Wednesday, December 30, 2009

Investing the easy way

If I combine the ideas of my land tax post, and my post on Tony Abbott, I end up with a generalised principle of scarce resources.  That is, that productivity gains across the economy accumulate as capital value of scarce resources that have few substitutes, with land being the ultimate example of this principle.

As we find dwindling environmental assets such as wild fish stocks, scarce rights to harvest fish begin to accumulate value due to economy wide productivity gains.  Australia is separating land and water rights as part of National Water Reform, and these finite water rights will also exhibit this general principle.

Most interestingly, and permits from the proposed Carbon Pollution Reduction Scheme will have this characteristic.

We will make a transition from a society where wealth accumulates in land, to one where wealth also accumulates in various rights to other finite resources.  I'm not saying this is bad. In fact the creation of finite rights is the best way I can think to place a value on scarce environmental assets.

I guess my point is that investing in these new finite rights to the environment is one way to invest in the protection of the environment.  Simply buying and holding these rights will accumulate wealth in much the same way that land traditionally has.  Of course, buying land and not developing (or even improving the environmental condition of the land) is a fantastic way to invest in the environment.

*Please note this idea is not yet fully developed.  Any ideas/comments are appreciated.

Tuesday, December 22, 2009

The Christmas gift arms race

I do like Christmas. Maybe it’s the memories of childhood where a simple water pistol was enough to keep the anticipation high for weeks, and then become an object of desire (and destruction) for months.

But these days I feel like Christmas has become more of a burden then a blessing. My experience suggests that the last decade has seen the demise of delayed gratification. Maybe it’s just because as a child you are subject to parental decisions, and so you learn about delayed gratification. Then in adulthood, you realise there is little need for that anymore and are happy to splurge whenever it suits you. But maybe it is a more widespread cultural phenomenon.

The cause of this burden I feel is what I call the Christmas arms race.

Sunday, December 20, 2009

Summer Reading

The past few weeks I’ve somehow found time to read.  Here are a few interesting titles that I would recommend.

Sunday, December 13, 2009

Tony Abbott...

…believes that a high price of oil will encourage new discoveries, such that the concept of peak oil is not valid.  This is a classic example of what could be called ‘Price religion’.

Could I suggest that Tony Abbott (and I guess many ideological economic zealots) try and apply their logic elsewhere.

For example, if the price of fish goes up, does that mean that we will discover more fish on the Great Barrier Reef?

If the price of land goes up, will we discover more land?

Of course Tony Abbott and other followers of the Price religion don’t believe we will find more fish on the reef if the price goes up. But somehow, they will leave their logic at the door when it comes to oil or other fossil and mineral resources.

Then again, he could just be reiterating his party line – it is probably not a good time to let the media catch a glimpse of anything other than unity in the Liberal party these days.

Best of luck with that Tony.

*Note: I have grown to dislike all the current political parties, although I used to give support to the Greens. Maybe there is an opportunity for a fresh young political party in Australia these days?

Thursday, December 10, 2009

Are the States simply an historical legacy?

Kevin Rudd seems to be taking Federal control wherever he can.  His latest move is take more control over town and regional planning.  (Does that mean more regulation or less?)

But why not scrap the States altogether?  Aren't States just historical happenstance?

It's an old question. As a State employee I have witnessed the inefficiencies of this bureaucracy first hand.  More importantly, I have witnessed the animosity between State and Federal governments where open cooperation should be the order of the day.  The States always complain about the lack of understanding of Federal officers. "They don't understand what it's like in Queensland" - true, they don't understand the getting things down the slowest and most expensive way is the how we do it.

But my questions are, what is holding back Federalism (for want of a better word)?  Is there not enough public frustration with the States, no political will?

If there was the political will, how would one actually start the process of removing State governments?

Maybe in my lifetime I will get a chance to witness these things.

PS.  I'll be in Canberra next week liaising with the Federal government, so the blog may be quite for a while.  Maybe when I'm there I can get some thoughts from Federal government officers on this issue.

Tuesday, December 8, 2009

A graph I promised to make

There is a lot of talk about population and number of new dwellings in the housing market debate.  What is generally overlooked is that at any point in time everybody is living somewhere.  Occupancy rate is fluid, prices change, and in the long term, population growth in an area can't happen without prior construction of housing. 

The graph shows the new dwellings constructed per new person (per person of population growth).  We do notice a recent decline in the number of dwellings being constructed nationwide compared to the population growth, which is reflected in the later graph showing increased occupancy rates.  The direction of causation amongst these variables remains unclear, and in all likelihood, they are interdependent.

Regression with net new dwellings per person of population growth as an explanatory variable for change in the capital city price index gives a negative coefficient (-0.011) but really, has no explanatory power (r2 of 0.006).

That means that analysis of population growth and dwelling construction figures has no power in explaining housing price changes.

Australia's most expensive house

The previous record for Australia's most expensive single dwelling (don't think it falls into the house category, nor even the mansion category) was a measly $45million.  Just this week that record has been smashed by a respectable figure of $57.5million for a Perth waterfront mega/super/ulltra-mansion.

(What was he askin'? $70million - tell him he's dreaming!)

It shouldn't be a surprise that the sale was from one mining baron to another.  In Brisbane mining companies have a reputation for sending lots of cash in a hurry.

What shocked me was the claim from the real estate agent the he had sold Australia's most expensive house back in 1980 - for just $2,150,000.

Times have indeed changed.

Sunday, December 6, 2009

The sleepwalking defence

I state in my profile that we need to turn our ideas on their heads to gain understanding.

So what did I make of this report of a man who strangled his wife in her sleep? His charge of murder was dropped, but I would be surprised if he is not now charged with manslaughter.

But behind the headlines there is an interesting tale about responsibility. We humans are extremely susceptible to external influence. Stanley Milgram’s famous experiment showed many years ago how our rational decision making capabilities can be heavily influenced by our interactions with others. We seem to obey authority figures, and we are known to also conform to group behaviours.

Economists generally assume people behave in a perfectly rational way, and that decisions are made independently. Legal practice certainly seems to take decisions as personal and independent. But we only can make these decisions based on our past education and experiences – past external factors.

But just as we still believe that people are responsible for the decisions and behaviour, even though these arise from past external factors, we should believe that a sleepwalker is responsible for their actions.

Tuesday, December 1, 2009

Fuel efficiency insights

I watched a Top Gear episode where Jeremy Clarkson raced a Toyota Prius and a BMW M3 around their test track for 10 laps. It wasn’t a race really. The BMW only had to follow the Prius as it drove the tack as fast as possible.

And what happened? The Prius, with its 1.3L engine used more fuel than the M3 with its 4L V8!

To make matters worse for the pro-hybrid lobby, Clarkson also drove a 1.7 tonne V8 Jaguar XJ6 from Basel in Switzerland to Blackpool in the UK on one tank of fuel – a similar result to the little VW Polo.

So what is going on here with fuel efficiency?

Sunday, November 29, 2009

Australia, meet Dubai

The property market is Dubai is crashing and burning as we speak.  It was inevitable of course, but never underestimate the perseverance of a property boom.

On that note I want to talk about the future here in Australia.  In 2010 and beyond I foresee the following sequence of events.

1. Rate hikes of another 0.5%
2. Property prices will flatten and fall in some areas
3. The government will run out of ways to keep housing demand propped up – we had more cash injections and foreign buyers (although as yet I can’t imagine what else may be dreamt up).
4.  Inflation will be a major concern again – the USD will recover and the fuel price here will head up.
5.  September 2010 will lead to another correction on the share market, taking the ASX200 down below 4000 again.
6.  But then a strong rebound in November up to 4400
7.  House price will stabilise at 10% below their peak (in nominal terms) but real growth in house prices will not occur until 2015.
8.  A Current Affair and Today Tonight will has specials about house prices crashing in certain areas and people being forced out of their homes by mortgagees.
9.  Even while this is happening, people will continue to shout and scream about a housing shortage and argue for reduced taxes on developers (even though we have the world's biggest houses)
10.  The 2011 census data will show that demolition rates were less than expected and that the total number of dwellings in Australia is higher than expected (the remarks by the RBA’s Ric Battellino seemed a bit pushy on the supply constraint issue).

It’s not a catastrophic forecast, but it seems reasonable to me. Anything I've missed?

Wednesday, November 25, 2009

Why all this property market discussion from an ‘environmentalist’?

I have been thinking of changing the title of this blog—mostly because the term environmentalist is associated with fairly extreme views on the protection of ‘natural’ environments and other species, and partly because I also have a keen interest in the property market.

But in my mind, understanding property is the key to a reasoned approach to preserving our quality of life by preserving environmental amenity. Maybe I am more of a ‘quality of life’ economist who believes there are many non-market goods, including the quality of, and accessibility of, natural environments, and that these are major contributors to our well-being.

However the increasing fanaticism I have observed in some areas of the climate change movement, the lack of ability for some environmentalists to see the forest for the trees (pun intended) has led me to distance myself from some of the core environmentalist views.

Take the topic of the moment, climate change. Why don’t we hear about\
  • Any potential benefits of climate change (crop yields, new land use opportunities, etc)
  • The statistical reality behind some of the conclusions (high uncertainties)
  • Other important environmental issues that are cheap to address and provide immediate direct benefits
I feel like climate change is crowding out other local environmental concerns that will immediately contribute to quality of life of Australians.

In my mind, a quality combination of land use and environmental controls in our cities and towns can contribute far more to the well-being of society than other popular environmental issues.

So what then of the blog title? Any ideas? Or does the economist part imply a rational approach?

Tuesday, November 24, 2009

Is road congestion the best allocation mechanism?

Congestion is a darling topic of politics and the media, and a topic of many conversations around the barbeque. But what is it? Is it a bad thing? Do we want more of it or less of it?

I define congestion as a condition of a network (of roads or other conduits) whereby the existence of extra users slows the rate of progress of all other vehicles. Given this definition, there can be a little congestion, where progress of road users is slowed a little, or plenty of congestion, where progress is greatly slowed.

Sunday, November 22, 2009

Real Estate Review

My colleague is looking for a real estate agent to manage her house after downsizing to an apartment, choosing to keep the house as an investment.

She is facing a conundrum I have faced before. How does one go about comparing the performance of property managers before committing to a management contract?

Can the market for property management services be competitive without reasonable access to information?

Wednesday, November 18, 2009

Are Chinese buyers affecting house prices?

Respected economist Alan Wood notes here why he believes small increases in foreign investment in the Australian real estate market will not have a tangible impact on home prices.

While it is nice to have a little calm to a situation that is sure to encourage exaggerated media spin, I’m not sure whether Wood’s claim holds - that because Chinese investors are a small percentage of buyers there will be little to no impact on prices. If we make one assumption, that Chinese buyers are willing to pay more than local and other foreign buyers, then his claim completely breaks down.

The following stories might help explain why.

Monday, November 16, 2009

Some empirical support for land economics

There has been a paper recently published by Andrew Leigh, Economics Professor at ANU, which empirically estimates the impact of stamp duties on the housing market. I found out about this paper through Chris Joye’s blog at Business Spectator, although I regularly read the Core Economics blog, where it was also linked with some added thoughts from Andrew. I mention this only because I have now been involved with discussions about the paper at these sites.

I need to quickly summarise Leigh’s findings before moving on to the important theoretical and political implications.

His main finding is that if stamp duties are raised, house prices will fall by more than in the increase in the tax. Did you get that? If you increase stamp duty, the total price of housing (price plus stamp duty) will fall. Sellers suffer, buyers benefit. It’s a classic land tax - there is no deadweight loss, as shown in the figure below.

How can such a thing occur? For any other product, assuming a competitive market, if you add costs to production, prices will have to go up (even if quantity sold goes down), or margins will go down (temporarily at least).

Land, however, has some characteristics that make it quite different from other goods
  1. There is a fixed supply (vertical supply curve), and
  2. It is costless to produce (the producer surplus starts at a price of zero)
Some would argue that land available to be developed is not in fixed supply, and that town planning regulations can change that supply. I agree. But these are regulations, they are not market players, and that does not make the supply of land price elastic (although I would suggest the supply curve for serviced residential lots above the intersection with demand is quite elastic as land parcels are brought to market). I think both sides would agree that from a theoretical standpoint, the supply curve is vertical below the intersection with the demand curve.

It is the second point that is far more important to understanding the land market. Land itself is costless to produce. That means that the level of demand determines the price of land at any point in time. Not supply, demand. So when you increase a tax on land the total land and tax price stays constant, but the underlying value of the land declines (as shown by the reduced producer surplus in the figure above).

I have been quite baffled by the success of Christopher Joye’s argument that the supply of housing is a major factor in determining prices. He maintains two contradictory positions. The first is that we have a land price boom, not a house price boom. The second is that we should elastify the supply of housing to avoid further unnecessary price increases. Hang on chap. We don’t have a problem supplying housing. Our problem is that we all decided to pay ridiculously high prices for land.

There are two more characteristics to the land market that make analysis difficult. There is competitive behaviour in the market for buying land, both development sites and serviced land parcels, but not a competitive market for the sale of land.

Once a serviced land parcel is developed, there is no price competitiveness exhibited when selling to the final consumer market. The problem with land is that if prices fall, they can gather momentum as people sell to avoid further falls. Also, if developers seek to undercut the market price, it reduces the value of all their other land holdings. There is no incentive to release below market prices.

I also believe Leigh’s findings shed some light on my argument that changes to town planning rules, including increases in height limits and allowable building area, does nothing to affect home prices. Any site with increased development potential will fetch a higher price, and the resulting dwellings will be released at the market price.

While Leigh’s paper is just one simple analysis of stamp duty rates and house prices, the theoretically sound finding should put to rest some of the illogical arguments of the supply side warriors, and the property development lobby in general.

Sunday, November 15, 2009

In Japan you can glimpse the future

When I first visited Japan in 2004 I saw the future - trains, gadgets, vending machines - but most importantly, I saw some amazing toilets. Even now, when I have a conversation with people returning from Japan they always comment about toilets. If you’ve visited Japan you would know why – they range from traditional squatters, to high tech digital robots. The most best of them all will greet you, automatically lift the lid, warm your seat, wash and dry your backside, play your favourite music, and flush automatically.

Back in 2004 I saw one particular style that was simple and profoundly efficient, where the cistern was filled via a basin so that you could wash your hands with clean water, and then use that same water to flush the toilet.

At the time I saw a market for such a design in Australia. I visited Japanese kitchen and bathroom stores to see the price range for these types of toilets, and investigated possible shipping costs. Alas, I became distracted and never followed through with this idea.

Now it seems that popular toilet maker Caroma is making these very toilets in Australia and the US. Only 25 years after their invention in Japan.

For anyone who likes the idea but is not interested in buying a new toilet, you can get a step by step guide to retrofitting your own throne to have this functionality here.

As an economist I wonder why it took the market so long to adopt this simple innovation in our water starved nation.  Was everyone simply as bad as I am at following through their ideas?  Was there a stigma in Australia about washing your hands with 'toilet water'?  Now that it is available here in Australia, will it even catch on?

Thursday, November 12, 2009


I read a book that opened my mind recently. It is probably not on the best seller lists (is #53,525 rank in Amazon a best seller?). It is called The Unthinkable: Who survives when disaster strikes – and why.

This book examines the human response to fear in crisis situations and is presented in a very easy to read, non-scientific, yet analytical way.

Tuesday, November 10, 2009

A Redwater diverter for every new home?

Markets and opportunity. Peas and carrots.
Hand in hand go such things, and one would expect that in our new water conscious world, any device that can reduce water use in the home will go hand in hand with the phrase 'in demand'.

Here’s one device that has the benefit of being automatic and energy free.

It diverts the cold water sitting in the pipe between the hot water system and the hot tap to a storage (toilet, rain tank etc), then diverts the water back to the tap as it warms.
For all those whingers who need hot showers in Queensland it is probably a good water saving idea (yes, that's me).

I have, however, seen a nifty alternative. In Budapest I remember staying in an apartment that had a gas water heater bolted to the bathroom wall just one metre from the shower. Not only was the water in the pipe already warm from being inside, but there was hardly any water in the one metre of pipe anyway.

I’m not sure you can actually put gas water heaters indoors in Queensland, but one similar solution would be to have your water heater outside the shower wall.

Of course, if all that is a bit much and you still want to save water, you can just buy a diverter valve.

Wednesday, November 4, 2009

Psychologists at the RBA?

People have instinctual short sightedness. It is a primal trait. Each passing day adds risks to the realisation of future events. Our probability of dying increases, and the waiting time captures multiple risks of the event not occurring at all. In economese, that’s why we discount the future.

However, it is not all that simple. Behavioural economists have shown that people don’t discount in the expected rational way. Instead of treating each year into the future as capturing the same risk, each consecutive year is treated as less risky than the previous year – a concept known as hyperbolic discounting.
For instance, when offered the choice between $50 now and $100 a year from now, many people will choose the immediate $50. However, given the choice between $50 in five years or $100 in six years almost everyone will choose $100 in six years, even though that is the same choice seen at five years' greater distance
Why does the RBA need to know this?

The strategy of a gradual withdrawal of monetary stimulus by incrementally raising interest rates is meant to allow people time to adjust to higher interest rate levels. However, if people discount the likelihood and impact of each further interest rate rise, they will not adjust until it is too late anyway. The instinct of the masses will be to all but ignore the highly probably increases in interest rates in the near future.

This may be one reason for the long lags between execution and outcome in monetary policy.

A quarter of a percent increase in rates every month (1% over four months) is going to hardly register in our animal minds – each change is too marginal, and probability and impact of each future change is heavily discounted. A 1% immediate increase followed by no change for 4 months would actually change behaviour in the way the incremental approach is intended.

Have you heard people who have just bought a new house talk about the inevitable interest rate hikes – “We’ll deal with that when the time comes”. They are simply acting on instinct.

Tuesday, November 3, 2009

Fractal Finance

Ever heard of the Elliot Wave Theory? Maybe you have, but I hadn't until last week. Put simply, this theory suggests that markets behave is a predictable way which is not driven by fundamentals (actual production of goods, actual jobs, etc) but simply by human behaviour in the marketplace – the collective investor psychology.

The image below show the fundamental Elliot wave – 3 peaks (1, 3, 5) and two troughs (2, 4) on the way up, and two troughs (A, C) and one peak (B) on the way down.

While quirky (as an economist I like to think in terms of the fundamental patterns of production) this theory has a lot going for it.

Monday, November 2, 2009

Business stripped bare

This book is Richard Branson’s latest eye opener into the world of Virgin. The one man publicity machine takes the reader on a tour of his business philosophy and how the philosophy actually works in the realms of the Virgin empire.

I am a fan of Branson and the Virgin empire, for the most part because the company seems to bring competition to formerly uncompetitive markets. Virgin Blue is a classic case study – it revolutionised air travel in Australia. The budget carriers in Europe had already been vigorously competing for some years, and it was only a matter of time before the same thing happened down under. But without Virgin, would we have waited another 5-10 years for air travel competition?

Sunday, November 1, 2009

Population caps: Social catastrophe or sound planning?

My favourite lobby group, the Property Council of Australia (PCA), have attacked South East Queensland Mayors for starting debate about limiting population growth in the region through town planning restrictions.  The PCA's argument is that restricting development in a region has disastrous social and economic impacts. They wield the crossed supply and demand swords to argue that house prices will sky-rocket in areas with restrictive planning regimes.

Not surprisingly, their arguments are flawed.  Here's why:

Wednesday, October 28, 2009

Don't let bridge designers near our buses!

It has come to my attention that buses in Brisbane are, by international standards, slow.  There’s really no other way to put it.  And I think I have found a way to improve the speed of bus services at the smallest of costs.

Remove bus stops.

Wednesday, October 21, 2009

My economic philosophy of town planning

At the most broad level, the rationale for regulating land use is to minimise negative externalities to neighbouring owners of immobile property assets. This is why even ancient civilisations had strict rules attached to land.

Modern planning continues this tradition. There are few, if any, countries in the world that fail to regulate land uses (maybe the Vatican?) due to town planning’s success in addressing this fundamental externality problem. By regulating land use you can exclude development that will produce impacts such as noise, pollution, traffic, over-shadowing, and other externalities on other land owners. Protecting land rights, and subsequently land values, is essential to a functioning market economy.

This most basic principle is probably forgotten by many 21st century planners. It is one of my reasons for objecting to the proposed South Brisbane / West End plan. Allowing 30 storey developments creates severe externalities in terms of traffic, overshadowing, and use of public space such as parks. Another reason is based on the following second principle.

Thought of the day

I was intrigued by this question:

What are some examples of successful government bureaucracies?

Defining success in order to answer this question is the same problem that ultimately results in serious inefficiencies within government bureaucracies.  Without clear goals, governments end up stirring the pot but never actually cooking the meal.

To make matters worse, even unclear goals change unexpectedly on a political whim.

Imagine Steve Jobs one day promising in the media that Apple is now going to make running shoes and car tyres.  The whole Apple company would have to learn a new business, and the transition would be costly.  Then 3 years later, he is replaced by a newcomer who declares the shoe and tyre business a failure, and decides instead that Apple should run an airline.  Furthermore, the newcomer decides that the success of the new airline enterprise will not be defined by profits, but instead declares that success will be defined in terms of how much the airline is 'giving back to the community'.  It would be a disaster.

But that's the problem you see.  Tasks that have clear long term goals are no longer implemented by government, but by private contractors.  Governments are left with those tasks that are subject to pot stirring and political whim.  Hence, government bureaucracies never seem to get more efficient relative to private enterprise.

Tuesday, October 20, 2009

Town planning and organic growth – can we reconcile the two?

After a rather challenging discussion with a close friend last week about the necessity of town planning and the degree to which planning constraints impact property markets, I have decided to embark on what might become a detailed rant on the matter. This may the first of many posts on the topic.

The trigger for this planning discussion was a conversation about the proposed increase in height restrictions on former industrial land in the South Brisbane / West End area of Brisbane (see map below). Currently this area is a mix of light and heavy industrial uses, office and warehouse space, and new apartment developments. The area is earmarked as a new growth precinct, in the same vein as Newstead's transition from industrial to a mix of medium density urban uses.
The reason for the ensuing debate is that I oppose the 30 storey height restrictions being proposed in the neighbourhood plan, even though I support densification as a planning strategy. Instead, what I propose is a plan to allow for flexible organic growth.

Sunday, October 18, 2009

Lobbyists: If they are always wrong, why are they so influential?

The Property Council of Australia (PCA) is one of those lobby groups with a blatant disregard of the facts and a history of political influence – the kind we love to hate.

Just yesterday the PCA made a submission to the Queensland government outlining how planning laws that promote densification are likely to increase greenhouse gas emissions compared to planning for more urban sprawl. This is not a joke.

They cite a 2007 Australian Conservation Foundation study to give their position merit, but what the study actually says is that environmental benefits from increased density are wiped away by the wealth and consumption effect. Essentially, the data shows living in smaller dwellings closer to conveniences reduces households’ greenhouse gas emissions, but generally, these households are wealthier, and thus have higher greenhouse gas emissions overall. No surprises really.

Thursday, October 15, 2009


Only this week I wrote about cyclist resentment in Australia, with a detailed look into the arguments of the emotional cyclist v motorist debate that happens down under (but not in continental Europe I might add).

In today's local rag there is a snippet of news in the business section that epitomises the anti-cycling attitude of the typical Australian. For the life of me I can't find it online, so I will reproduce it here verbatim. 

You have to imagine this accompanied by a cartoon of a smiling Neil Summerson running over a cyclist, with bike parts, helmet and limbs flying out from under a precious collectable antique Mercedes.  It's true I swear - look on p40 of The Curious Snail. 

In the fast lane
Bank of Queensland chairman Neil Summerosn had a traumatic encounter of the cycling variety prior to fronting the media and analysts at the bank's record results presentation yesterday morning.
Summerson, a keen car buff with several automobiles in his garage, suffered the indignity of having a cyclist pass his car as he headed into the city for the press conference, estimating the speed of the cyclist at well over 40km/h.
The BoQ chairman pulled up at a stop sign only to see the cyclist whiz through the sign, prompting Summerson to call out, "Don't you obey road rules?" The two-finger salute followed and Summerson then pulled up alongside the bike rider, smiled, and put his foot full down on the accelerator of his Mercedes E500 V8, leaving our rider behind in a cloud of dust. Sticking to the speed limit of course.

My questions:
1. Why is having a cyclist pass you a 'traumatic event'?
2. Why is Summerson's hooning behaviour promoted as an acceptable response for motorists unhappy with other road users?
3. Is this how Summerson behaves every time he witnesses a road rule being breached?

Honestly, I couldn't believe what I was reading.

Wednesday, October 14, 2009

Coming up next - medicated air!

I couldn't think of a snappier title, but I wonder when we, as a society, decided that everything needs medicating.

Last year I wrote about Queensland's move to fluoridate the water supply, and how there are probably better drugs to put in water that fluoride.

It appears this is just the beginning.  It is now mandatory to add folic acid to bread flour in Australia.  You probably haven't even heard of this before.  Niether had I until I read this article, which argues why this heavy handed regulation is stepping way over the mark. 

Tuesday, October 13, 2009

100th post: Bicycle registration?

I wanted to write a beautiful piece reflecting on two years of blogging for this event – my 100th blog post. But instead, I’ll get down to some nitty gritty analysis of contemporary issues with an economic and environmental twist.

Today’s topic is cycling.

After a charity ride from Brisbane to the Gold Coast last weekend, the local rag has ignited the dry tinder of cyclist resentment present in the Australian motoring psyche (remember the Rex Hunt incident?). I want to deconstruct the emotional Cyclist V Motorist debate to see which positions hold merit, and what type of government intervention could provide benefits for all involved.

Sunday, October 11, 2009

Most rewarding careers?

To my loyal readers,

I want to take a break from the usual blog topics and talk about something a little more personal.  For those who don't know, I am an economist working in the public service but find the work most frustrating, intellectually dull, and completely unchallenging.  You may say that this is no surprise, and that I really should have been expecting this situation.  But the pay and conditions are great and these things were very important when I started the job.

I am now contemplating my next career move and am seeking some advice.  My next move should meet the following criteria:
1.  Intellectual challenge
2.  Rewarding - in the way that you feel like you accomplished something at the end of the day
3.  Potentially ourdoors and active

Another idea is to simply sell up the traditional life, buy a sail boat, and take the family around the world - picking up some unskilled work as we go. If not now, when?

I would really appreciate any thoughts and ideas, no matter how 'out there' they are.


I think the results of this online personality test sum things up, but don't know where that leaves me as far as a rewarding careers goes.

As a Groundbreaking Thinker, you are one of the extroverted personality types. Dealing with others, communication, discussions, and a little action are your life’s blood - and some of your strengths. You are very articulate and love variety personally as well professionally. New tasks, new projects, new people, fascinate you because you are always interested to increase your wealth of experience. Consequently, you have no problem dancing at several weddings; juggling parallel tasks to be accomplished electrifies you, and you are an accomplished improviser.

Your enthusiasm carries others along and enables you to create positive impulses in your team. Mountains of paperwork, endless e-mail correspondences, and solitary work tire you quickly, and bore and frustrate you. The appreciation of your work by others is more important for you than for the introverted Thinker types. You measure your own professional value by the admiring glances of your colleagues and superiors.

The psychologist Keirsey once described the Groundbreaking Thinker as the “soul of the company,” and that can be just as easily applied to an employee position, as to an independent chief of a company. Since risk represents less of a threat than excitement, freelance or self-employment are well suited to you. However, you must take care to have collaborating staff around you, or that you are able to work closely with other teams in order to satisfy your contact and communication needs. You are naturally suited for leadership positions because there you have the ultimate freedom making your decisions and choosing your tasks.

As a superior, you like to let your subordinates operate on a long leash as long as they do a good job, because it is not your thing to exercise power for power’s sake. Additionally, you don’t feel like worrying about the stuff of others. You much prefer that the person concerned disappears after you have handed him his/her task and later shows up with the finished (and naturally excellent) result. Based on your open way to communicate, then you are not parsimonious with praise.

If you are an employee, you should make sure that your company’s hierarchal structures are as level as possible because you have real trouble with authority for authority’s sake. Otherwise, you can handle critique or diverging opinions pretty well because you don’t take them personally, and are prepared to adapt if you can be convinced of the validity of an argument - if in your opinion it is “logical“.

Wednesday, October 7, 2009

The Value Problem

Economists believe they have solved the old Water-Diamond Paradox by showing how prices are determined at the margins. But how then do we value a large stock of resources when we only know the value of a marginal unit?

Consider this problem. A river catchment has 1,200 megalitres of tradeable water rights. The last trade occurred at a price of $2,000/megalitre. Essentially this means that the last megalitre (the marginal unit), out of the 1,200 megalitre stock of water in the catchment, is worth about $2,000. But are all the other 1,199 megalitres therefore worth $2,000 a pop? Quite simply no. If the government compulsorily acquired half of the water in the catchment, the 600th megalitre would be worth more than the 1200th megalitre – an example of declining marginal value.

Tuesday, October 6, 2009

Whether the weather increases volatility of markets

I recently read, and thoroughly enjoyed, the book Rigged. In one scene a young trader is asked what factor contributes most to changes in the price of oil - to which he responds, the weather. For example, a cold winter in North America or Europe signals an increased demand for oil and sends the price up. 

So my question is this. Given how weather dependent our agricultural industry, our energy industry, and other essential primaries industries can be, how much less volatile would financial markets be if we had predictable or constant weather?

Monday, October 5, 2009

UPDATE - Turning points

Recently I posted about the spike in population growth experienced in Australia over 2008, and how we cannot simply extrapolate the trend, or we will miss important turning points. I predicted that the rate of population growth will fall from this level over the next few years as a result of

1) reduced migration, and
2) a decline in birth rates due to the ‘bringing forward’ of births encouraged by the baby bonus.

I didn’t have to wait long for some supporting evidence. The ABS today released overseas arrivals and departures data showing a significant increase in departures, and decline in arrivals, since April 2009.  It looks like migration is on its way back down.  When the June 2009 release of the population statistics is published on 3rd December we might just see the turning point in population growth I forecast back in September. 

Sunday, October 4, 2009

iTunes v Foxtel

I know; there is no battle between iTunes and Foxtel (yet) but it seems like a good attention grabbing headline. The relevant point here is that Foxtel is releasing a new service where subscribers can download movies and TV programs. Although the service has its drawbacks, it sounds like the next big thing to me.

Whenever I see innovation like this, I can’t help but see it as another example of economics in action. It also makes me wonder what industries will be next to leap into the downloadable marketplace. Given that music and books have taken the leap, probably in response to pirated downloads, movies were an obvious candidate to jump soon. But what next?

Rebound effect in action

The image below is from an email sent by the Queensland Government Climate Smart program.  What an odd prize for a program designed to reduce energy consumption!

Thursday, October 1, 2009

Move over horoscopes, forget cold reading, here is… economics!

Derren Brown, famous British magician, mind reader, and all round deceptive yet entertaining fellow, has often discussed the tricks used by psychics and fortune tellers. One particular method, cold reading, involves suggesting non-specific messages, and letting the subject of the reading provide the meaning to the message.

For example, a psychic using cold reading techniques might suggest that there is an old male, or a dog, or another such subject of emotional connection, and let the subject say something like, “yes, my dog Spot died recently”, to which the psychic replies with something like, “I can feel you have a strong bond with those, human or otherwise, that you share your life with”. Essentially, the psychic says nothing except that you are close to the people you are close to. But the delivery of the message makes it appear that the psychic knows something about you that they couldn’t have – unless they have psychic ability.

I will get to economists under the fold.

Tuesday, September 29, 2009

The value of food security?

Food security, energy security, job security - all political terms that conjure up emotion, deliver electoral support, all the while remaining devoid of meaning.

I have been asked impossible questions in my job. But one comment recently sticks in my mind. It goes:

..there must be some data that they could have used to address the “value” of having future food security.

What value might that be? Do you want a dollar figure that represents the present value of all future value streams from having food security? And do you imply that food security means that Australia remains a net exporter of food?

Wikipedia provides a fairly detailed, but useless, entry on food security. It does not mention national self-sufficiency at all, but merely one’s access to nutrition, and the link with poverty. No surprises there.

I’m all for national pride, but arbitrarily deciding that a country must be self-sufficient in one particular good is a poor philosophical position. If we replaced food security with toilet paper security, or car security, or hat security, we would immediately reveal the absurdity of the argument.

Monday, September 28, 2009

That bloody housing shortage

It seems that the RBA's Anthony Richards may have been reading my blog. His comment today from a national housing market forum includes the following

I said in a talk earlier this year that most calculations available then put underlying demand at something like 180,000 to 200,000 dwellings per year. However, I noted that such figuring was based on simply extrapolating earlier trends in household size and ignored the likely impact of prices on the demand for housing. At some point, the overall demand for housing will be affected by the higher cost of housing. For example, with housing – both owner-occupied and renter – more expensive than in
the past, we might expect to see some young adults choosing to live with their parents for longer. We might expect some households to look for an extra flatmate rather than leaving a bedroom vacant. Some owners of holiday homes or second homes might have become more inclined to sell them, with those houses then occupied full-time.

Hence the ‘undersupply’ of housing might not be as large as sometimes thought. But this is not necessarily something that should reassure us – it may be because the higher cost of housing – partly reflecting supply side problems – has choked off some of the demand that might otherwise have existed.

However, by the end of his statement, fingers are squarely pointed at the pet issue for housing analysts, supply side constraints.  That bloody housing shortage gets a good run in his statement as well. 

I also wonder how we are meant to know the counterfactual demand that might otherwise have existed.  Isn't he just saying that demand for housing follows the law of demand?
His remarks are reported as evidence that the housing market is ready to 'take off'. But only time will tell whether the inverse correlation between change in housing shortage and change in price proves reliable in the longer term, or whether the RBA really can forecast market behaviour.


It looks like I'm not the only one who has interepreted the housing market exactly the opposite way to the RBA and other property bulls.

Sunday, September 27, 2009

Roads for nobody

Friday's local rag suggests that the State government here in Queensland is keeping their employees busy by investigating a possible new tunnel from Toowong to Everton Park.  This is to alleviate traffic congestion (of course).

Let me make some predictions.
1. This tunnel will not start construction within a decade.
2.  If 1 comes true, expect the tunnel never to be built.

The reasons are equally as obvious as the predictions.
1. The State government has no money for ridiculous projects like this.
2. The Federal government will tighten its belt before they are asked to fund this project.
3. The private sector will not fund it - they wouldn't fund a little $250million bridge because of good alternative routes, why would they fund this. 

If you want to head north on the Bruce highway from Toowong, wouldn't you take the other tunnel they plan to build to the Inner City Bypass, then get on the other new tunnel to the airport, then get on the Gateway motorway heading north?  I would.

It appears that the transport planning community has looked to cities around the world that have similar traffic problems to Brisbane (Los Angeles, Sydney etc), and adopted similar approaches to alleviating traffic congestion.  One wonders why transport planners don't instead look to cities that actually don't have severe traffic problems, and instead adopt some of the approaches used in these cities.  It is a lot like asking a chronic alcoholic which intervention worked best for him when he still drinks like a fish. 

I await a more diversified transport plan for South East Queensland.

Thursday, September 24, 2009

Property bulls take note

The main problem with the housing shortage proponents is that they neglect the existing 8.5million or so existing residential dwellings as a supply of housing. Currently, the average dwelling occupancy rate across the country is 2.53 persons/dwelling. This rate has varied between 2.48 and 2.60 over the last 27 years. In fact, it peaked at 2.6 in 1982 (soon after the second oil crisis). The graph below shows that we are currently heading back to level of occupancy last seen in the 1980s.

But surely, with such a small variation, this issue is minor compared to the 17,000 homes we are currently short of! On the contrary, it is the crux of the whole debate. You see, a change in the occupancy rate occurs for all dwellings, including the 8.5million existing homes. The 43,000 people apparently in need of the 17,000 dwellings can be accommodated in existing dwellings, and the result would be a shift in the occupancy rate of 0.005. If you look at the y-axis scale you can see how small an increment this is (one quarter of one notch), and how quickly we are heading that way.

In fact it only requires 1 in 200 households to welcome another person. Seems realistic to me, considering how popular this trend is amongst my peer group. Also, considering that the average dwelling is much larger now than when the occupancy rate was 2.6 back in 1982, such a shift would barely be noticable. 

I have mentioned before how this adjustment in occupancy rate occurs, for example:
  • youths stay home with parents longer
  • group households rent spare rooms
  • elderly parents move in with children’s families
  • other lone relatives move in
  • when families relocate they choose smaller houses… and so on
This is happening and there is plenty of scope for it to continue. In 2003-4, 35% of households reported one spare bedroom, while 42% reported more than one spare bedroom. That’s at least 9.4million spare rooms in existing dwellings.

So I caution the property bulls to be realistic with their investments. Don’t expect a boom of 6 years to be followed by a six month bust. If you want to get into the market now, buy on the high rental yield and find good tenants. And of course, don’t forget about location.

Wednesday, September 23, 2009

Upon request

Peter Fraser recently commented that I should look a little more closely at the ABS data on housing construction, demolitions, and population growth, as the data I linked to that suggested the was no housing shortage was a bit light on (and outdated).  Fair point, so I thought I'd play with the same data as other analysts and see what I make of it.

Below is the graph that apparently makes quite obvious the current housing shortage (the scale is such that the ratio between the two variables is set at the last decades average occupancy rate).  I measure shortage first by establishing the underlying demand for new dwellings as change in population divided by occupancy rate (which changes through time as well), then subtracting new dwellings completed.  (I wanted to then add demolitions of residential dwellings, but it appears that the ABS does not collect such data, and after a brief chat with them, they don't know of anyone who does collect it.  In fact, determining a reliable collection method is one of their current projects.  If anyone knows who is collecting it, and how reliable it might be, I would love to know; as would the ABS).

At first glance, yes, the housing shortage appears to be getting out of control.  But I think what matters is how this comparison of population growth and new housing completions can be useful in forecasting the future behaviour of the market.  Below, the ABS capital city price index is also plotted, and shows a surprising relationship with the shortage. 

The plot below shows the relationship between change in shortage and change in price.  A quick regression shows a significant negative correlation between change in shortage and change in price, even when the shortage is lagged a little.

This is what makes me wonder if we all have this forecasting thing backwards.  If the housing shortage declines (by way of adjustments in occupancy rates, conversion of non-residential to residential, dramatic reduction in population growth), would that signal an increase in prices is imminent?

What theory could explain this relationship?  My suggestion relies on the fact that the demand and supply of housing are interrelated - that is, they each react to the other, and the price change is a signal for actions by both sides of the equation.  Ceteris paribus (including constant incomes), we have a number of reactions to a price change on both the supply and demand side.

1. When the rate of price growth increases, occupancy rates increase, to reduce the effect on a per person housing cost, which in turn decreases demand.
2. When the rate of price growth increases, supply increases as developers can now build more profitably.
3. When rate of price growth declines, occupancy rates decrease as people can afford more space per person.
4. When rate of price growth declines, the supply of new dwellings slows dramatically.

How can that make sense?  If we follow this through, an increase in the rate of price growth is a signal that demand is declining but supply is rising! And vice versa.  A decline in rate of price change signals a increase in demand and a decrease in supply! 

I am pretty sure that the market is not so simple that it can be deciphered by comparison of population growth and dwelling construction. 

Those crazy French

The French have a reputation for pursuing the art of living. An appreciation of the finer things in life is a typically French quality. Their government reflects that pursuit back to the people through policies that reduce the hours of work of full time jobs, and that enable plentiful holidays. Their President, Nicolas Sarkosy, percieved as womaniser and playboy by some, embodies the French passion for life.

Sarkosy is now considering redirecting his government to use measures of happiness as a benchmark for progress; much like the quirky Kingdom of Bhutan, whose King Jigme Singye Wangchuck introduced Gross National Happiness as a measure of Bhutans progress in the 1970s.

It makes me wonder how subjective these measures might be, and how they will deal with the problem encountered by economists studying happiness - that after a shock to peoples happiness (death in the family, loss of job etc.), they return back to their equilibrium state rather quickly.  As a society, does this mean that this measure may lose validity, as the population has an equilibrium level of happiness that is not determined by external factors?  Poor government decisions would quickly drop from the radar as people returned to their previous happiness level. 

I can answer that one myself - no.  Because the measures being discussed are simply subjective weighted averages of external measures, such as air quality, income inequality etc.  The happiness measure therefore faces the problem of reconciling these subject external measurements with peoples actual self reported happiness.

Another interesting problem facing happiness researchers is that they can find very counterintuitive results.  For example, a new job actually decreases happiness, rather than increases it as would be expected.  An of course there is the Easterlin Paradox, which suggests that wealth is not an important factor in happiness.

But, in the end, what gets measured get managed.  If we as a society strive for progress of a kind that reflect our values of fairness, equality and our environmental concern, then maybe Gross Domestic Happiness is the tool for the job.  Maybe, it's simple another example of politicians playing politics.

Turning points

I declared in July that the turning point in thinking about climate change has arrived. Now it seems one of the world's most renouned climate modelers is questioning the validity of the climate change hypothesis (here).

You see the thing is, complex systems results in perculiar outcomes, and can violently change without apparent reason. I have written in the past that I think N.N. Taleb covers the topic well when he talks of Black Swans. Extrapolating the past does not predict the future.

Let us look at some relevant examples. Recently, the population growth predictions from the Treasury were revised upward. But I wonder what the logic behind this revision might be. What new information could change significantly a previous prediction of a century of population growth?

My suggestion is that they make the mistake of extrapolating the past to predict the future. Let's imagine we are Treasury in 1988, and that we have just witnesses population growth like in the graph below.

Wouldn't it be obvious that we should be expecting higher growth in the future? Be if you knew the causes of this growth you could predict that the trend would not continue. It would certainly decline again. And it did.

So I imagine that the current boom in population is the result of two main factors - increased skilled migration, and the baby bonus. The increase in skilled migration could decline drastically at any moment upon political will. Of course, if the douple-dip downturn eventuates, this is more than likely to occur.

Additionally, the increase in natural growth due to increasing births in recent year - the baby bonus children - are likely to be the result of couples bringing forward their decision to have a family. Thus, this little boom is likely to fade quickly as all the number of remaining fertile young couples who desire children drastically reduces. I would hope these underlying points did not escape the Treasury.

Put simply, in complex systems, the longer period of time we consider, the more likley we are to gain insights into the behaviour of the system.  My bet is that the rate of population growth will fall significantly from this peak over the next few years. 

Monday, September 21, 2009

Doesn’t current monetary policy indirectly target asset prices anyway?

There has been plenty of talk about the RBA targeting asset prices by leaning against bubbles. All reports are that this is unlikely to happen in the foreseeable future. And for good reason.

They would face two problems;
a) identifying bubbles, and
b) using an economy wide instrument, interest rates, to target asset prices in an individual sector. All other sectors will suffer as a result.

But after thinking about this after footy last night, doesn’t inflation targeting automatically lean against asset price bubbles if they appear in a broad range of sectors?

Think about it. Asset price increases flow on to the price of consumer goods. Property price rises are the simplest example. Commercial property price increases have increased the costs of business, for everyone, which eventually flows though to retail/consumer prices. I don’t have much data at hand, but it would appear that asset prices are a good leading indicator of inflation. When interest rates are increased to curb inflation, they also curb asset price growth.


Sunday, September 20, 2009

Live anywhere and join the new rich

Timothy Ferriss’ book, The 4-hour Work Week, is definitely motivational, is full of practical ideas and tips. But after taking me on an exciting journey, it somehow it left me back where I began.

The premise of this book is there is no need to be trapped in the 9 to 5 drudgery, and that the life we want is waiting for us to come and grab it. We can stop wasting our precious time on menial tasks by becoming extremely efficient, and outsourcing much of our time consuming routine. By making your work ultra efficient, and mobile, you develop the freedom to see the world and fulfill your dreams. Simple.

I am economist, so the idea of maximising utility is no stranger to me. Timothy Ferriss, in my mind, is the ultimate homo economicus. He designs his life to fulfil his own goals, and ignores the need for social convention and traditional work routine – he should really be on the cover on of economic text book! But before I get into my thoughts on particular parts of the book, let me present some of my favourite quotes.

Retirement is worst-case scenario insurance
Less is not laziness
The timing is never right
Ask for forgiveness, not permission
Emphasise strengths; don’t fix weaknesses

And that’s all by the second chapter. One point I would like to develop is the distinction Tim makes between effectiveness and efficiency. Effectiveness is doing things that get you closer to your goals. Efficiency is performing a given task in the most economical manner. This idea resonated with me (I had never heard this distinction made before), as I believe I naturally think in terms of effectiveness.

Two other little gems from this book the 80/20 rule, and Parkinson’s Law. The 80/20 rule is a restatement of the non-linearity of our inputs and outcomes. For example, 80% of our output might come from 20% of our time, while 20% of sources might cause 80% of my problems. It allows one to optimise by isolating and eliminating (another key point of Tim’s) wasteful use of your time.

Parkinson’s Law dictates that a task will swell in (perceived) importance and complexity in relation to the time allocated for its completion. Just like those university assignments, a long deadline give too much time to think about the unimportant parts and delay hitting the key tasks in the head. Combining these two principles is the secret to heightened productivity. As Tim states:

Limit tasks to the important to shorten work time (80/20)
Shorten work time to limit tasks to the important (Parkinson’s Law)

Couldn’t agree more - but I've never been able to express it like that. As well of these little gems of advice, the book is packed with actual practical advice, such as email templates, examples of courteous phone messages explaining how you won’t be answering y our phone much anymore, and phrases to use when negotiating remote working arrangements with your boss. Oh, and there’s plenty of links to website dealing where particular issues covered in more detail.

In the end, I feel like I am already living the 'lifestyle design' mentality of the new rich espoused by Ferriss. While his advice is extremely helpful, and quite motivating, it leaves me back to the existential conundrum I had at the beginning. If we can have anything we want out of life, and I believe we can, what is it that I want?

Friday, September 18, 2009

A man’s home is his castle - and the major component of his investment portfolio

I said it like this (in support of Kris Sayce):

…house prices during a bubble (if you want to call it that, however mild) begin to carry a growth premium. People begin paying a premium on the price for the expected future capital growth. The elimination of this growth premium may explain the decline in prices observed over 2008.

These guys, Karl E Case, John M Quigley and Robert J Shiller, say it like this:

For the vast majority of buyers, investment was ‘a major consideration’ or they at least ‘in part’ thought of it as an investment. …it was a major consideration for a majority of buyers. Similarly, only a small percentage of buyers thought that housing involved a great deal of risk in all cities...

While I’m here, a question that has been bothering me for some time is why property ‘experts’ obsess about auction clearance rates? I’m not sure what theory supports this measure as sign of strength in the market. High clearance rates could either be a sign of buyer enthusiasm, or seller desperation. In the share market, an ongoing auction, a high volume of trade is generally necessary for a significant price change – up or down. I would love to see the correlation between auction clearance rates and price movement.

Wednesday, September 16, 2009

Must-see data on ye olde chronic housing shortage

I guess the housing shortage advocates have not looked at the data straight in the eye before.

A simple comparison of percentage change in population, and percentage change in dwellings shows that only a few places in Australia suffer from anything that could be labelled a shortage, while most capital cities show a glut of housing.

Not only that, but the prices continued to rise in 2006-08, the period immediately following the data in the linked table. Looks a lot like a bubble to me. Don't know about you, but I'm waiting for another slump in residential real estate prices next year.

Tuesday, September 15, 2009

Move over stock exchange – welcome the Real Estate exchange!

There are reasons buying and selling a home gives the average person a high risk of bursting into fits of rage. Ninety percent of real estate agents are dodgy ninety percent of the time. Information on the home buying process is provided by the self-interested agent to the otherwise (but often not) uninformed buyers and sellers. And while the provision of information, in the form of sales data, legal and financial advice is growing, the incentive structure at all levels is engineered to complete a sale, rather than achieve the best price for the seller. I am going to suggest that the provision of a nationwide residential real estate exchange will benefit both buyers and sellers in the real estate market, at the expense of commission based leeches (that’s real estate agents).

First, consider the role of an agent. They are contracted to act on behalf of the seller to find a buyer at the highest possible price. For this service, they receive a commission on the sale price, which is designed as an incentive for them act in the sellers best interests. Which we all know that in practice this often faces some obstacles. An agent, who would receive in their own hand 1.25% of the sale price, or $2,500 on a $200,000 sale, has little incentive to work harder to achieve an extra $10,000 for the seller. The agent’s premium for the extra $10,000 is a meagre $125.

But maybe the current commission system is better than the alternative fixed cost system. Imagine you pay an agent a fixed cost of, say, $2,500. Where is the incentive for them? Well, they get the same money at whatever price the house sells for. And if it was structured as a fee for service, where the price needs to be paid regardless of whether the house is sold, the incentive is to never get it sold - to get the repeat business!

My main concern however, is actually not about the commission structure itself, but that the commission charged by every agent is the same. The State regulates that the maximum commission charged is 2.5% of the sale price plus $900. You cannot find one single agent who will endeavour to sell your house for less, even though the standard REIQ contract suggests negotiating this amount. Wouldn’t competition amongst agents cause this price to decline, especially as house prices have increased substantially since the regulation was introduced?

The question then is would anyone be worse off if the maximum commission rate was reduced? Some agent would of course, and it may send some out of the game, but that wouldn’t be such a bad thing at a society wide level. The prices acheived in the market will be the same (people's willingness to pay for housing will not be affected by this small detail).

The other little nasty in the real estate game is auctions. As a buyer I always find it amazing how often auctions occur, because it puts me off completely. First, to be a serious bidder you have to commit money for appropriate inspections and financial arrangements without being certain of the price you will have to pay, and whether you will actually buy. The media has recently reported some buyer complaints against agents for misleading them on house prices. The potential buyers had committed around $1,500 to inspections and other arrangements, only to find that the eventual price was way out of the ballpark. So buyers at auctions face higher risks, and hence are likely to pay a lower price than they would be willing to if they could buy with a conditional contract.

But that risk is the key. Agents face the risk of a house not selling because the seller has unrealistic expectations, or they change their mind, or whatever the case may be. Eliminating this extra ‘agency risk’ will reduce transaction costs significantly.

Imagine a real estate exchange (REE) where home owners could list their properties. Maybe each property has a list of compulsory documentation to be included – Survey plan, title, aerial photo, front photo, number of rooms, bath, bed, total covered area, building materials, age, car spaces, maybe pest inspector and engineers reports. The house would be put up on the exchange, which could be searched by any of the characteristics. The seller would nominate a price and contract conditions they are willing to accept, and buyers would nominate a price in a kind of open auction process. There would be no time limit, and people could keep their house in the exchange at a ridiculously high price, and if someone agreed, they would be forced to enter the contract, even if it was a bit of a joke - “just testing the market” or something like that.

In this case, there is no requirement for agents. Remember their fundamental role is to bring buyers and sellers together, and that role would now be replaced with the REE. Risks of uncommitted sellers would be eliminated.

There may then open up a market niche for business to provide the service of granting entry to homes for sale. Real estate agents may metamorphise into home display service providers, who collect a fee for answering enquiries and granting entry to potential buyers. Similarly, they may inspect houses on behalf of buyers. But without commissions, and without the associated risk, they can focus on the streamline management of inquiries and inspections, and compete on price for a rather homogenous service.

But maybe we don’t need government here. Google offers listings on their mapping tool for free to any individual or agent. This is a real step in the right direction. Maybe soon they will use their Google Checkout to enable bids to be made, further facilitating transactions. Maybe we will find market solutions to market failures?

*I had this blog written for some time, then searched the web before publishing and found the REE idea here.

Economists strike – what next?

One wonders about such things (and here). The most highly educated group in our society (university academics if you are still wondering) are threatening strike action for better pay.

The question in my mind is; will the economics departments be participating in such actions, and what is there reasoning?

The economic academics I know think that the university lifestyle, autonomy, and interesting research projects, mean that moderate pay is sufficient to attract good talent. After all, that’s what keeps them in the game – it’s not the money honey. Why then the need for more pay?

Surely if there was a problem attracting staff, universities could voluntarily offer higher salaries for some positions?

In the end, academics always have self interest to fall back on as a justification for participating in strikes. Although, they could just as easily benefit from the strike action and not bother participating – another self-interest motive at work.

Oh, the mystery.

Monday, September 14, 2009


I don’t take anything at face value. I give credit to conspiracy theories, as they often seem as plausible as the mainstream interpretation of events. Many times though, I simply don’t care, and even if I did, I couldn’t do much about correcting any misrepresentations of history.

I want to throw another one out there.

I have written before how implying causality between correlations of changing global surface temperature and increasing concentrations of carbon dioxide is statistical mumbo jumbo. But considering we know so little about whether the global climate will in fact ‘change’ (we still don’t know if that is for better or for worse) as a result of humanities combustion of fossil fuels, we seem to be taking quite radical actions. Households appear to want to do their part to prevent some hypothesised distant future even of low probability, while immediate and dire problems exists all around us (maybe more so in other parts of the world than the Lucky Country). So the question remains, how did such a fringe issue become so mainstream?

Today’s conspiracy theory is that a group of very powerful world business leaders (the big oil men) saw the imminent peak of fossil fuel production, and the resulting problems of a declining productive capacity of the economy. They wanted to get governments to act on this problem without having to admit that the problem existed. So, they utilised the fringe climate change movement, giving them a voice in mainstream circles. Any government actions implemented to curb climate change would conceal the peak of oil production for a little longer. Government research and subsidies may even assist in finding alternatives for big oil to invest in. All they while they can maintain that oil reserves are plentiful, keep confidence in their business and the share price high, while having governments unknowingly assist them to wean themselves off oil.

They use lines like “the stone age didn’t end because of a stone shortage” to show that change can happen voluntarily.

Anyway, that’s a nice one for today. I’ll leave you with this interesting comment from here.

I'm a bit of a conspiracy theory buff and one of my favorites is the meta-theory: all conspiracy theories that become popular are actually produced by the government to keep the paranoids occupied looking for aliens, bigfoot, and psychics instead of focusing on the more nefarious intrusions into civil and social rights. Meta-theory has a lot of benefits, such as that it explains why government explanations for things like Roswell are so terrible: a good explanation would leave only a few true believers, a bad explanation actually creates more believers in the conspiracy. As a final benefit, generating conspiracy theories as red herrings is cost-effective. A conspiracy theory works by arguing from the void/gaps. All the government need do is create a few vague clues and let the mind of the legions of paranoids do the rest of the work filling in the huge, ambiguous spaces. Why would anyone investigate mundane government corruption when there are aliens and psychics to research?

Sunday, September 13, 2009

Information deficiencies in the job market

I am in the market for a new job. Here are some things I have noticed:

1. All jobs are exciting, and require people with enthusiasm.
2. All jobs are for an integral role in a team.
3. All jobs require you to work independently and as part of a team.

Here's a snapshot of the jargon.

...with a strong mission to provide outstanding services to our sunshine state. Undergoing an exciting diversification of its portfolio...

It all makes me pretty cynical. I mean, not all jobs can be that exiting! To make matters worse, many job advertisements emphasise the importance of experience. Even for a dish-pig or waiter, they seem to want a minimum of 2 years experience. Is there anything about washing dishes or carrying plates that can't be learnt in a week?

One job I saw suggested that the suitable candidate would have 5 years experience in a similar role. In my letter I wrote:

While I may not have 5 years experience in a similar role, I would suggest you are unlikely to find a proactive candidate given those requirements. Anyone who has spent 5 years in the same role, then applies for another similar one, in my mind, appears to be destined for mediocrity. If instead you seek a candidate with enthusiasm, analytical skills, and drive for constant improvement, then I may be quite suitable.

We’ll see how that application goes. I always wonder how you are meant to explain how great you will be for a job after reading a total of two paragraphs of non-sense. Maybe I'll offer a 'try before you buy' period in my next application. Surely that's in the best interests of all involved.

Thursday, September 10, 2009

Where did we leave our common sense? Is it behind the new plasma screen?

This article raises the point that we have a tendency to eat more after exercise, negating the potential weight loss benefits. I don’t think this is breaking news. Nor does it actually mean that exercise won’t make you thin, as the title so controversially states. In fact, the following excerpt shows the ridiculous need to frame a discussion about how to address the compensating hunger from the exercise in emotive and controversial terms:

Exercise, in other words, isn’t necessarily helping us lose weight. It may even be making it harder.

Common sense tells us that diet and exercise are the ingredients to weight loss (and gain mind you – athletes are right into this diet and exercise equation). Eat less, exercise more, and you should lose weight. Eat more, exercise less, you should gain weight. And for those who want to gain muscle, heavy exercise and a high protein diet with plenty of calories. I heard a third hand story once that a famous Iron-man was asked in an interview whether he would consider writing a book about his particular views on health and fitness, and he replied along the following lines: “It would be a pretty short book”. It is after all, a simple equation.

Also, imagine that reality TV show where contestants lose weight. Are we to think now that they would have done a better job without all the exercise? Or that they could have really shed all that weight by sitting on their arse, but eating slightly less - really?

Anyway, I wonder where common sense has gone sometimes.

Child care subsidies and maternity Leave: New incentives and unintended consequences

The maternity leave debate was raised yesterday with an angle I had not thought about before, but being an economist, really should have. It suggests that maternity leave has the unintended consequence of encouraging women with young children to work rather than stay home with their children. Rather than bringing families together, it actually tears them apart. Let us examine this claim.

The article claims that more than 80% of children under 5 years of age attend formal day care in Sweden, where 12 months maternity leave is the norm. This figure must surely be closer to 100% of children aged 1-5, given that mothers (or fathers) are paid to stay home for the first year of their child’s life. In Australia, the number of children under 5 in formal day care is currently less than 40%, and much of that I would imagine is part time.

Both the pro and anti maternity leave debaters need to get straight the purpose of their policy. That way we can examine whether there are possible unintended consequences which can undermine the suggested outcomes.

For example, the pro-maternity side appear to want to reduce the cost of child rearing to working mothers. Fair enough. But the unintended outcome of a maternity leave is to decrease the costs of child rearing for working mothers, but not stay-at-home mums. The new incentive structure encourages mothers to choose work over staying home with youngsters.

Complementing maternity leave is the current child care benefit scheme. I have mentioned before how cheap child care can be after all the subsidies are considered – about $15/day/child. This policy increases the net benefits of working for mums, as the cost of working, in the form child care, is reduced. These subsidies provide incentives for mothers to return to work quickly after the birth of their children.

Sweden is the classic case study of the pro-maternity leave lobbyists, but I wonder if they have really examined the outcomes of Swedish policies in detail.

Consider this comment (all quotes from here): 

Policies such as childcare and parental leave have meant that the majority of Swedish women are employed in the labour market and remain there throughout their lives, with only minor interruptions after the birth of a child.


from 1990-1998 the percentage of women engaged in part-time work fluctuated between 43 and 47 percent, while since then it has decreased to between 33 and 36 percent.

It appears more kids in full time, rather than part time, child care is what you get.

The following graph is of the period following the introduction of 180 days parental leave, at 90% of previous salary, in 1974 in Sweden. This was extended to 9 months in 1978.

During the 1970s and 1980s, the state and the municipalities both covered approximately 45 per cent of the fees, leaving the remaining 10 per cent to be covered by parental fees.

Again, subsidising child care works, in that it increases the uptake of child care. Not subsidising it works too. Cost of childcare exploded in the 1990s, and

…by 1998, 17 per cent of the costs of childcare were being covered by parental fees

The graph above clearly shows this impact. But what of the 2000s boom? We have another policy change to explain that one.

In July 2001 the Swedish government expanded childcare to include children of parents who are unemployed and in January 2002 to include children of parents who are on parental leave looking after a sibling (Swedish National Agency for Education, 2003). In addition, in January 2003 all children aged 4-5 became entitled to 525 hours of free attendance in childcare per year.

It is time for the pro-maternity leave lobby to ask whether having almost all of our children aged 1-5 in full time child care is a desirable social outcome.

My gut instinct is no, but I have no reason for this position. My son is in family day care two days a week, and he started this at 18months of age. He enjoys it, and he learns to socialise with other kids. Since putting kids in child care is a voluntary action of parents, my inner economist says that it must be the best outcome in the circumstances. Of course, the circumstances are the direct result of government policy tweaking the incentive structure.

In the end, it appears maternity leave policies do not bring families closer together, but create a generation where parents and children become strangers.