Category: Economics

• A taxonomy of moats

  Jerry Neumann’s recent blog post on the “taxonomy of moats” is a great summary of the ways in which companies — and perhaps even cities — can protect themselves against competition.

  Here’s an excerpt from his introduction:

  Value is created through innovation, but how much of that value accrues to the innovator depends partly on how quickly their competitors imitate the innovation. Innovators must deter competition to get some of the value they created. These ways of deterring competition are called, in various contexts, barriers to entry, sustainable competitive advantages, or, colloquially, moats. There are many different moats but they have at their root only a few different principles. This post is an attempt at categorizing the best-known moats by those principles in order to evaluate them systematically in the context of starting a company.

  And here is his taxonomy of moats. He identifies four main sources:

  

  As a sidebar, consider how this might also apply to cities.

  Scale, for example, matters a great deal. We know that as cities get bigger, people tend to walk faster, have broader social connections (the relationship is super-linear), and be far more productive and innovative.

  If you’d like to read Jerry’s full post, click here. And if you’re interested in this space, I recommend you also check out Fred Wilson’s recent post on, “The Great Public Market Reckoning.”

  2019.09.30

• New rental supply needs to double in Toronto

  This week, RBC Economics published a study on Canada’s rental market where they argued that the pace of new supply needs to at least double in markets like Toronto in order to meet future housing demand and balance the market. Similar things, I’m sure, could be said about many other housing markets around the world.

  The report pegs the current rental housing deficit in Toronto at about 9,100 units:

  

  And because they believe that the cost of ownership is pushing more people into rentals, the number of renter households is expected to grow at an average rate of 22,200 units per year in Toronto.

  

  If you take 22,200 units per year over the next two years, and add in the current deficit of 9,100 rental units, you get to a total count of 53,500 rental units. This is what RBC Economics believes must be delivered to the market in order to restore equilibrium, and decrease the upward pressure on rents.

  Rental units are, of course, delivered to the market in two main ways. There’s purpose-built rentals and there are for-sale units that end up as rental housing. But even if you amalgamate both of these tenures, we are not building enough housing.

  Against this backdrop, I find it curious that developers are so often vilified. Earlier this week, I saw Jennifer Keesmaat tweet out that — as we ready for this fall’s federal election — any sensible housing plan must move away from our current for profit housing delivery model.

  Who, then, will build these 53,500 rental units? That part wasn’t clear to me.

  2019.09.27

• Conservatives announce four-point housing plan

  Earlier today, the Conservative Party of Canada made the following housing policy announcement. If elected this fall, they would (copied verbatim from here):

  • Fix the mortgage stress test to ensure that first-time homebuyers aren’t unnecessarily prevented from accessing mortgages and work with OFSI to remove the stress test from mortgage renewals to give homeowners more options.
  • Increase amortization periods on insured mortgages to 30 years for first-time homebuyers to lower monthly payments.
  • Launch an inquiry into money laundering in the real estate sector and work with our industry partners to root out corrupt practices that inflate housing prices.
  • Make surplus federal real estate available for development to increase the supply of housing.

  There aren’t a lot of details here, but Andrew Scheer did say that his party would eliminate the financing “stress test” for all mortgage renewals. Currently, you’re only exempt if you renew with your existing lender.

  As Rob Carrick points out, this is a pretty sensible move. (Though he doesn’t agree with “fixing” the stress test.) The current situation gives the incumbent lender almost monopolistic power if the borrower can’t meet the stress test and is unable to shop around for a better rate.

  At the same time, we know that the price of a highly levered asset tends to correlate with financing ability. So depending on what serves you better, you may be either concerned or delighted that this increased buying power could spur further housing consumption/appreciation.

  Housing policy is a complex and curious thing.

  2019.09.23

• Apartment rents in Ottawa vs. Gatineau

  

  Ottawa, Ontario and Gatineau, Quebec are border cities. They exist on either sides of the Ottawa River. And yet, 2017 data from the Canada Mortgage and Housing Corporation revealed that there’s about a $450 per month rent spread on the average two-bedroom apartment in these two cities. The average rent on the Ontario side was $1,232 per month; whereas the average rent on the Quebec side was $782 per month.

  Now, Ottawa is bigger. The city has a population of about 934,243 (2016); whereas Gatineau is about 276,245 (2016). Ottawa is also the nation’s capital, and so the center of gravity is firmly toward the former. But the border is also very porous. Google Maps is telling me that you can walk from downtown Ottawa to downtown Hull (Gatineau) in 30 minutes. So why then is there such a rent disparity?

  Is there a language barrier? Is it because income taxes are higher in Quebec? Or is it something else? Interesting.

  Photo by Marc-Olivier Jodoin on Unsplash

  2019.09.19

• Fees on homes

  A colleague of mine sent me this Bloomberg article today and said, “Here’s an article about things you already know.” The article cites a recent report by Altus Group that compared government-related fees on new housing across Canada and the U.S. What they discovered will not surprise any of you who are in the industry: Toronto has some of the highest government-imposed charges on new homes.

  

  For new condo apartments, the report found that government charges can add up to as much as C$124,582 per unit. That’s about 50% higher than the average unit in the U.S. and about 30% higher than the average unit in Canada (see above chart for the list of cities). While all of us in the industry can appreciate this, I don’t think most homeowners and tenants understand this. Hopefully they’re reading this post.

  Chart: Bloomberg

  2019.09.17

• Suburban household debt in Canada

  

  Rachelle Younglai and Chen Wang’s recent piece in the Globe and Mail on suburban household debt (in Canada) has a number of interesting stats. Here are some of them:

  • Looking at debt service ratios across the country, the most financially stressed neighborhoods in Canada are almost exclusively in the suburbs. (Map of the Greater Toronto Area shown at the top of this post. Data from Environics Analytics.)
  • 34 of the top 100 most financially strained neighborhoods in Canada are located in Brampton, Ontario.
  • Brampton has grown at 2x the rate of Toronto over the last decade.
  • 43% of Brampton’s housing was built between 2001 and 2016.
  • 80% of homeowners in Brampton have a mortgage compared to 63% across the Toronto region as a whole.
  • 80% of Brampton’s property tax revenue comes from residential property (not surprising). In comparison, 47% of Toronto’s property tax revenue comes from commercial properties.
  • About 2/3 of Brampton’s work force leaves the city for their job. This makes sense given the above point.

  The other thing the article talks about is the increase in the average household size in many suburban communities as a result of people renting out parts of their house.

  One Brampton gentleman is quoted as saying that he rents his basement out to 3 or 4 students and his upstairs bedrooms to two truckers. This translates into typically 6 vehicles parked in his driveway.

  Assuming this is the trend, I wonder how much of this additional income is being reported to CRA. Because if it’s not, then it could be throwing of these debt ratios and making the financial situation look more dire than it is.

  In any event, I think this speaks to, among other things, the role that many suburban communities now serve for new immigrants coming to Canada. They are doing what they can to try and get ahead.

  It’s also worth noting that if you look at the above map of the Greater Toronto Area, the lowest “debt spots” are in fact where homes tend to be the most expensive — the core.

  Map: The Globe and Mail

  2019.09.15

• Prime residential pricing in 10 global cities

  The below graphs are taken from a recent (June 2019) report by Knight Frank on “prime” residential pricing across the world. They define “prime” as generally being the top 5% of each market by value. What these graphs show are the spread between the average price of a prime property and the top price achieved in that market.

  

  

  The most expensive market is Hong Kong. The average price of a prime property in 2018 was USD 4,251 per square foot (or USD 45,760 per square meter) and the top price achieved was in 2016 at USD 28,154 per square foot (or USD 303,051 per square meter).

  Using the 2018 average, a 350 square foot studio apartment would run nearly USD 1.5 million (or almost CAD 2 million), assuming there are “prime” studios available in the market. Remember, we are talking about the top end of the market.

  If you’d like to download a copy of the full report, you can do that over here.

  2019.09.07

• The new decentralized workforce

  

  A few weeks ago the WSJ published an article about Toronto’s growing tech talent pool, arguing that its base now rivals the top US cities, but that it may not be an entirely good thing for the city’s ecosystem. I wrote about it here.

  This morning venture capitalist Fred Wilson published a post on his blog talking about the necessity of scaling tech companies in lower cost locations. It’s a good follow-up to the above article/post.

  Here’s an excerpt from Fred:

  Last week I heard some shocking numbers about salary levels for certain kinds of engineers in the bay area. I checked them out with a few of our bay area portfolio companies and they were more or less corroborated.

  The tight technical labor markets in the bay area, NYC, and a number of other regions in the US are making it hard to scale software businesses without burning massive amounts of cash.

  He goes on to argue that (startup) companies now need to think about scaling in other/remote locations sooner than they ever have before — basically as soon as the company hits about 50 engineers (or 100-200 employees).

  Many companies are now working with a distributed workforce. Supposedly 2/3 of the global workforce now spends at least one day of the week working remotely. I almost never work from home, but I do get how this is possible.

  So what is happening is that engineering talent is spilling over into secondary markets out of necessity. There’s an economic imperative to colonize. But I would imagine that, at least initially, most of the economic benefits accrue to the colonizer.

  Photo by NASA on Unsplash

  2019.09.01

• Boom babies (of China)

  A few years ago I wrote a post talking about “depression babies.” In it, I cited a research paper that looked at the impact of macroeconomic shocks on people’s willingness to take on financial risk in the future. The term “depression babies” stems from the Great Depression and how it is believed to have impacted risk taking, savings rates, and probably many other things.

  I was reminded of this when I read this recent article in the WSJ talking about how the Chinese have started spending — and taking on the debt — like Americans, particularly among Chinese under 30. It is the inverse of the depression baby phenomenon. In this case, it is arguably years of economic expansion leading to greater comfort around financial risk.

  Here are a couple of figures from the article:

  

  JPMorgan estimates China’s ratio of household debt to gross domestic product will climb to 61% by 2020. That’s up from 26% in 2010 and higher than current levels in Italy and Greece.

  The level in the U.S. is about 76%, after falling from 98% in 2006, according to the International Monetary Fund.

  By another measure—the ratio of household debt to disposable income—China appears to have already surpassed the U.S. Its ratio reached 117.2% in 2018, up from 42.7% in 2008, according to calculations by Lei Ning, a researcher at the Institute for Advanced Research at Shanghai University of Finance and Economics. The U.S. peaked at 135% in 2007 and dropped to 101% in 2018.

  Not surprisingly, the article goes on to talk about how this dramatic increase in household debt might be something to worry about. Maybe. I’m not an economist. But I do think this is designed to boost the Chinese growth machine and I do think it makes them less reliant on other countries — such as, maybe, the United States.

  2019.08.29

• Is Toronto’s tech ecosystem too US-centric?

  The Wall Street Journal’s recent piece about “Silicon Valley invading Toronto” is, in my view, describing a generally positive outcome.

  We are one of the largest cities in North America (the exact ranking depends on where you draw the urban boundaries).

  We have more enlightened views around foreign and high-skilled workers (I was given a short window in which to leave the US after I finished my first graduate degree there).

  And we have a large and highly educated pool of tech talent (the salary differential discussed in the article looks to be, at least partially, a result of the weaker Canadian dollar).

  

  US companies are gobbling up office space in Toronto. And presumably, this is one of the reasons why 139 new flights were added between Toronto and Francisco over the last two years. (Source: WSJ)

  However, I do agree with the remarks from people like Jim Balsillie (Blackberry) and Harley Finkelstein (Shopify) that a better outcome would be the creation of more massively successful Canadian tech companies.

  As Finkelstein points out, there’s a big difference between 100,000 square feet of space for the HQ of a new and growing Canadian tech company and 100,000 square feet for a new branch or satellite office.

  The stats we read in the papers about the number of tech jobs being created in Toronto generally don’t speak to composition. Where in the value chain do these people sit? Where is the value accruing?

  The intellectual capital is here. And we should be doing everything we can to foster and finance new homegrown ideas and businesses.

  Image: WSJ

  2019.08.18