educate so we can develop appropriate strategies to capture maximum value when selecting an asset class to invest in.
Hence, quality in the selection of rare and desirable items is of paramount importance when it comes to value capture.
And in price growth for verifiably rare and desirable assets, there is no upper limit. #999club #10kclubofficial