Category: Economics

• The neutral rate and housing supply

  Below are two interesting excerpts from this recent Globe and Mail interview with Tiff Macklem (the current governor of the Bank of Canada of the former dean of the Rotman School).

  The first has to do with where he believes the “neutral rate” will be in the foreseeable future. He believes it will be higher than where it has been in the past:

  We have different models we use to estimate the neutral rate [the central bank’s estimate of where its policy rate would settle if the bank were neither trying to stimulate nor restraining the economy]. … Those models, based on the data we have, still suggest a neutral rate in the range of 2 to 3 per cent.

  When we look forward, and we look at a number of the forces, it seems more likely that the neutral rate is going to be higher than that … [rather] than lower than that. We don’t have that data yet. But there are a number of factors.

  More people are retiring. The labour market looks like it could be sort of structurally tighter going forward. Globalization has at least stalled, if not reversed. That could create more cost pressures. We’re going to need a lot of new investment in cleaner technologies if we’re going to meet our emissions-reduction targets. When I say ‘we,’ it’s the world – so that’s going to affect global real interest rates.

  So when you look forward, it seems more likely that the neutral rate is higher, not lower. And the message is that households, businesses, governments, the financial system, they need to be prepared for that possibility.

  The second is about his view on Canadian housing:

  The fundamental issue in the housing market, and this has been an issue in Canada for 10 years, at least, is structurally the demand for housing is growing faster than the supply. And so yes, interest rates go up, the housing market will slow. But it’s only going to slow so much because there is a sort of structural shortage of supply relative to demand.

  I think what you’re seeing is that with supply growing less than demand, the housing market has started to tick back up, housing prices have started to tick back up. That’s something we need to take into account in monetary policy. But we’re not targeting the housing market. We have one target: CPI inflation.

  These two forces are opposing ones. Higher rates create downward pressure on home prices. But, as we all know, a structural housing supply problem does the opposite. Where these two forces balance out is anybody’s guess. But as Tiff mentions above, his concern is not home prices; it is inflation.

  I am not an economist, but my view is that the broader real estate market is still going through its reset. There will be more pain and less housing supply overall in the short-term. Risk and leverage are still being unwound and that takes time. It also sucks.

  Because of this, I think if you ask most people today, they will likely tell you to wait: “We haven’t yet hit the bottom of the market.” This is likely true. But I have zero ability to time the bottom of a market. And at the same time, the future does feel a lot more knowable compared to a year ago.

  My philosophy is more akin to what I blogged about earlier in the week: If it’s cheap, if the thesis is sound, and if you have the ability to think long-term, then these downturns are when you want to buy. And that is how I’m starting to feel about things right now. This includes everything from real estate to NFTs.

  Disclaimer: This is not investment advice.

  2023.07.15

• If it’s cheap, buy it

  Reading Howard Marks’ investment memos is up there with reading Paul Graham’s essays. You just need to do it. Howard’s latest is about “taking the temperature” of the market and I think you’ll find the lessons invaluable for everything from equities to residential real estate.

  Here’s an excerpt that I liked:

  We don’t say, “It’s cheap today, but it’ll be cheaper in six months, so we’ll wait.” If it’s cheap, we buy. If it gets cheaper and we conclude the thesis is still intact, we buy more. We’re much more afraid of missing a bargain-priced opportunity than we are of starting to buy a good thing too early. No one really knows whether something will get cheaper in the days and weeks ahead – that’s a matter of predicting investor psychology, which is somewhere between challenging and impossible. We feel we’re much more likely to correctly gauge the value of individual assets.

  These are investing words to live by. Avoid your own emotionality and value the asset. If it’s not cheap, don’t buy it. If it’s cheap, buy it. Then take a long-term view. It all sounds simple enough, but it’s clearly not so easy. And that’s why we have extreme highs and extreme lows in the market.

  Eighteen months ago, everyone wanted to buy residential real estate. Today, prices are lower, but fewer people want to buy residential real estate. Part of this is obviously because of interest rates. But part of it is also just because of emotion.

  2023.07.10

• Canada’s tech talent strategy

  This past week at Collision Toronto, Canada unveiled a new “Tech Talent Strategy” that includes a number of initiatives designed to attract more human capital across the science, technology, engineering, and math sectors. (Sidebar: The STEM sectors are great, but I’m really a fan of STEAM.)

  At a high level, these measures are intended to continue to grow Canada as a hub for global tech talent. So they cover things like promoting Canada as a destination for digital nomads, improving the Start-up Visa Program, and dunking on US immigration policies by creating an open work permit stream for H-1B specialty occupation visa holders.

  Overall, it seems great.

  But there are people who are concerned about the pace of immigration in Canada. Over the past year (ending in Q2-2023), the country added about 1.2 million people. This is a record. And perhaps the greatest concern, is that we simply aren’t building enough housing and related infrastructure.

  But I don’t get this logic. Canada is a relatively small country. Attracting smart and ambitious people from around the world is good for us. And there are simple ways to address these concerns: build more housing and related infrastructure. I’m pretty sure that we can figure out how to do that.

  2023.06.29

• Land prices can be weird

  Jeremiah Shamess of Colliers made the claim this week that land values in some areas of the Toronto region are down 25%. He then shared a chart from Alan Leela showing how various factors have increased or decreased land values since 2020.

  Broadly speaking, a revenue increase and/or more development density should increase land values; whereas something like inclusionary zoning, which is a cost to the project, should decrease land values. Indeed, this is one of the arguments in favor of inclusionary zoning: “Don’t worry about the additional cost to the project because landowners will simply pay for it through reduced land prices.”

  In theory, all of this is correct.

  Land is (or should be) the residual claimant in a development pro forma. Start with your revenue, subtract your costs, and then see what is left over for the land. (Though keep in mind that what is left over for the land could be $0 or even a negative number.)

  But as I have argued before in the context of inclusionary zoning, I don’t think things always play out so neatly in the market. Put differently, if the cost impact of inclusionary zoning is something like $44 psf, I don’t think all landowners suddenly drop their prices accordingly — especially in a rising market where developers are competing fiercely for land.

  They don’t care about your residual value model. Many or most will just hang on to their number and wait for someone to pay it.

  So what I am saying with all of this is that, yeah, there are factors that put either downward or upward pressure on land values. But how it all actually plays out in the market tends to depend on the macro environment and what else is going on at the time. And right now we are at a point in the cycle where there is clearly downward pressure on land values.

  2023.06.22

• Canada is about to pass 40 million people

  I learned this morning that Statistics Canada publishes a real-time population counter and that it is currently hovering at just below 40 million people:

  

  So by the time that many of you read this post, Canada will likely be over the 40 million mark. If you’d like to see for yourself, you can do that here.

  2023.06.15

• France’s luxury goods empire

  The US has tech and France has luxury goods:

  The roots of French dominance lie in a luxury ecosystem that dates to the court of Louis XIV, and a culture of corporate raiding that began with Bernard Arnault. After gaining control of LVMH in 1989, he set out to build the first house of luxury brands through serial acquisitions. Rivals followed his lead. Increasingly, the global luxury industry is based on goods that are still made by small Italian firms but sold by big French conglomerates. Gucci, Bulgari, Fendi — all are Italian brands now under French owners.

  While US tech firms overshadow all rivals, the same can be said of French luxury. Among the top luxury firms, the French have annual sales three times higher than the Swiss, more than four times the Americans and Chinese and 12 times the Italians.

  One of the most interesting things that LVMH is doing, though, is a combination of tech and luxury goods. In 2021, they announced, along with founding partners Prada and Cartier, a new luxury goods blockchain called Aura.

  The idea behind Aura (an appropriate name, in my opinion) is to create a kind of digital passport that proves authenticity and ownership, and also allows for traceability. So if you want to sell one of your luxury items or you need to service it, now someone can easily see the chain of ownership and determine that it’s real.

  This to me is a perfect use case for the blockchain technology and, as of March of this year, the group was reporting 24 brands on board. At the same time, they also announced a new feature that allows brands to participate through public chains such as Ethereum or Solana.

  All of this is probably still very esoteric to most. But eventually the tech will recede into the background and most will probably just see it as, “I’m buying this expensive purse and along with it I get this digital passport thingy that lives on my phone. I don’t know or care how the tech works, but it makes me feel even more special.”

  However, a big question remains: What does all of this innovation do to industry concentration? (Which is one of the main points of the above article.) One promise of crypto is that it will be a decentralizing force in our economy. And while I believe this to be directionally true, I obviously understand that LVMH has an empire to maintain here.

  For those of us who deal in real estate, it is also interesting to think about this topic of brands and authenticity when it comes to property. And so we will talk about that later this week on the blog.

  2023.06.04

• The nomadification of cities

  

  One common way to measure affordability is to look at the cost of things relative to local incomes. But the world is getting increasingly more complicated than this. Here, for example, is an interesting article talking about the “nomadification” of cities such as Medellín.

  What this is referring to is digital nomads who might work for and draw a salary from a company in say the US, but who work fully remotely in places like Medellín, Buenos Aires, and Mexico City. It’s like working from home all the time, except home is some exciting city in Latin America.

  The appeal of this work arrangement is obvious. You get to both live in an exciting city and you get to arbitrage between a US or other similarly high salary and a place where the cost of living is significantly less.

  But the point of the above article is that this can distort a local economy and make locals feel like they’re getting priced out. When you take enough software developers making $150k a year and you drop them into a place where the minimum wage is $350 per month, that additional income starts to have an impact.

  Though, many countries seem to think it’s a positive one. Last year, both Portugal and Colombia introduced new digital nomad visas, which presumably means they want more of them. And I certainly think that we will see more and not less of this kind of working.

  But in a way, isn’t this really just an extreme form of tourism? I mean, unless these nomadic cities are collecting additional income taxes (or deriving some other benefits), aren’t we just talking about foreigners renting Airbnbs and spending money that is earned and taxed elsewhere?

  Chart: Rest of World

  2023.05.27

• Consumer city and playground city — are they any different?

  

  One conventional way to think about cities is that people migrate to urban areas in order to make more money. This remains true today and the data is pretty clear that, if you live in an urban area, you’re likely to make more money than if you didn’t — even if you’re just as educated. You’re also likely to make even more money if the city is really big (there’s a correlation between income and city size). And you probably also walk a little faster given that, you know, time equals money.

  But there are other reasons for wanting to live in a city. And probably the biggest is that they can bring us pleasure. Back in 2001, Edward Glaeser, Jed Kook, and Albert Saiz published this paper called, “Consumer City”, where they showed that high amenity cities have tended to grow faster than low amenity cities. They also went on to demonstrate that, in high amenity cities, urban rents have tended to increase faster than urban wages, suggesting that there are other reasons for wanting to live in a city beyond simply wage growth.

  Fast forward to today and Ed Glaeser has a new opinion piece in the New York Times arguing the following:

  New York is undergoing a metamorphosis from a city dedicated to productivity to one built around pleasure. . . The economic future of the city that never sleeps depends on embracing this shift from vocation to recreation and ensuring that New Yorkers with a wide range of talents want to spend their nights downtown, even if they are spending their days on Zoom. We are witnessing the dawn of a new kind of urban area: the Playground City.

  I saw City Observatory comment that they thought it was odd Glaeser didn’t mention his previous work on the Consumer City. But I wonder if this is him not wanting to suggest that this was a trend decades in the making. Maybe instead, he wanted to position it as a dramatic and profound shift brought about by a pandemic. But how can you not ask this question: Is the Playground City truly something novel, or are we just following a trend line?

  In my view, they’re not all that different. The basic idea is that people like cities that are cool and fun, and so they will pay a premium to be in those kinds of places. This was true in 2001 and it’s still true in 2023. The only difference today is that we now believe we have too much office space in some markets, and so we’re trying to recalibrate around work vs. pleasure. But even with this, the work component of our cities isn’t going to zero.

  Photo by Jan Folwarczny on Unsplash

  2023.05.12

• Yes, I want a pair of these 3D-printed shoes

  3D printing, or additive manufacturing, is often referred to as the next industrial revolution. And we are certainly seeing it creep into the mainstream economy in meaningful ways. You can soon buy a 3D-printed home for under $99,000, and already you can buy a home in the world’s largest 3D-printed community. We also now make bridges using additive manufacturing, which in this case in Amsterdam, was prefabricated off site and craned in.

  Many of the architects we work with also use 3D-printed models to rapidly prototype, which I am guessing is disruptive to the whole unpaid architectural intern thing. But what has been missing, for me at least, is a comfortable pair of 3D-printed shoes from the future. Thankfully, Denmark-based RAINS (in collaboration with Zellerfeld) announced their first 3D-printed pair at Paris Fashion Week earlier in the year.

  And now they’re available for order:

  

  Maybe you like the look of these, or maybe you don’t. I would definitely wear them. But what’s interesting is that they’re 100% recyclable; they’re printed upon order (so no excess supply); and they’re made using a fully automated production process — meaning there’s little to no labor component and there’s no overseas factory. This sounds like something!

  I mean, presumably this completely changes where shoes want to be made. Previously you wanted an overseas factory where labor was cheapest. But if labor is no longer a meaningful input, do you now just want to produce these things closer to where your customers actually live and reduce shipping costs? From what I have read, Zellerfeld’s factory is in Hamburg and it currently takes something like 40 hours to print one pair of shoes.

  Decentralization was always one of the great promises of 3D printing. And to be honest, it’s not hard to imagine a world where you walk into a store, have your feet scanned for optimal sizing (already the company lets you do this online with your phone’s front camera), and then you get a new pair of shoes printed for you right on the spot. Maybe you even get to play with the design a little so that no two shoes are ever exactly the same.

  Of course, along with this, you’d also get an NFT version of your shoes indicating where you printed/minted them. This would be your decentralized blockchain record for your decentralized physical shoes. This sounds weird and consumers won’t necessarily think of it in this way, but it’ll be what’s happening behind the scenes. What consumers will care about is being able to flex their new shoes both offline and online.

  On that note, let’s get back to the basics here: Would you ever order/wear these shoes?

  2023.05.07

• Wealthiest cities in the world

  According to this annual survey by Henley & Partners (first chart from Bloomberg), these are the top 10 wealthiest cities in the world when you count the number of high-net-worth individuals (i.e. people with investable wealth greater than US$1 million):

  

  However, if you instead count billionaires, the top city flips from New York City to the Bay Area (which includes San Francisco and all of Silicon Valley). This isn’t all that surprising.

  Also not surprising is the precipitous decline in the number of HNWIs residing in Hong Kong. From 2012 to 2022, the number declined by 27%. That said, a bunch of other cities fared even worse. The city that lost the most millionaires over this same decade was Moscow. It declined by 44%.

  For those of you wondering about Toronto, we placed 12th, just after Chicago, with 105,200 millionaires, 193 centi-millionaires, and 18 billionaires:

  

  The next city in Canada on the list is Vancouver, and following that is Montreal:

  

  

  It is interesting to see how much further behind Montreal places with these metrics given that it is an urban region with about 1.6x the population of that of Vancouver’s.

  Also interesting — given its size and global importance — is Paris (18th when it comes to HNWIs):

  

  However, when it comes to seasonal draw, Paris is second only to Miami, which appears to be the undisputed global destination for rich people in the winter. Paris has 126 centi-millionaire residents, but during its peak holiday month (presumably summer), this number is believed to increase to over 300:

  

  Finally, looking at Park City, Utah, it has 8 permanent centi-millionaires and this number is thought to increase to over 100 during the winter snowboarding season. And to be clear, this transient population figure only includes people who own a second home there. It does not include rich people paying US$3,700 per night to stay at Deer Valley. That’s pretty good for a small town of only 8,500 permanent residents.

  

  To check out the full list of 97 cities, click here.

  2023.04.22