Canadian geographer Mario Polèse's book, The Wealth and Poverty of Regions: Why Cities Matter, is not new. It was originally published in 2010. But it's perhaps a good follow-up to yesterday's post about the untethering of wealth. Here's an excerpt from a review of the book by Jeb Brugmann:
All cities, Polèse explains, share the same basic economic causes and effects. These are economies of localization (i.e., locating activities close together) and of urbanization (i.e., clustering lots of diverse activities together at scale). Polèse shows how these urban economies—usefully distinguished and defined in detail as economies of scale, proximity, diversity and concentration—combine with unique natural features and resource endowments, technology and infrastructure investments, national boundaries and market controls, and historical events to create quintessentially local and unique places. Every time he explains the status of another place—New York, London, Chicago, Paris, Montreal, the northern Mexico border, the North American west coast—he demonstrates again how the source code of geography combines with specific local and historical conditions to create a momentum of wealth or poverty.
The rich may have the means to tax-optimize through physical mobility, but the draw to established urban clusters remains strong, which is why it can be a challenge to stay away from them for more than 183 days. There is a "stickiness" to established cities that is the result of momentum and compounding over centuries.
Still, nothing is guaranteed, and there's only so much that can be done if you're swimming against a global landscape that is shifting away from you. Geography does matter. And today, the world's economic center of gravity is rapidly shifting toward Asia. This is good for some cities and bad for others.
Cover photo by Zhu Hongzhi on Unsplash
The US just announced that they are working on a plan to introduce 50-year mortgages. I don't know what this plan entails, but my first reaction to the headline was: “Yeah, this is a bad idea.” But then I thought to myself, why is a 50-year amortization period too long? And is there any magic to 25- and 30-year mortgages?
At the most basic level, you could think of it this way: the average life expectancy of both sexes in America is currently 78.4 years. That means the average American would need to buy a home — with a 50-year mortgage — at 28.4 years old in order to fully pay it off by the time they die. At that point, why not rent?
A more rigorous analysis of amortization periods would likely involve a myriad of trade-offs related to housing affordability, homeownership rates, asset-price stability, household debt, overall financial risk, and other factors. But the primary feature of a long-ass mortgage is that it's alleged to make homeownership more attainable.
The obvious benefit of a 50-year mortgage is that it lowers a borrower’s monthly payment. For example, an $800,000 mortgage at 6% would create the following payments:
25-year amortization: $5,154 per month
30-year amortization: $4,796 per month
50-year amortization: $4,211 per month
But it's important to keep in mind that this is a synthetic affordability solution. It does not address fundamental constraints such as land use, zoning, construction costs, and the overall supply of new housing. Here's an excerpt from a speech that Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, delivered last year:
"...we need to resist the temptation to try to solve the housing affordability challenge by tinkering too much with the mortgage market... leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy."
I like to think of real estate as a downstream industry. What I mean by this is that the demand for space — whether it be housing or office space — happens downstream from other underlying economic activities.
For example, if someone creates a successful business and then hires a bunch of new employees, at least two things happen. The company now needs to consume more office space, and the employees of this successful company will likely demand more housing. Maybe they're relocating for this new job, or maybe they just got a pay increase and now want to consume more housing.
Whatever the exact case, real estate is the tail of the dog, and the new and successful company is the dog itself. Sometimes real estate gets mistaken for the dog itself. Rising real estate values become a substitute (albeit a poor one) for genuine economic growth.
But this does nothing to help overall productivity and innovation. And eventually you'll need to find some bonafide dogs. That's why I think this recent op-ed (which was presented in partnership with Shopify) is an important one:
But nation-building isn’t only cranes and concrete. It’s also the builders who start companies and create new industries. If we want a prosperous future, Canada can’t just be a place that builds big things; it has to be a place that builds new things. A Founder Nation.
Our growth challenge isn’t just shovels in the ground. It’s whether new businesses are forming, whether founders have the tools and freedom to scale, and whether our economy is dynamic enough to let tomorrow’s builders outcompete yesterday’s incumbents.
I couldn't agree more. We need to build — in every sense of the word. Over-indexing on real estate alone is not sustainable long term. And I say this as a real estate developer who makes a living from monetizing space.
Canadian geographer Mario Polèse's book, The Wealth and Poverty of Regions: Why Cities Matter, is not new. It was originally published in 2010. But it's perhaps a good follow-up to yesterday's post about the untethering of wealth. Here's an excerpt from a review of the book by Jeb Brugmann:
All cities, Polèse explains, share the same basic economic causes and effects. These are economies of localization (i.e., locating activities close together) and of urbanization (i.e., clustering lots of diverse activities together at scale). Polèse shows how these urban economies—usefully distinguished and defined in detail as economies of scale, proximity, diversity and concentration—combine with unique natural features and resource endowments, technology and infrastructure investments, national boundaries and market controls, and historical events to create quintessentially local and unique places. Every time he explains the status of another place—New York, London, Chicago, Paris, Montreal, the northern Mexico border, the North American west coast—he demonstrates again how the source code of geography combines with specific local and historical conditions to create a momentum of wealth or poverty.
The rich may have the means to tax-optimize through physical mobility, but the draw to established urban clusters remains strong, which is why it can be a challenge to stay away from them for more than 183 days. There is a "stickiness" to established cities that is the result of momentum and compounding over centuries.
Still, nothing is guaranteed, and there's only so much that can be done if you're swimming against a global landscape that is shifting away from you. Geography does matter. And today, the world's economic center of gravity is rapidly shifting toward Asia. This is good for some cities and bad for others.
Cover photo by Zhu Hongzhi on Unsplash
The US just announced that they are working on a plan to introduce 50-year mortgages. I don't know what this plan entails, but my first reaction to the headline was: “Yeah, this is a bad idea.” But then I thought to myself, why is a 50-year amortization period too long? And is there any magic to 25- and 30-year mortgages?
At the most basic level, you could think of it this way: the average life expectancy of both sexes in America is currently 78.4 years. That means the average American would need to buy a home — with a 50-year mortgage — at 28.4 years old in order to fully pay it off by the time they die. At that point, why not rent?
A more rigorous analysis of amortization periods would likely involve a myriad of trade-offs related to housing affordability, homeownership rates, asset-price stability, household debt, overall financial risk, and other factors. But the primary feature of a long-ass mortgage is that it's alleged to make homeownership more attainable.
The obvious benefit of a 50-year mortgage is that it lowers a borrower’s monthly payment. For example, an $800,000 mortgage at 6% would create the following payments:
25-year amortization: $5,154 per month
30-year amortization: $4,796 per month
50-year amortization: $4,211 per month
But it's important to keep in mind that this is a synthetic affordability solution. It does not address fundamental constraints such as land use, zoning, construction costs, and the overall supply of new housing. Here's an excerpt from a speech that Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, delivered last year:
"...we need to resist the temptation to try to solve the housing affordability challenge by tinkering too much with the mortgage market... leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy."
I like to think of real estate as a downstream industry. What I mean by this is that the demand for space — whether it be housing or office space — happens downstream from other underlying economic activities.
For example, if someone creates a successful business and then hires a bunch of new employees, at least two things happen. The company now needs to consume more office space, and the employees of this successful company will likely demand more housing. Maybe they're relocating for this new job, or maybe they just got a pay increase and now want to consume more housing.
Whatever the exact case, real estate is the tail of the dog, and the new and successful company is the dog itself. Sometimes real estate gets mistaken for the dog itself. Rising real estate values become a substitute (albeit a poor one) for genuine economic growth.
But this does nothing to help overall productivity and innovation. And eventually you'll need to find some bonafide dogs. That's why I think this recent op-ed (which was presented in partnership with Shopify) is an important one:
But nation-building isn’t only cranes and concrete. It’s also the builders who start companies and create new industries. If we want a prosperous future, Canada can’t just be a place that builds big things; it has to be a place that builds new things. A Founder Nation.
Our growth challenge isn’t just shovels in the ground. It’s whether new businesses are forming, whether founders have the tools and freedom to scale, and whether our economy is dynamic enough to let tomorrow’s builders outcompete yesterday’s incumbents.
I couldn't agree more. We need to build — in every sense of the word. Over-indexing on real estate alone is not sustainable long term. And I say this as a real estate developer who makes a living from monetizing space.
The corollary to these lower monthly payments is that if you can afford a monthly payment of $5,154, you now have the option of taking out a bigger mortgage with a longer amortization period. With a 50-year amortization, that same monthly payment could support a $979,173 mortgage.
But what increased leverage does is drive up home prices even further, in the same way that lowering interest rates creates upward pressure. Imagine that mortgage rates drop from 6% to 3%. This same $5,154 monthly payment would now carry a $1.6 million mortgage with a 50-year amortization period.
I'm not an economist and, from what I can tell, there's no perfect amortization period. But there does appear to be a Goldilocks zone that balances a number of the trade-offs, and it is somewhere between 20-30 years. In fact, as recently as 2008, Canada offered government-backed 40-year mortgages. But then a consensus emerged that they were "really not in the best interest of Canadians."
I know that lots of people would love to own a $2 million home. But economic history has shown us that 50-year mortgages are likely to raise home prices for everyone, slow equity build-up for owners, and increase overall financial risk in the system. As Howard Marks once wrote in one of his memos, “There’s no free lunch in economics."
Cover photo by Kimson Doan on Unsplash
The corollary to these lower monthly payments is that if you can afford a monthly payment of $5,154, you now have the option of taking out a bigger mortgage with a longer amortization period. With a 50-year amortization, that same monthly payment could support a $979,173 mortgage.
But what increased leverage does is drive up home prices even further, in the same way that lowering interest rates creates upward pressure. Imagine that mortgage rates drop from 6% to 3%. This same $5,154 monthly payment would now carry a $1.6 million mortgage with a 50-year amortization period.
I'm not an economist and, from what I can tell, there's no perfect amortization period. But there does appear to be a Goldilocks zone that balances a number of the trade-offs, and it is somewhere between 20-30 years. In fact, as recently as 2008, Canada offered government-backed 40-year mortgages. But then a consensus emerged that they were "really not in the best interest of Canadians."
I know that lots of people would love to own a $2 million home. But economic history has shown us that 50-year mortgages are likely to raise home prices for everyone, slow equity build-up for owners, and increase overall financial risk in the system. As Howard Marks once wrote in one of his memos, “There’s no free lunch in economics."
Cover photo by Kimson Doan on Unsplash
Share Dialog
Share Dialog
Share Dialog
Share Dialog
Share Dialog
Share Dialog
