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The world is increasingly spiky. Inequality is growing and it is increasingly geographic in nature. We know that people tend to make more money in urban areas compared to rural areas – even when they possess the exact same level of education. The returns to being smart and educated are simply greater in cities.
But they also depend on the size of the city. Mark Muro and Jacob Whiton of Brookings recently published data looking at labor market performance – by metro size – from 2009-2015 (right after the financial crisis). What they found is that larger metropolitan areas simply performed better than smaller ones.
In summary:
City size matters because it’s a major influence on city prosperity and adaptability as well as local worker fortunes. Bigger cities are more productive. They are more innovative. They draw better-educated workers by offering higher wages.
The situation is even more pronounced across the pond. According to the New York Times (quote from Richard Florida), a third of Britain’s gross domestic product comes from London alone.
What is far less clear is what should be done to address the decline of some of the smaller cities in America – cities that are stagnating and feeling left behind. But perhaps the first step is acknowledging what has happened and what remains feasible in today’s global economy.
Here is another quote from the above NY Times article:
Mr. Trump’s promise to relieve the pain by reviving the coal and steel industries, by keeping immigrants out of the country and by raising barriers against manufactured imports is only a rhetorical balm to satisfy an angry base seeking to reclaim a prosperous past that is no longer available.
That rhetorical balm.
This morning the Toronto Star published a detailed autopsy of the failed Trump International Hotel and Tower Toronto. It outlines the players, the investors, and what supposedly went wrong. Of course, the headline is all about how Trump managed to make money from the deal – through his well-publicized licensing business – even though the project went bankrupt.
At the beginning of this year, the Washington Post reported that Trump’s name had been licensed and linked to over 50 properties and that these contracts have earned him at least USD$59 million in revenue. Outside of the US and Canada, the Trump Organization has (or had) deals in Brazil, Turkey, Azerbaijan, India, Indonesia, the UAE, and so on.
There would have been more money to be made in the actual development of these properties, but the beauty of these licensing deals – for Trump – is that they are “low-effort, low-risk, high-reward.” In fact, this past summer it was reported that the breakup fee at Trump Toronto – the fee to exit all contracts with the Trump Organization – was at least $6 million (guessing that’s in USD).
This story is not unique to Toronto. And so I have got to believe that there’s major brand dilution happening here. Does the Trump name really bring credibility to projects in some markets? How sustainable is this licensing business?
The only other thing that I would add to the Toronto Star article is that the hybrid condo-hotel model has proven to be difficult in this city. It’s perfectly fine to have residential condos and a hotel in one tower. There are lots of successful examples of those. But when the condo units can be put into a hotel pool (and there’s an IRR expectation on the part of individual owners), many seem to have been disappointed.
Part of the challenge with this model here in Toronto is that the condo-hotel units typically end up with a commercial property tax rate, which, in this city, is much higher than the residential rate. This can suppress values.
In the US you can reduce your taxable income by deducting the mortgage interest you pay toward your principal residence. You can’t do this in Canada, at least not on the property where you live.
However, there are limitations. It is capped at loans up to $500,000 or up to $1M if you’re married and you file jointly. On the other end of the spectrum, you also need a loan big enough such that an itemized deduction will save you more money than the standard deduction.
Not surprisingly, the MID is popular among homeowners. And from a public policy standpoint, one of its selling features is that it’s supposed to stimulate homeownership. But many have argued that it doesn’t actually do this – it unequally benefits people with larger mortgages. (Canada has a higher homeownership rate than the US.)
Right now it looks like you need to buying a home worth at least $305,000 in order for the mortgage interest deduction to make economic sense for you. Again, if your loan isn’t big enough, you’re simply going to opt for the standard deduction.
In 2015, about 22% of all US taxpayers opted to take advantage of the MID. According to Zillow, only about 29% of all homes in the US are valuable enough for the MID to actually make sense. Though in some cities, like San Francisco, it’s pretty much all of the homes. Of course.
Zillow also recently looked at what the recent tax reforms put forward by the Trump Administration would mean for the MID and the real estate market.
One of proposed changes is a doubling of the standard deduction. What this means, based on Zillow’s math, is that you would need to be buying a home worth at least $801,000 today for the MID to make sense. This also means that the deduction would now only benefit about 5% of all homes in the US.
This would seem to only exacerbate the criticism that the MID does not in fact stimulate homeownership in the segment of the market that needs it the most. But perhaps this is the only politically palatable way of removing it – gradually.
Photo by Erol Ahmed on Unsplash
The world is increasingly spiky. Inequality is growing and it is increasingly geographic in nature. We know that people tend to make more money in urban areas compared to rural areas – even when they possess the exact same level of education. The returns to being smart and educated are simply greater in cities.
But they also depend on the size of the city. Mark Muro and Jacob Whiton of Brookings recently published data looking at labor market performance – by metro size – from 2009-2015 (right after the financial crisis). What they found is that larger metropolitan areas simply performed better than smaller ones.
In summary:
City size matters because it’s a major influence on city prosperity and adaptability as well as local worker fortunes. Bigger cities are more productive. They are more innovative. They draw better-educated workers by offering higher wages.
The situation is even more pronounced across the pond. According to the New York Times (quote from Richard Florida), a third of Britain’s gross domestic product comes from London alone.
What is far less clear is what should be done to address the decline of some of the smaller cities in America – cities that are stagnating and feeling left behind. But perhaps the first step is acknowledging what has happened and what remains feasible in today’s global economy.
Here is another quote from the above NY Times article:
Mr. Trump’s promise to relieve the pain by reviving the coal and steel industries, by keeping immigrants out of the country and by raising barriers against manufactured imports is only a rhetorical balm to satisfy an angry base seeking to reclaim a prosperous past that is no longer available.
That rhetorical balm.
This morning the Toronto Star published a detailed autopsy of the failed Trump International Hotel and Tower Toronto. It outlines the players, the investors, and what supposedly went wrong. Of course, the headline is all about how Trump managed to make money from the deal – through his well-publicized licensing business – even though the project went bankrupt.
At the beginning of this year, the Washington Post reported that Trump’s name had been licensed and linked to over 50 properties and that these contracts have earned him at least USD$59 million in revenue. Outside of the US and Canada, the Trump Organization has (or had) deals in Brazil, Turkey, Azerbaijan, India, Indonesia, the UAE, and so on.
There would have been more money to be made in the actual development of these properties, but the beauty of these licensing deals – for Trump – is that they are “low-effort, low-risk, high-reward.” In fact, this past summer it was reported that the breakup fee at Trump Toronto – the fee to exit all contracts with the Trump Organization – was at least $6 million (guessing that’s in USD).
This story is not unique to Toronto. And so I have got to believe that there’s major brand dilution happening here. Does the Trump name really bring credibility to projects in some markets? How sustainable is this licensing business?
The only other thing that I would add to the Toronto Star article is that the hybrid condo-hotel model has proven to be difficult in this city. It’s perfectly fine to have residential condos and a hotel in one tower. There are lots of successful examples of those. But when the condo units can be put into a hotel pool (and there’s an IRR expectation on the part of individual owners), many seem to have been disappointed.
Part of the challenge with this model here in Toronto is that the condo-hotel units typically end up with a commercial property tax rate, which, in this city, is much higher than the residential rate. This can suppress values.
In the US you can reduce your taxable income by deducting the mortgage interest you pay toward your principal residence. You can’t do this in Canada, at least not on the property where you live.
However, there are limitations. It is capped at loans up to $500,000 or up to $1M if you’re married and you file jointly. On the other end of the spectrum, you also need a loan big enough such that an itemized deduction will save you more money than the standard deduction.
Not surprisingly, the MID is popular among homeowners. And from a public policy standpoint, one of its selling features is that it’s supposed to stimulate homeownership. But many have argued that it doesn’t actually do this – it unequally benefits people with larger mortgages. (Canada has a higher homeownership rate than the US.)
Right now it looks like you need to buying a home worth at least $305,000 in order for the mortgage interest deduction to make economic sense for you. Again, if your loan isn’t big enough, you’re simply going to opt for the standard deduction.
In 2015, about 22% of all US taxpayers opted to take advantage of the MID. According to Zillow, only about 29% of all homes in the US are valuable enough for the MID to actually make sense. Though in some cities, like San Francisco, it’s pretty much all of the homes. Of course.
Zillow also recently looked at what the recent tax reforms put forward by the Trump Administration would mean for the MID and the real estate market.
One of proposed changes is a doubling of the standard deduction. What this means, based on Zillow’s math, is that you would need to be buying a home worth at least $801,000 today for the MID to make sense. This also means that the deduction would now only benefit about 5% of all homes in the US.
This would seem to only exacerbate the criticism that the MID does not in fact stimulate homeownership in the segment of the market that needs it the most. But perhaps this is the only politically palatable way of removing it – gradually.
Photo by Erol Ahmed on Unsplash
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