Minimum Wage in BC

Source: http://www.motherjones.com/

With all the discussion around minimum wage - particularly the push for a $15 minimum wage. I was recently asked my opinions on the matter. 

Although I have many, which are two-sided and highly contingent on our basic assumptions of market structure in hiring minimum wage employees, the point here is not to make a bunch of normative statements. 

From my readings, much of the literature seems to be split on minimum wage, for every study I have read which supports raising minimum wage due to some list of net benefits, there is another study which is against minimum wage for some list of net costs. 

Rather here. I wanted to briefly evaluate the minimum wage condition here in BC. 

the following utilizes minimum wage data over the last 20 years which I obtained from here and utilizing the all-items Consumer Price Index for both BC and Canada from here. 

using these data sets I created two plots.

first, in BC minimum wage is not indexed to inflation, as a result, it is set intermittently based on the political pressure of the time. 

thus the first plot (below) shows the nominal minimum wage compared to what the minimum wage would have been if it had been indexed to inflation. Here I have indexed it to both the Canadian inflation rate as well as the BC inflation rate for comparison. 

What we witness is that in relation to 1997, the minimum wage today is higher than it would have been if the minimum wage had been inflation adjusted. Keep in mind this was definitely not true between 2005 and 2012. 

The next plot (below) demonstrates the real minimum wage (in 2017) dollars over the last 20 years. Again this real wage is constructed using both Canadian and BC CPI data, then compared to the nominal. 

Nothing too surprising from this graph, most the intuition could have been pulled out of the previous by comparing an inflation-adjusted wage to the true wage. But what we witness is a reinforcement of our previous statement that minimum wage in real terms is higher today than it was 20 years ago. 

Due to the nearly 10 years of constant wage at $8.00/hr we see the outcome that between roughly 2003 and 2012 the real minimum wage was lower than it was in 1997. That is those individuals earning minimum wage saw a steady erosion of their purchasing power over this almost 10 year period due to inflationary pressures. It took nearly 2 years of increasing minimum wage, from about 2010 to 2012 for the real minimum wage to match its 1997 level before continuing to increase. 

Keep in mind this is strictly observational - there are no statements being made that 1997 was the proper minimum wage, which subsequently saw years of erosion. Nor is today's minimum wage necessarily a correct minimum wage either. 

Depending on our assumptions of labour markets minimum wage can either help correct a market failure (in the case of monopsony or oligopsony) or in any other case minimum wage will cause a market failure. 

Final note, because all around we are seeing a big push for $15/hr minimum wage. My big response to this is what makes $15/hr so special? based on the market situation, perhaps no-minimum wage might be optimal, perhaps $16.26 might be optimal. 

The takeaway is that, as far as I can tell, there is nothing special or optimal about a $15/hr minimum wage, rather it is a convenient, round, rally cry - where $14.12/hr just does not have the same ring to it. 

What are your thoughts? feel free to comment below. 

Almost Half of Canadian mortgages up for renewal next year.

Bank of Canada has recently released a report on Canada's financial system and the risks presented to it. the full report can be found here.

Although there was a lot of interesting insight into the Canadian mortgage and debt situation of Canadians, the part which really stuck out to me was that 47% of Canadians are set to renew their mortgages within the next year. Expanding this out, 78% of Canadians will be renewing sometime between now and 2020.

On this there has been a lot of talk of the renewal shock, shouldn't be a surprise that interest rates have been creeping up over the last year. Thus at first glance, I bought the whole renewal shock argument.

I then started thinking back to about 5 years ago when I was underwriting 5 year fixed rate mortgages typically at about 2.99%. Fast forward to today and the local bank is advertising 5 year fixed rates of 2.84%, jumping on to "ratehub.ca" shows an even lower 5 year fixed rate of 2.69% currently.

Although I don't recall giving out many rates lower than 2.99% looking back at ratehub.ca - it appears that during the spring early summer of 2013 rates fell to a low of 2.64% before rising to a high of 3.68% (I do remember when this spike happened).

The end result is that through most of 2013 rates were on par or higher than rates are today. Taking a ceteris paribus approach that today's 5-year fixed rate will more or less stay constant through 2018 means that the 47% of Canadians renewing this year will be renewing at a similar if not lower rate than their current mortgage contract.

It is not until about the end of 2014, early 2015 that the 5-year rate dipped below current rates. That is if rates were just to stay constant, those renewing in 2019 and 2020 will likely see a higher rate on their renewal than they had on their previous contract. likely this will not be a problem though as these families have also likely seen their incomes grow over this time period.

All this to say, Although it is interesting that we have such a huge bulk of mortgages entering renewal in the next year, it may be much ado about nothing. likely many of these households will be renewing at contract rates similar to their previous, and thus unlikely to see a payment shock.

The potential problem that may arise - often renewals provided the financial institution with the time to re-visit clients finances, allowing the opportunity to up and cross-sell products or consolidate debt into the mortgage (push a 20-year term back out to 25 for example).

While the new rules coming into effect are not going to affect renewals - they will end up affecting any mortgage which is re-written. this means it will greatly inhibit the financial institution's ability to rework clients debt, or for clients to consolidate larger consumer debt into their house.

What are your thoughts on this report?

Is it that this massive 47% of mortgages coming up for renewal over the year is a cause for concern or just business as usual?

Feel free to comment below.

Canadians most indebted in OECD

Stumbled across this CBC Article today, you can find the full article here

I have written and spoken on much of this before, but a brief summary is that Canadians currently are the most indebted of any OECD nation with 101% household debt to GDP. with the link being made that the majority of this debt is being held in real-estate or mortgage debt.

I know the Bank Of Canada has expressed concern about this the last few times they have raised rates to control inflation.

Reason being, here in Canada, majority of mortgage holders are on five year fixed rate mortgages. That is, every five years they need to re-negotiate their mortgage rate with their financial institution. So any borrower who locked in 4 years ago at record low rates, now that they are coming up for renewal, they may be in for a surprise as their mortgage payments drastically increase in order to keep their amortization schedule on track.

If inflation ever rebounds forcing the Bank of Canada to act on interest rate to fulfill their mandate ... many borrowers may find themselves in trouble.

Adding to the problem, the article also notes that house prices in Canada are 50% over-valued in relation to the corresponding rental price for that real-estate. Although there are several ways in which rental prices are tied to real-estate price, if you are interested about the relationship, I have written about one here.

What are your thoughts on the revelation, shocking, or as expected?

Feel free to comment below.

Climate change and trump

Been a long while since a post, as I am attempting to complete several large projects for a few posts all at once.

In the meantime, let's keep things moving with a few short topical posts on current events.

Donald Trump on Climate Change:

Need I say any more?  I hope no one actually believes this.

Why was he tweeting this? well on the subject on the same day the following report was released arguing that global temperatures are definitely rising with 2017 set to be one of the hottest on record. The report also made the causal link between human actions fueling climate change.

The report can be found here.

Thoughts?

Changes to enrollment priorities within SD 61.

Image Source: https://www.sd61.bc.ca/

A while back now, early June 2017, the Greater Victoria School District (SD 61) released a press release on the results of a survey they had sent out, as well as the resulting policy changes, a change in enrollment priorities within SD 61.

At the time I had a few parents bring this report to my attention, asking me to look into the survey results, as they felt that the released results were misleading, or rather that the proposed policy changes did not appear to line up with the opinions of most parents (in their view).

Initially, my first thought was "Everything is probably legitimate and it's great to see some evidence based decision making on the part of the school board" ... but within minutes of reading the press release, I began to wonder if this press release was the result of a rushed ad hoc job on the part of the school district, or if they were purposely trying to twist the evidence to support a pre-determined policy. Let's hope that it was the former and nothing sinister is at work here.

The full press release can be found here for those interested.

Early in the results, SD 61 claims that their survey had a 70% response rate. (starting page 12 of this document)

• 3450 to the parent survey
• 418 to the student survey

Yielding a total of 3868 respondents. 70% response rate, pretty good! (mind you no back ground as to the methodology as to how these surveys were distributed). 

The next bit is the geographical distribution of the respondents to the parent survey, I have created a little table (below) to demonstrate the breakdown including the relative frequencies as well as comparing these relative frequencies to the relative frequency of the population in each municipality and school aged children. Keep in mind, given limited access to data (and time on my part ... this is only a blog!) we are looking at different years for each of these points -- but we should expect the relative frequencies to stay relatively constant over this short time period:

The first thing we should notice is that despite the earlier claim of having 3450 parent respondents, we only have a geographical break down of 3168 surveys, meaning 282 (8.2%) of the respondents were not included or dropped for what ever reason.

The second thing we should notice is the large discrepancy between the relative frequencies of the municipalities - specifically, Saanich is grossly under represented while Oak Bay is grossly over represented. (The two yellow rows are identified as such as there are no true relative frequencies to compare these too).

Here is a bar chart of the above table -- because pictures are nice too.

So, page one (truthfully page 13 if you're following along) of the report so far - some questions raised, but perhaps nothing too misleading so far -- Let's explore the reported results of the survey.

The first thing to note is that these reported results are only from the parent survey, the details of the student survey are not presented. Again pay attention to the numbers here.

The first question is along the lines of enrollment priorities. specifically, should siblings have priority (in order to keep siblings together at same school) or should catchment students have priority? meaning siblings may be split between schools.

The results (as presented in the report) are as follows:

Based off of this - it seems as if a strong majority of respondents (almost 61%) support catchment school enrollment over keeping siblings together. But pay attention to the total respondents ... only 2971. Turns out 469 respondents "skipped" this question for one reason or another.

The big question then - is it important that 469 respondents skipped this question? should these 469 respondents be dropped from the results? or should we include these 469 as perhaps a "no opinion" category? Let's include these skipped responses and see how our relative frequencies change.

If we include these skipped responses -- now only 52.65% of respondents support catchment over siblings ... not such a loud statement anymore! Additionally, with the 469 skipped included, we only have 3450 respondents. What happened to the other 10 respondents?

Sadly as we move through the other responses we see a similar trend. we have 469 respondents who decided to skip a question, and were just completely omitted as a result.

We see the same situation here - The question being, who should have class priority each year, non-catchment returning students or new catchment students -- the reported results (omitting the skipped) say that almost 58% support returning non-catchment students. If we include the 469 who skipped the question, less than 50% support returning non-catchment students having priority, a sudden change in results if we are interested in majority support.

Again, total responses are only 3440, not the 3450 stated as total respondents. 10 are still missing.

The final reported question is asking about what should happen when students finish at their current school and are set to transfer to their middle or high school. Specifically, should out of catchment students simply follow the school path (certain elementary schools feed into specific middle schools etc.) or should these students be required to go to their catchment school, and have to apply to follow the school path. 

The interesting part of this question is that we only have 2914 responses, with no information about skipped responses or any hint about the other 536 omitted respondents. Do we assume that 536 (15.5%) of respondents skipped this question? Or did these 536 spoil their response, circling both answers? unfortunately, we have no insight, only that 2914 answered this question as opposed to 2971 which answered the prior two.

Sadly, it is reports and lazy statistics like this which are supporting government policy. The school board has already met and revised enrollment priorities based off of these results.

The biggest question I have is this. If there are so many errors in this 'polished' press release, can we trust any of the methodology or process used in determining any of these results? remember, all that is being presented in the above is summary statistics - we have to trust that the individuals who put this report together properly sorted, compiled and calculated these statistics properly. Given the issues, I have just raised - I have my doubts.

What are your thoughts on this? feel free to comment below.

Climate Change and the macro economy.

IPCC Scenarios, Source: https://earthobservatory.nasa.gov/Features/GlobalWarming/page5.php

Recently here in BC, we have had a change in the legislature, a return of the NDP (kind of) after 16 years. 

I say kind of because for those not familiar, the NDP have only obtained power by brokering a deal with the BC Green Party to obtain a slim majority through their working relationship and by slim I mean one seat. Truthfully much still needs to be determined - a Speaker for the House will still need to be elected. If this speaker comes from the NDP/Green, it will result in an equivalent number of seats between the BC Liberals and the NDP/Greens, meaning any legislation will need to be carefully crafted if they hope to pass it through the house. 

political background aside -  the whole point to get at is that the NDP and Greens have committed to increasing the carbon tax here in BC. You can read my thoughts about the carbon tax in a previous post about Alberta's here. To summarize that post, Carbons taxes are desperately needed -- however I don't think anyone will actually be happy with one being put into place -- essentially because we are now forced to pay for something which we previously were getting for free (pollution).

Now there are serious economic implications of implementing a higher carbon tax - which will often be presented in the news - how higher taxes will hurt the already fragile economy. How if BC increases a carbon tax while other provinces do not, we will lose businesses to other provinces, etc. 

While all these arguments hold an element of truth - the problem is they are all short-term arguments. that we shouldn't implement a carbon tax today because it will hurt today. The problem with this argument is that it will hurt a lot more tomorrow if we don't do it today.

On this topic I have recently come across a report released by the European Systemic Risk Board which was published in February of 2016 titled Too Late, Too Sudden: Transition to a low-carbon economy and systemic risk, the full article can be found here.

Where other papers I have read focus on the devastating climate effects on the economy due to inaction on climate policies, this report takes a different approach. Acting under the assumption that humanity will eventually be forced to deal with the climate problem - either today, allowing a gradual change towards a new low-carbon society, a "soft landing". Or in the future when the situation is so dire that the costs are very real, apparent and demanding immediate action, a "hard landing". 

In the latter, as we will be forced to rapidly adjust to low-carbon production processes the effect on the economy will be severe and systemic. To look at one side of this, the report suggests that massive amounts of capital will be rendered worthless in a short amount of time due to their reliance on carbon fuels. 

A short snippet on this from the report:

Avoiding substantial climate change implies that assets dependent on fossil-fuel energy will become obsolete. Carbon-intensive sectors such as transportation, manufacturing, agriculture and real estate rely on a large stock of long-lived physical capital whose efficient use requires a continued supply of cheap energy and, in many cases, energy specifically derived from fossil fuels. In a “hard landing” transition to a low-carbon economy, carbon-intensive physical capital (such as conventional vehicles, electricity supply infrastructure, machinery used in manufacturing processes) would quickly become obsolete.

It often seems rather removed to look at the effects of rapidly transitioning to a low-carbon society when talking about generic capital and manufacturing processes which often appear as a world removed to most Canadians.

When we talk about the fact that during a rapid adjustment to a low-carbon society that your house or automobile will quickly become obsolete and worthless due to its dependency on fossil fuels - now, suddenly, this becomes a reality and a situation which we would hope to avoid given how much of our individual net worth is held in these assets.

The report itself is a very light easy read which I would recommend. Hopefully showing that we need to start acting today in response to this (as painful as it is) rather than wait until the 11th hour.

Unfortunately - given human behavior - I will be pleasantly surprised if humanity can unite to deal with this problem before we are forced to. But maybe I am a bit of a pessimist.

What are your thoughts? Feel free to comment below.

The IMF on Canada's Housing Market

Image Source: Curry, Bill. Globe and Mail, "IMF warns of significant risks from Canada's housing market",https://beta.theglobeandmail.com/report-on-business/economy/imf-praises-infrastructure-bank-plan-flags-housing-market-concerns/article35160977/?ref=https://www.theglobeandmail.com&service=mobile

Recently came across this article in the globe and mail, the full article can be found here. It seems that once again the IMF is warning Canada that our housing market is overheated and that this may have serious consequences for future economic performance.

Here the IMF notes how the Canadian banks credit ratings were recently downgraded expressing fears over the number of consumer loans and mortgages on their books and the potential risk that they present given the exceptionally high levels of consumer debt.

I was happy to see this little bit in the report:

Ms. Lim's staff statement also took issue with the foreign buyers tax approach introduced in British Columbia and Ontario that "discriminates against non-resident buyers." The IMF states that non-resident activity is not the sole driver of housing prices and the provinces should replace the foreign-buyers taxes with more effective tax changes aimed at discouraging speculative activity.

Where the emphasis is my own.

What are your thoughts on this? Are we heading for a correction? Or, alternatively, is there too much on the line for the government to allow a housing correction to actually happen? If that is the case, can we have this hypothesized 'soft landing'?

feel free to comment below.

A short TED talk I found interesting

first, you may have noticed that posts have slowed down as of late. For those who have been regularly reading and checking back - this is not a new long-run trend. I have found myself in a busy semester, lacking the time to regularly develop and post new articles. That being said, expect a few short posts, like this, and then full ramp up again once we hit mid-June, July.

Onto the video:
Mona Chalabi: 3 ways to spot a bad statistic
https://go.ted.com/CyJb

I found this particularly relevant given all the media attention and criticism (even rejection) of statistics and data/evidence-based decision making.

Some alarming discussion along these lines can be found with a quick google search, and with the recent deletion of some EPA data sets in the United States (Climate change can't be happening if we can't prove it?):

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-epa-climate-20170501-story.html

What are your thoughts on these? feel free to comment below.

Comparison of BCAS and Vancouver Fire call types.

Image Source: http://www.gettyimages.ca/detail/illustration/icon-set-emergency-services-royalty-free-illustration/165723541

In my previous post, which can be found here. I evaluated the cost structure differences between Vancouver Fire and BC Ambulance (division of BCEHS) operations in Vancouver.

Here I am following up with a comparison of the breakdown of the types of calls Ambulance and Fire responds to. In my previous post, I mentioned that Vancouver Fire responds to nearly 50% of all Ambulances' calls and commented that given the much higher cost per call for Vancouver Fire that this may be a miss appropriation of public funds, as BCAS may be able to provide the same service for cheaper if they beefed up their resources.

Of course, the issue becomes. What if, the majority of calls which Vancouver Fire responds to are types of calls in which their special skills and training come into play adding a benefit over an additional ambulance crew. For example, if most of these calls are HAZMAT, Rescue, MVA (Motor vehicle Accident), or Fire (Burns). Then perhaps this high rate of call out is justified!

As promised, here is the breakdown of the calls received by BCAS in 2014 in Vancouver and corresponding Fire response based off of call category.

In the above bar chart (organized by highest to lowest frequencies of BCAS calls) we witness that the top five calls which BCAS responds to are for

1.  Sick (12,393 calls)
2. Unconcious (6107 calls)
3. Psychiatric (4890 calls)
4. Breathing Problems (3975 calls)
5. Chest pain. (3672 calls)

At the same time the top give calls which Vancouver Fire responds to most are: 

1. Sick (4157 calls)
2. Unconcious (4015 calls)
3. Breathing problems (3975 calls)
4. Chest pain (3508 calls)
5. Falls (2233 calls)

The part that I find most interesting about this, is that (as far as I know as an observer!) there is no added benefit of special skills from Fire in the response of these calls over having an additional paramedic crew respond.

Next, let's look at how many of BC Ambulances calls Vancouver responds to as a percent by call category. 

Right off the start - Fire responds to 100% of BC Ambulances HAZMAT calls. Just as I would have expected, the use of their specialized skill set to assist and aid in this situation. 

Next down, Fire also responds to 100% of breathing problems, 99% of Cardiac arrests, and 96% of chest pain. For these calls, I am struggling to understand what extra benefit Fire would provide over an extra ambulance crew (Any insight would be appreciated! as hopefully there is a rational)

What I find interesting is the other side where Fire only responds to 6% of the MVA's which Ambulance responds to (I am assuming that Ambulance only responds to the MVA's which are serious enough to justify). This I find interesting because if the accident is serious enough for Ambulance, might there be a need for Fire in this case as well?

This last graph is Ambulance and Fire response by call severity. from Alpha to Omega, which I understand is most serious to least serious. 

My (updated) understanding is that these call severities, in order from most severe to least, go Echo, Delta, Charlie Bravo, Alpha, Omega. Given this call ordering, our fire response perfectly lines up with the frequency of Fire response, with Fire responding to nearly all Echo and Delta calls and showing up with decreasing frequency as we move down the call severity. 

What are your thoughts on all of this? Feel free to comment below.

EDIT: A previous version had the order of call severities reversed, Thank you for bringing this to my attention in order to correct.

Costs of Emergency Response: Comparing Ambulance in Vancouver with the Vancouver Fire Department.

Image Source: http://www.bcehs.ca/PublishingImages/BCAS_VAN_033012_113.jpg

A while ago I stumbled across this dataset which outlined the call volumes and types of calls which BCAS (BC Ambulance Service) responded to in the lower-mainland. Although I have plans to use this dataset for some future analysis. At an initial glance, what popped out at me was that the fire department responds on average to about 5% of BC Ambulances calls in the entire lower mainland but, close to 50% of calls in Vancouver itself. (in 2014)

This piqued my interest and got me wondering. What is the cost structure of the fire department? what is the cost structure of BCAS?

From a cost perspective, I have always wondered how cost effective it is to send 6 firefighters and the large fire truck to that many calls - both from a wage and capital cost perspective. Keep in mind, both BCAS and the Fire Department are paid for with public funds, just at different levels of government, provincial and municipal respectively.

Now, luckily the Vancouver fire department provides an extremely detailed breakdown of their previous years' activities in each municipal budget, these can be found here.  Unfortunately, BCAS provides a much less detailed public budget, as a result, I have had to do my best, scrounging together information from the above dataset, the BCAS 2014 annual report, which can be found here, and the BCAS 2014 Vancouver demand analysis which can be found here.

Compiling all this information I obtain the following table, which has also been augmented with wage data from workbc.ca

The big disclaimer here is that the BCAS expense data for Vancouver and the Lower mainland is entirely estimated at 25% and 50% based off of call volumes in relation to the provincial level. As such these are entirely arbitrary and may have no bearing on reality, but at least provide an insight into these areas.

While the expenses are estimated, the call volumes and labour information is accurate and obtained from the above-noted BCAS reports.

The second disclaimer is that Vancouver Fire provides their staffing information in terms of FTE, while BCAS provides it in terms of regular full-time, irregular full-time and part-time.

Through hear-say I understand that many of these "part-time" paramedics in Vancouver can, and often do, work more than a full-time schedule. But, at the risk of underestimating, I assign each part-time employee only 0.5 FTE while each full-time 1 FTE in calculating the FTE for BCAS in each region.

Finally, for the per crew information, BCAS generally operates in crews of 2 while I understand Vancouver Fire generally operates in crews of 4. (thank you, Brian, for this update! Also recognizing that Vancouver Fire will operate with as little as 2 for some medical calls. While this changes the number of FTE crew, this does not change the total expenses/call)

Now some discussion of the actual results of the above table.

My first surprise was that only 3% of the Vancouver fire departments calls are actually to deal with fires. Another 25% of their calls are fire inspections, to finish off with 72% of their calls being medical in nature, supporting BC ambulance. That means despite being a fire department (with their budget being about twice the estimated Vancouver BC ambulance budget) they primarily act in a capacity of being first responders to medical calls.

Now in a bit of preliminary research on this topic. I looked into the importance of first-responders, and empirically it appears that having a fast response time, all else equal, greatly increases the viability of the patient. My question then; does society benefit more when the first responder is from the fire department? or given the cost of fire response, would a modified response structure with BCAS be more cost effective and provide the same patient benefit?

Clearly, the Fire Department provides an extremely valuable service, especially in cases of vehicle accidents and hazardous materials. Unfortunately, I have not yet worked out from the above dataset, what percentage of Fire calls are due to hazmat or MVI (Motor Vehicle Incident), or just medical, with the request of a first-responder (Fire) crew. This will definitely, be the area of future follow ups! (followed-up here)

To finish off this post, as it has gotten a little long, If we evaluate the cost per call and the wage cost per call between calls in Vancouver for BCAS and the Fire Department we see that:

• Vancouver Fire has a wage cost per call almost 8 times larger than BC ambulance.
• Vancouver Fire has a total cost per call almost 3 times larger than BC ambulance. 

Although this data is already 3 years old and pre-fentanyl crisis, I find it fascinating that most of the news coverage on the crisis comes from the fire department, resulting in calls for more department funding when perhaps a more cost effective solution would be to increase ambulance funding and staffing.

But then again, these observations are just from a quick back of the envelope calculation. Perhaps there is much much more to the story. 

As I said my interest has been piqued and I now have a good chunk of data to pour over. 

Move over real-estate market, I have found a new topic for the next little while.

What are your thoughts? feel free to comment below.

EDIT: In retrospect, this article may seem like I have decided to pick a side in an emergency services battle for supremacy. This is not the case! Rather the above article is purely motivated by my curiosity and surprise based on the results and through this hopefully stir some thought on how these essential services may be provided in a more cost-effective manner!

#Budget2017

Image Source: https://goo.gl/images/SWCjEH

I was really looking forward to the federal budget, I had big plans to look through it and be able to write a bit of praise, a bit of criticism, and everything between.

Instead ... I am left with not much to write about because there is very little that is actually happening in this budget!

First, the 2017 Canadian Federal Budget can be found in detail here, or summarized fact sheets can be found here.

Thus ... to be nitpicky, a few comments on the budget below:

Apparently, this budget is going to help the middle class (What is the middle class?) - at one point Morneau says:

We’re repairing nearly 50,000 social housing units, to make sure families have a safe and secure place to live.

We’ve lifted 18 long-term boil water advisories in First Nations communities, getting us closer to our ultimate goal of ensuring that every child in Canada has access to clean drinking water.

Ten years from now, our cities, towns, and northern and rural communities will be healthier and better connected.

Our air and water will be cleaner.

This is admirable, the lifting of 18 long-term boil water advisories is commendable! but my issue with this is that - in the first liberal budget, they gave a small amount of money to commission a study on housing affordability, to a degree I was expecting a follow-up to this in this budget, especially since the issue of housing has been dominating local media, especially in Vancouver and Toronto.

"To make sure families have a safe and secure place to live", is that except for families in Vancouver/Toronto? where I am sure we are going to need more than 50,000 repaired social housing units to house a "middle class" which is finding it harder and hard to afford basic shelter.

Okay, given my recent posts on shelter and real-estate, that little rant should have been expected, but there is one area in particular which really struck me, that most in the media seem to be praising.

That is the governments pick of 6 specific industries which it deems worthy to invest in, to further develop our comparative advantage and ability to produce and trade in these fields. While in theory, the process of the government picking "winners and losers" amongst industry can generate comparative advantage and assist an economy - but what happens if we get it wrong? In this case, the government is considering the following 6 industries:

1. Digital
2. Clean Technology
3. Agri-food
4. Advanced manufacturing
5. Bio-sciences
6. Clean Resources.

I mean ... if the politicians actually get things right, this could be good! And really, politicians with all their resources and information must be pretty good at picking winners and losers - just look at the Canadian Aerospace industry and bombardier.

Overall, this is a midterm budget and in the back of my mind, I had low expectations for it. 

At the same time, I kept telling myself that it was a midterm budget and because voters are short-sighted and because to our south we have some interesting politics happening. So perhaps the government will present some serious structural changes (few that they campaigned on, and which Canadians had been asking for) - after all, they have the time to recuperate before the next election if they turned out poorly! 

so maybe it was a well-played wait and see on the part of Morneau, or perhaps it will turn out to be a missed opportunity. 

What are your thoughts on this budget? Much ado about nothing? any parts you liked, didn't like, had hoped to see?

Calls for extending the foreign home buyer tax

Image source: http://vancouver.ca/about-vancouver.aspx

If you have been watching the news, there have been recent calls to extend the Vancouver foreign home buyer tax (a 15% tax levied on foreign buyers of real-estate) from Vancouver to Toronto and Victoria as well.

some of these news articles can be found here, here, and here.

What I find amazing about these arguments for a foreign homebuyer tax is the covert racism that underpins it. That somehow, only foreigners are able to afford homes in such quantities that it stimulates demand and pushes up prices!

Specifically, (in my opinion at least) the problem is not foreigners willing to pay obscene amounts for homes - if they plan to reside in said homes. Rather, the problem becomes when individuals (whether domestic or foreign) are willing to pay obscene amounts for these homes because they view these as an investment rather than a form of shelter.

Let's compare and contrast two similar and current situations.

First, Imagine if you will, an individual from China decides to move to Vancouver and purchased a  $1 million dollar condo to live in, paying a $150,000 tax because they are not a Canadian citizen or permanent resident. However, this individual has planned to live in this home - maybe attending school, working, or starting their own business, all in Canada and contributing to local economy.

Meanwhile to contrast.

Second, a Canadian investor from elsewhere in Canada buys a condo in Vancouver for $1 million. Because this investor is domestic, he (she) pays no foreign homebuyer tax. At the same time, this investor is not residing in the condo, nor are they renting it out, as they are betting on the market appreciating and earning capital gains through this price appreciation.

What is the difference between these two cases?

In both cases, there was a new purchase of real-estate, adding to the demand for real estate in Vancouver.

the difference rests in what is done with that purchased real-estate.

In the first case, the foreign national has purchased the condo to live in, using it as shelter, thus jointly adding to the local economy, spending their money and spurring economic activity. (even if they are also hoping to sell in a few years for capital gains!).

In the second case, the domestic investor has purchased the condo to sit empty. thus adding to the demand for real-estate, but other than the initial contribution to the FIRE (Finance, Insurance, Real Estate) industry, there is no prolonged contribution to the local economy.

The question then - which scenario is more damaging?

Well, if real estate is viewed as just another good, then neither case is overly damaging, as in both cases both the buyer and seller are obtaining value from their transaction - which is why they transact!

However, if real estate is understood to be the primary form of shelter (a basic human need) then the second case clearly carries more social costs (increased demand pushing up the price while excluding others the use of the shelter.).

While the first case also adds to the demand, pushing up the price and excluding others the use of the shelter - we are also experiencing a continued contribution to our economy, through an addition to the labour force, additional consumer spending, and possibly investment, all of which helps spur the economy which may not happen in the pure real estate investment situation.

To wrap up, my personal feeling, and opinion. Is that there is a problem with the current real estate market, but that foreign buyers are not in themselves the problem, but rather an easy target. The problem lies in the use of real estate as an investment - something to be bought to earn a return rather than something to be used as a shelter. In this case, it is not that foreigners are the problem, but real estate investors in general, whether they be domestic or foreign.

Thus a foreign homebuyer tax is discriminatory, and perhaps even violates trade agreements which require laws to be enacted fairly over both domestic and foreign individuals and companies. Specifically, what should be evaluated is a changing tax structure to penalize real estate speculation in general, regardless of ethnicity - however, this is clearly easier said than done!

What are your thoughts on this? feel free to comment below.

EDIT: I want to clarify, real-estate investment in terms of a rental property is not really an issue in my mind and in fact should probably be encouraged. The issue becomes real estate investment in vacant properties for capital gains and given the recent census and many investigative news pieces, this appears to be a growing problem.

Apocalyptic equality

Image source: Four Horsemen of Apocalypse, by Viktor Vasnetsov. Painted in 1887. (Public Domain)

First off, I have not yet read the book (but it is now on my reading list!). But I was recently referred to this article after a conversation on the topic of income inequality.

The Economist newspaper offers an interesting synopsis of the book "The Great Leveller: Violence and the History of Inequality from the Stone Age to the Twenty-First Century" By Walter Scheidel. The Economist synopsis can be found here.

From reading this synopsis it appears the Scheidel's thesis is that political initiatives to reduce income inequality have historically never had a significant effect on the income distribution. Rather it has historically only been through periods of great war, pandemic, total revolution and similar catastrophic events which have had any real [favorable?] impact on income distributions throughout history. 

Not necessarily an uplifting piece for those concerned about the notion of fair income distribution, but may prove to be an interesting read! 

On this topic, the first thought hat entered my mind as I read this synopsis was that (with the exception of pandemic) couldn't it be argued that Wars, Radicalization, and Revolution are just as likely the cause of a disenchanted social grouping embracing extreme tactics to try to improve their degrading lot in the social order? 

That is, whether it be through democracy or other violent mass uprisings. as income concentrates at the top and the majority of people feel left behind, their willingness to accept extreme or radical solutions may increase. At least, my reading of history seems to suggest so. 

Again, I have not yet read Scheidel's book, perhaps he brings this idea into his work, that often income inequality may lead to these events which then decrease income inequality ... scary thought that I would hope is proven false if that is the only solution to a growing income inequality. 

As Ii said. this book is definitely on my reading list! -- Anyone have a chance to look over this book yet? what are your thoughts? Once I give this book a read, I will post my own synopsis.

Present Value of shelter -- part 2

Image Source: https://clipartfest.com/download/c4caaa1fc43167db76f3e9cf0206708647023d40.html

Here is part two of a post that aims to evaluate housing as an investment ... where owners are expecting to earn an annual return (rent) as well as capital gains due to appreciating property values upon final sale.

in part 1 - I laid the groundwork as to the basic premise which would be used to evaluate the prices of real-estate.

recall -- that basically, the most a rational investor would be willing to pay for an investment is the present value of the income stream of the investment, with all future income being discounted by a corresponding equivalently risked market return. for a re-hash as to what this looks like, part 1 can be found here.

In this, we have to lay some basic assumptions out first.

• housing in Victoria, BC (the CRD) has had an average growth rate of 5.07% per year from 2005 to 2016 based on the Canadian Real Estate Associations Housing Price Index (CREA HPI) which can be found here.
• (For those familiar with the rule of 72 -- this estimates that if this continues, the price of housing will double approximately every 14.2 years.
• Rent prices between 2015 and 2016 in the CRD increased on average by 5.77% although this does differ from a min of 4.9% for a 1 bedroom and up to a 6.8% increase for a 3+ bedroom, as determined by CMHC which can be found here. 
• Recognizing that between 2015 and 2016 there was an influx of people into the CRD pushing up prices, coupled with not being able to have access to a longer time frame of rental prices, I have arbitrarily adjusted the annual growth rate of rental prices down to 4.5% from 5.77% as I feel this 5.77% is not representative of normal rental activity.
• Second, BC tenancy act allows landlords to increase rent at 2% above inflation ... given a targeted inflation rate of 2%, this further seems to fit this assumption
• For reference: Expected return over the last 61 years from an aggressive to a conservative portfolio is as follows: data obtained from here.
• Aggressive portfolio (80% equity, 20% bond): 10.9% per year.
• Moderate portfolio (60% equity, 40% bond): 9.8% per year.
• Conservative portfolio (20% equity, 80% bond): 8.11% per year.

Recall we want to compare our payments from this investment in real-estate versus an equivalently risked investment -- Based on a preliminary search, the consensus seems to be that real-estate is less risky than equities, but riskier than bonds (due to potential maintenance problems, non-payment, periods of vacancy etc.). Thus perhaps around 9% similar to our Moderate portfolio may be good grounds to compare real-estate to (we will, in fact, calculate for an array of interest rates).

Presently we have the following price and rental situation in greater Victoria (CRD):

If we (as investors) were to assume that our annual house price was to continue to increase at 5.07% per year and that our annualized rental payment could be expected in to increase at 4% per year into the for seeable future, then we should expect the following present values if we hold on to the property for 30 years, collecting rent, and then willing to sell it for its market price.

Where if we sum up the present value of the future income streams over 30 years (discounting by the respective interest rates) we see that at the current market price -- If the interest rate is 7% then all real-estate regardless of unit type is a great buy! alternatively, as we move up to an 8% interest rate, one bedroom and three plus bedroom units are over priced. Finally, as we move up to a 9% interest rate, all units are over priced.  

Now perhaps investors are not actually looking to purchase real estate to invest in for a 30 year time period, so perhaps that is too long to consider. Thus, let's graphically look at the present value of each unit based off of its income streams over a 0,1,5,10,15,20,25 and 30 year time period. keep in mind that over a time period of zero, we have the current price of the unit. 

As this would be a bit too cumbersome to display in tables, we have graphs:

Updated: As was kindly pointed out to me, the previous graphs in this post were very misleading - the nature of a line graph seemed to show how the price of real-estate was expected to change over the next 30 years when this was not the case. the graph instead is demonstrating what the present value of real-estate is based on the period of time you hold it for as an investment.

At a 7% prevailing interest rate, all unit types are currently for sale for cheaper than their present value for all holding period.

As we move to an 8% prevailing rate, three or more bedrooms and one bedroom units initially have higher present values (for short holding periods) but quickly decrease.

 Finally, as we look at a 9% prevailing rate, we see rapidly falling present values for all holding periods greater than 1 year -- indicating that all unit types would be overpriced relative to their present value of future income.

As stated at the beginning, real estate as a risk class is considered less risky than equities, but riskier than bonds -- I arbitrarily assumed a rate of 9% based off of historical portfolio returns. It shouldn't however, be a surprise to learn that in recent years we have been in a lower interest rate environment, thus it is under this rationale that I have included a range of prevailing rates. To finish off, for reference, I will include one lower rate of 6% and the corresponding present values.

The takeaway? depending on our view of the prevailing interest rate on a similarly risky investment, current real-estate in the CRD could continue to increase, or could already be over-priced.

Of course -- all of this is extremely sensitive to our assumptions - especially the growth of real-estate and rental prices into the future ... if either of these begins to slow, then we have a very different story!

What are your thoughts -- should real estate be viewed as an investment? or strictly as a means to provide shelter? Feel free to comment below.

Thank you to Francis and Joel for your comments leading to this revision!

Present Value of shelter -- part 1

Here comes another post about the housing market in BC as the news keeps peaking my interest along different avenues of this topic.

This time I began to wonder if maybe the driving demand for housing is not at all for shelter -- but what if the primary consumers of real-estate saw real-estate as an investment. That is, a place to park their capital in order to earn a decent return.

This idea was spurred by a recent article the tyee, an independent online newspaper written by Geoff Dembicki which can be found here.

I'm not sure I fully agree with all the conclusions made in the article, but just the same it made me think. If real-estate is primarily seen as an investment, then we could realistically obtain a price for real-estate based on the expected returns to be had over time.

First, this will be long enough to describe the methodology, the basic concept by which we will attempt to measure the present value of housing. Thus for this post, part 1, I will strictly be discussing one way to determine the price of an investment, while in a follow-up post I will apply this method to the housing market to explore the effects.

The way I normally teach this premise is to introduce the idea of some magic machine that you can buy and put in your house. This machine then regularly creates money, such that it generates $1000 a year. Now this machine is only capable of doing this for two years, then runs out of its magic. Despite the loss of the magic, the machine is still worth $5,000 for the scrap metals and parts - thus it can still be sold after it stops producing your money.

Based off of this -- I ask, "What is the absolute most you are willing to pay for this machine?" typically the answer is $7000 ($1000 from each year and the $5000 you sell the machine for) The rationale being that if you paid $7000 for this machine, you neither made or lost money -- thus it would be the most you would be willing to pay.

Well, the problem with this answer is - If I offered $7000 today or $7000 in 2 years - which would you take? Most rational individuals would take the $7000 today because they to a degree discount the future.

Alternatively, they know that even if they have no need for the money today, but might in 2 years time, if they take the $7000 today and invest it at a market rate of return they will have more than $7000 in two years.

In this same way, the $1000 we earn from the machine at the end of year 1 is less than $1000 today, and the $5000 we sell the machine for at the end of the two years is less than $5000 today. Thus we need to discount these values based on the market interest rate.

Thus we say the present value (maximum we are willing to pay) for this machine would be equal to:

Thus in each year, we discount the payment (and the final sale price) by the equivalent interest rate we could have earned, had we instead bought an equivalent risk-adjusted item in the market.

Thus if we assume a similar case would have held an interest rate of 5% we have the following maximum willingness to pay for this magic machine:

Thus the absolute most you would be willing to pay for this machine is $6394.56 as this is the amount that if you had today, would yield $7000 in over 2 years time at the given interest rate.

In this sense - If the current price of this machine is anything less than $6394.56 then you buy this machine without hesitation because it will be making some positive amount of money for you.

That is, to put it a different way -- $7000 in two years is worth $6394.56 to you today ... thus if you could pay $6200 in order to get this machine, you have instantly made $194.56.

In a follow up post I will take this basic premise an apply it to the real-estate market.

"Why Trumponomics fails"

link to an interesting blog piece by Robert Reich called "Why Trumponomics fails".

Specifically great are the comments Trump recently made about the new Boeing being made in the US (realistically assembled). but more relevant to the topic at hand, the situation of the workers who do the majority of the manufacturing of the components which are then assembled in the US.

To quote Reich below he states the following when speaking about the workers in the countries where a good chunk of the production takes place:

Notably, these companies don’t pay their workers low wages. In fact, when you add in the value of health and pension benefits – either directly from these companies to their workers, or in the form of public benefits to which the companies contribute – most of these foreign workers get a better deal than do Boeing’s workers. (The average wage for Boeing production and maintenance workers in South Carolina is $20.59 per hour, or $42,827 a year.) They also get more paid vacation days. 

These nations also provide most young people with excellent educations and technical training. They continuously upgrade the skills of their workers. And they offer universally-available health care. 

To pay for all this, these countries also impose higher tax rates on their corporations and wealthy individuals than does the United States. And their health, safety, environmental, and labor regulations are stricter.

Not incidentally, they have stronger unions.

All of this initially seems like it would result in much higher costs (higher wages, high taxes, more vacation days, etc.) so why doesn't Boeing manufacture these parts at home (America) using their cheaper American labour who take fewer vacations?

to answer this with another snippet from Reich:

The way to make the American workforce more competitive isn’t to put economic walls around America. It’s to invest more and invest better in the education and skills of Americans, in on-the-job training, in a healthcare system that reaches more of us and makes sure we stay healthy. And to give workers a say in their companies through strong unions. 

In other words, we get a first-class workforce by investing in the productive capacities of Americans  – and rewarding them with high wages.

It’s the exact opposite of what Trump is proposing.

That is - despite the higher wages, taxes and vacation days being enjoyed by workers abroad, their high level of education and technical training translates into high quality, and high productivity work, allowing these workers to produce a superior product at a cost that must meet if not be below the cost which would be incurred domestically.

Again this simply reiterates the point made during an earlier post that the liberalization of trade (free trade) is not in itself the problem being faced by the US. Instead, the problem has been decades of misplaced policy resulting in a lack of investment in education and technical skills, leaving a vast amount of the American labour force unable to compete against global labour pools. Where this is no longer a case of being unable to compete due to lower wages being paid to workers in Asia, but rather unable to compete due to the higher skill sets and levels of productivity of workers in Europe as well other developed countries.

What are your thoughts on this, what are the solutions? protectionism? or evaluating some alternatives which pay prove the be quite costly in the short-run in order to play catch-up?

Feel free to comment below.