Brandon Donnelly

Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

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Category: Economics

  • How new technologies spread (and what that means for superstar cities)

    We know that innovation and economic growth tends to be unevenly distributed. This is the bull case for living in cities and, more particularly, for living in certain cities. But of course, the big question these days is whether or not our little work from home experiment has proven that, for the first time ever, work can now decentralize.

    Well here is a unique study that looked at 29 disruptive technologies over the last two decades in the United States. Using three main sources — patents, job postings, and hundreds of thousands of earnings calls — the team traced where new innovations/technologies have tended to emerge and then how they spread (or didn’t spread) across the rest of the US.

    Their initial findings won’t surprise regular readers of this blog. There are indeed a certain number of pioneering superstar cities. Within their list of new disruptive innovations, the team found that about 40.2% of them came from California. The next “super-cluster” was along the Boston-Washington corridor in the northeast with ~21.2%. By narrowing down their list to “disruptive patents”, as opposed to all patents, innovation looks even spikier.

    Next the team looked at how these disruptive technologies tend to diffuse across the country. This is where job postings and earnings calls come into play. New technology gets created in California garage. Cool. But at what point do CEOs across the country start talking about it and hiring people who are capable of doing things with it? This next figure shows that diffusion at various time intervals.

    Now here are the important takeaways. New disruptive technologies clearly take time to spread. However, high-skilled hiring tends to spread much more slowly than low-skilled hiring. This kind of makes sense as you’ve got a built up and entrenched knowledge base in these pioneering locations.

    But what this also means is that pioneering locations tend to maintain their hegemony for quite some time — decades. The high-paying jobs stick closer to home for much longer, presumably because geography makes it harder to transfer knowledge. This is, of course, based on historical data. But I remain highly suspect that Zoom calls can really disrupt the importance of our superstar cities.

    Maps: Vox

  • The Netherlands is short 330,000 homes

    The price of an existing home in the Netherlands increased 14.6% in the first 6 months of this year alone, according to this recent FT article. This is in comparison to 6.1% for existing homes across the EU on a year-over-year basis. Some economists estimate that the Netherlands is short about 330,000 homes right now and that it needs to build at least 1 million more over the next decade to better align supply and demand. I know that there is a lot of debate about the extent to which supply alone can solve problems of affordability. And indeed there are other factors at play here, such as low interest rates. But 330,000 is a lot of missing housing and numbers like this are not unique to the Netherlands. Most big cities have a supply of housing that is highly inelastic because of how difficult we make it to build. Most of us recognize this. But it remains a problem.

  • Cost of the Olympic Games, 1960-2021

    There are many reasons why one might want to host the Olympics. Brand building is certainly one. Making some kind of profit is another. But the direct economic benefits aren’t always clear. Embedded above are two recent charts from the WSJ outlining 1) the cost of the Olympic Games over the years (the exact numbers are likely debatable) and 2) some of the overruns that host cities have seen. Montreal stands out as an unfortunate outlier with cost overruns exceeding 700%. And Tokyo stands out as being the most expensive games ever. As I understand it, the economics are challenging in the best of times. So one can only imagine what kind of dent the Tokyo Olympics might leave behind.

  • Canada’s national net worth spiked largely because of home prices

    Here are some interesting figures from a recent Statistics Canada article about Canada’s national net worth.

    In the first quarter of this year, Canada’s national net worth increased by over $1 trillion or 7.7% to reach nearly $15 trillion. This is, as I understand it, record-breaking. National net worth is defined as the sum of national wealth and Canada’s net foreign asset position, the latter of which is assets that Canada owns abroad, minus the value of any domestic assets owned by foreigners. Most of the increase this past quarter was in national wealth.

    Here is a chart that speaks to this (quarterly change in national net worth by component). Again, the light blue is national wealth. It is the biggest bar.

    On a per capita basis, which is much easier to contextualize, national net worth rose from $365,184 to $392,496.

    The other metric that is up is household savings. We’ve talked about this before on the blog, but check out this chart. In the first quarter of this year, it was 13.1%. And at the beginning of the pandemic, back in Q2-2020, it was 27.4%. I believe these figures represent the percentage of after-tax disposable income that is saved. Either way, a double digit savings rate is not typical for Canadians.

    So what is driving this increase in national wealth? A big part of it is the value of residential real estate, which increased 9.4% in the first quarter. StatsCan is calling this “unprecedented” but I don’t know how far back they are looking to make this claim.

    Because of this, increases in net worth have been, not surprisingly, unequally felt. For households that own their home, net worth increased by over $730 billion last quarter. For households that rent their home, net worth increased by approximately $43 billion. On a per household basis, this translates into net worth increases of approximately $73,000 and $8,000, respectively.

    This is a meaningful spread.

    For the full Statistics Canada article, click here.

  • Economic update with Benjamin Tal — get ready for the second half of this year

    Benjamin Tal — CIBC’s Deputy Chief Economist — is seemingly everywhere. And earlier today, he was delivering an annual economic update at an online event hosted by Brattys LLP (our condo lawyers) in partnership with CIBC. Below are a handful of slides that I found interesting and that I tweeted out during the event.

    All of our personal risk curves changed during this pandemic. When the first wave hit, we all had no idea how bad this was going to be and what to expect. And so we all stayed home and washed our hands and our groceries. That changed with each subsequent wave. And now we’re all ready and anxious to be done with this.

    Tal referred to this as one of the most unequal recessions we’ve ever seen. If you had a high paying job, you probably kept it. And after you stopped spending money on eating out, entertainment, travel, and watching the Leafs lose in person, you likely had a meaningfully higher savings rate. That has created some $100 billion of “excess cash” sitting on the sidelines.

    This cash wants to be spent and I think we’re going to see it flying out the door in the second half of this year. Much of it will also flow into services, which should help to prop up the hardest hit segments of the economy. So while there has been some real pain, many are expecting the economy to snap back pretty quickly. Get ready for some euphoria in the second half of this year.

    This last slide is particularly relevant to the kind of things we often talk about on this blog. It is essentially showing the increased demand for housing outside of the city during this pandemic (as of Q4 2020).

    A flatter line (Vancouver, Calgary) indicates that year-over-year price growth was less affected by “distance from the city center.” On the other hand, a steeper line (Toronto, Ottawa) indicates that price growth was stronger the more you moved outward from the core. In the case of Toronto, it was nearly 20% YoY when you got about 60-70 kilometers out of the city.

    But it’s important to keep in mind that the core of Toronto still grew at about 5% year-over-year. About the same as in Vancouver. And in the case of Ottawa, the number looks to be about 17.5% in the city center. These are meaningful numbers and not the kind of symptoms you would expect to see from downtowns in the middle of a death spiral.

    I would argue, as I have many times before, that this last chart is the result of short-term phenomena. I bet we’ll see a number of these pitches reverse by the time Q4 2021 arrives.

  • There is no such thing as a free lunch

    Inclusionary zoning has been on my mind this week and so I thought I would revisit some of my old posts on the topic. I wrote about it here, here, here, here, here, and probably in a bunch of other places that I am forgetting right now. A number of these posts go as far back as 2015-2016.

    As well-intended as inclusionary zoning may be, I have never been able to get my head around it. There are lots of cities with inclusionary zoning polices in place and what history generally tells us is that it tends to reduce overall housing supply and increase market rents/prices.

    This makes intuitive sense when you consider that inclusionary zoning is in effect a tax on new development. And one of the only things I remember from my economics classes is that it’s generally good practice to tax the things we want less of. You know, things like cigarettes and carbon.

    This is why I have also been a strong supporter of road pricing over the years on this blog. Traffic congestion is bad (demand also happens to be relatively inelastic). So tax it and redirect the funds toward transit.

    Housing supply, on the other hand, isn’t bad. It’s pretty good and fairly useful. So in my simple mind, I don’t know why we would want to apply a tax to it instead of figuring out way to simultaneously encourage and incent the supply of new affordable housing. Here’s one idea.

  • Nearly half of the world’s population now lives in a country with a fertility rate below replacement levels

    Prior to COVID, many projections had the world’s population plateauing sometime in the second half of the 21st century. This is expected to happen because about half of the world’s population now lives in a country where the fertility rate is less than the replacement rate of 2.1 children for every woman. See above chart from The Economist.

    At the start of the pandemic, there was talk of a possible COVID baby boom. People were/are stuck at home and so that would surely translate into more sex among partners. But that doesn’t appear to have been the case for many countries. According to The Economist, births fell by 15% in China last year. The same drop was recorded in the United States last year between February and November.

    Because of this trend, the above projections are now being adjusted and pulled forward, with some predicting that the world’s population could plateau as early as the 2050s. That’s only about 30 years from now, which means that quite a few of us could end up living in a world with a declining population. This is likely to have both positive and negative consequences.

    There are nearly 8 billion people in the world today with China and India being the countries with the greatest numbers. But it’s interesting to consider how recent this figure really is (compounding takes time to gain momentum).

    The world didn’t hit a billion people until the 19th century, and the second billion was only reached by the 1920s, which in the grand scheme of things, isn’t that long ago. Since then the global population has exploded with about 6 billion people being added in only the last 100 years. That’s pretty wild when you think about it.

    P.S. I recently discovered a site called outline.com. It allows you to read, highlight, and annotate articles that you find online. But it also seems to allow you to read articles behind paywalls. Perhaps some of you will find that useful.

    Chart: The Economist

  • The sources of wealth

    Back in the old days, and by the old days I mean the 1980s, there were a handful of ways in which you were likely to get rich. You either inherited it, or you made it in oil or real estate. The Forbes list of the 100 richest Americans was first published in 1982 and, at that time, 60 of the people on this list had inherited their wealth. Of the 40 new fortunes on the list, about 60% were primarily related to oil or real estate. If you couldn’t inherit your money, these two industries were a good place to start.

    But as Paul Graham explains in this recent essay about “how people get rich now,” this is no longer the case. On the 2020 list, there were 73 new fortunes, but only 4 stemmed from real estate and only 2 stemmed from oil. As you might imagine, today’s biggest driver is what we call tech and, more specifically, it is people founding tech companies (there are also a couple of examples of early employees doing very well). Of the 73 new fortunes last year, approximately 30 came from tech, including 8 of the top 10 fortunes on the list.

    Given how many people are starting new companies today (it has become easier and cheaper) and given how many of these companies are quickly growing to big valuations (things are scaling faster), it is perhaps tempting to think about this period of time as being entirely unprecedented. Never before have we seen so many young people getting rich by starting their own company. And never before have we seen such inequality.

    However, Graham argues in his essay that this period of time is the default. What we saw in the second half of the 20th century was actually an anomaly. Indeed, if you go back to the end of the 19th century, the richest people in the US were mostly people who were starting their own companies and taking advantage of new technologies, such as that of mass production.

    His claim is that for the most part it wasn’t really viable to start your own company in, say, the 1960s. Instead, most people simply went to work for a big company that had some sort of oligopolistic positioning in the market. And it turns out that was pretty good for maintaining a strong middle class. Less people were getting fabulously rich. I’d like to see some more data points around entrepreneurship and wealth during this era. But regardless, I think it’s pretty clear that the dominant sources of wealth have changed.

  • London super prime and the City Trifecta Index

    The latest (15th) edition of Knight Frank’s annual The Wealth Report was published last month. I find these interesting because they give you a global view of how and where capital is flowing into real estate (specifically prime real estate). London, for example, did rather well last year despite the pandemic. Buyers from the around the world spent nearly $4 billion on what is commonly referred to as “super-prime properties.” This is real estate with a sale price of US$10 million or more. London saw 201 super-prime properties trade hands last year, with an average price of $18.6 million and with 31 of these transactions being at or above $25 million. This is an increase compared to the year prior (2019), which I suppose is something given that the UK’s housing market was more or less frozen between March and May of last year. These figures put London at the top, ahead of New York and Hong Kong, when it comes to super-prime real estate sales in 2020. (London figures via the Financial Times.)

    Another interesting thing that you’ll find in the report is a city ranking that Knight Frank calls their City Trifecta. What this index does is take Knight Frank’s City Wealth Index (which considers where wealth is currently concentrated) and then adds in two other dimensions: innovation and wellbeing. The idea here is that innovation should drive future economic growth and wealth, and that wellbeing (quality of life) is pretty important when it comes to the future competitiveness of our global cities. When you look at the world’s top cities through this lens, the ranking starts to differ from what you may be used to seeing with cities like London, New York, and Hong Kong at the top (see above chart). Now you have Munich taking the number one spot; Boston and Toronto in 5th and 6th position, respectively; and cities like Zurich jumping up ahead of cities like Hong Kong. These kind of rankings always need to be looked at with a critical eye, but they can be interesting nonetheless.

    Image: Knight Frank

  • Scarcity and stories

    Scarcity. FOMO. Scott Galloway is right. In this recent post, he talks about why humans are programmed to chase scarcity and why blockchains (specifically NFTs) could represent something incredibly meaningful for not just the art world but for many other asset classes. Here’s an excerpt from the post:

    People like scarcity — a lot. Owning something scarce makes one feel unique, and signals success and worthiness as a potential mate. Scarcity is also an instinctual trigger for obsession — when we sense a scarcity of something, be it food or a mate, we are programmed to become obsessed with finding it. Art auctions, the (pre-pandemic) lines outside Supreme, and the margins on a Panerai Tourbillon prove this point.

    A Van Gogh and a Rothko are both unique, and therefore scarce, because they are made of atoms, and it is impossible to arrange a second set of atoms in an identical configuration. Print artists, whose lithographs are made to be reproduced without alteration, use a small “17/100” written in the corner, to distinguish each print and bestow scarcity upon it.

    To hold value, scarcity must be credible. The dirty (not-so) secret of the art world is that art buyers, and even professional art appraisers, struggle to discern originals from forgeries. A well-made forgery provides the same practical value as an original — you can hang it on your wall and bask in its profundity. Yet the art world invests millions of dollars in identifying the “real” version of valuable works; once unmasked, forgeries are nearly worthless.

    I have always found this fascinating about art (but really, it applies to most other things). Is the price you pay so that you can “bask in its profundity” or because the object in question signifies something — it tells a story? In addition to scarcity, we also obsess over stories. They help create meaning for us.

    The interesting thing about all of this is that it’s really just a question of perception. When a work of art is discovered to be a fake that is, indeed, detrimental to value. But what changed? The art itself hasn’t changed. We just no longer enjoy it and derive as much value from it because the story is not what we thought it was.