I know; there is no battle between iTunes and Foxtel (yet) but it seems like a good attention grabbing headline. The relevant point here is that Foxtel is releasing a new service where subscribers can download movies and TV programs. Although the service has its drawbacks, it sounds like the next big thing to me.
Whenever I see innovation like this, I can’t help but see it as another example of economics in action. It also makes me wonder what industries will be next to leap into the downloadable marketplace. Given that music and books have taken the leap, probably in response to pirated downloads, movies were an obvious candidate to jump soon. But what next?
Sunday, October 4, 2009
Rebound effect in action
The image below is from an email sent by the Queensland Government Climate Smart program. What an odd prize for a program designed to reduce energy consumption!
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Thursday, October 1, 2009
Move over horoscopes, forget cold reading, here is… economics!
Derren Brown, famous British magician, mind reader, and all round deceptive yet entertaining fellow, has often discussed the tricks used by psychics and fortune tellers. One particular method, cold reading, involves suggesting non-specific messages, and letting the subject of the reading provide the meaning to the message.
For example, a psychic using cold reading techniques might suggest that there is an old male, or a dog, or another such subject of emotional connection, and let the subject say something like, “yes, my dog Spot died recently”, to which the psychic replies with something like, “I can feel you have a strong bond with those, human or otherwise, that you share your life with”. Essentially, the psychic says nothing except that you are close to the people you are close to. But the delivery of the message makes it appear that the psychic knows something about you that they couldn’t have – unless they have psychic ability.
I will get to economists under the fold.
For example, a psychic using cold reading techniques might suggest that there is an old male, or a dog, or another such subject of emotional connection, and let the subject say something like, “yes, my dog Spot died recently”, to which the psychic replies with something like, “I can feel you have a strong bond with those, human or otherwise, that you share your life with”. Essentially, the psychic says nothing except that you are close to the people you are close to. But the delivery of the message makes it appear that the psychic knows something about you that they couldn’t have – unless they have psychic ability.
I will get to economists under the fold.
Tuesday, September 29, 2009
The value of food security?
Food security, energy security, job security - all political terms that conjure up emotion, deliver electoral support, all the while remaining devoid of meaning.
I have been asked impossible questions in my job. But one comment recently sticks in my mind. It goes:
..there must be some data that they could have used to address the “value” of having future food security.
What value might that be? Do you want a dollar figure that represents the present value of all future value streams from having food security? And do you imply that food security means that Australia remains a net exporter of food?
Wikipedia provides a fairly detailed, but useless, entry on food security. It does not mention national self-sufficiency at all, but merely one’s access to nutrition, and the link with poverty. No surprises there.
I’m all for national pride, but arbitrarily deciding that a country must be self-sufficient in one particular good is a poor philosophical position. If we replaced food security with toilet paper security, or car security, or hat security, we would immediately reveal the absurdity of the argument.
I have been asked impossible questions in my job. But one comment recently sticks in my mind. It goes:
..there must be some data that they could have used to address the “value” of having future food security.
What value might that be? Do you want a dollar figure that represents the present value of all future value streams from having food security? And do you imply that food security means that Australia remains a net exporter of food?
Wikipedia provides a fairly detailed, but useless, entry on food security. It does not mention national self-sufficiency at all, but merely one’s access to nutrition, and the link with poverty. No surprises there.
I’m all for national pride, but arbitrarily deciding that a country must be self-sufficient in one particular good is a poor philosophical position. If we replaced food security with toilet paper security, or car security, or hat security, we would immediately reveal the absurdity of the argument.
Monday, September 28, 2009
That bloody housing shortage
It seems that the RBA's Anthony Richards may have been reading my blog. His comment today from a national housing market forum includes the following
I said in a talk earlier this year that most calculations available then put underlying demand at something like 180,000 to 200,000 dwellings per year. However, I noted that such figuring was based on simply extrapolating earlier trends in household size and ignored the likely impact of prices on the demand for housing. At some point, the overall demand for housing will be affected by the higher cost of housing. For example, with housing – both owner-occupied and renter – more expensive than in
the past, we might expect to see some young adults choosing to live with their parents for longer. We might expect some households to look for an extra flatmate rather than leaving a bedroom vacant. Some owners of holiday homes or second homes might have become more inclined to sell them, with those houses then occupied full-time.
Hence the ‘undersupply’ of housing might not be as large as sometimes thought. But this is not necessarily something that should reassure us – it may be because the higher cost of housing – partly reflecting supply side problems – has choked off some of the demand that might otherwise have existed.
However, by the end of his statement, fingers are squarely pointed at the pet issue for housing analysts, supply side constraints. That bloody housing shortage gets a good run in his statement as well.
I also wonder how we are meant to know the counterfactual demand that might otherwise have existed. Isn't he just saying that demand for housing follows the law of demand?
His remarks are reported as evidence that the housing market is ready to 'take off'. But only time will tell whether the inverse correlation between change in housing shortage and change in price proves reliable in the longer term, or whether the RBA really can forecast market behaviour.
----------UPDATE----------
It looks like I'm not the only one who has interepreted the housing market exactly the opposite way to the RBA and other property bulls.
I said in a talk earlier this year that most calculations available then put underlying demand at something like 180,000 to 200,000 dwellings per year. However, I noted that such figuring was based on simply extrapolating earlier trends in household size and ignored the likely impact of prices on the demand for housing. At some point, the overall demand for housing will be affected by the higher cost of housing. For example, with housing – both owner-occupied and renter – more expensive than in
the past, we might expect to see some young adults choosing to live with their parents for longer. We might expect some households to look for an extra flatmate rather than leaving a bedroom vacant. Some owners of holiday homes or second homes might have become more inclined to sell them, with those houses then occupied full-time.
Hence the ‘undersupply’ of housing might not be as large as sometimes thought. But this is not necessarily something that should reassure us – it may be because the higher cost of housing – partly reflecting supply side problems – has choked off some of the demand that might otherwise have existed.
However, by the end of his statement, fingers are squarely pointed at the pet issue for housing analysts, supply side constraints. That bloody housing shortage gets a good run in his statement as well.
I also wonder how we are meant to know the counterfactual demand that might otherwise have existed. Isn't he just saying that demand for housing follows the law of demand?
His remarks are reported as evidence that the housing market is ready to 'take off'. But only time will tell whether the inverse correlation between change in housing shortage and change in price proves reliable in the longer term, or whether the RBA really can forecast market behaviour.
----------UPDATE----------
It looks like I'm not the only one who has interepreted the housing market exactly the opposite way to the RBA and other property bulls.
Sunday, September 27, 2009
Roads for nobody
Friday's local rag suggests that the State government here in Queensland is keeping their employees busy by investigating a possible new tunnel from Toowong to Everton Park. This is to alleviate traffic congestion (of course).
Let me make some predictions.
1. This tunnel will not start construction within a decade.
2. If 1 comes true, expect the tunnel never to be built.
The reasons are equally as obvious as the predictions.
1. The State government has no money for ridiculous projects like this.
2. The Federal government will tighten its belt before they are asked to fund this project.
3. The private sector will not fund it - they wouldn't fund a little $250million bridge because of good alternative routes, why would they fund this.
If you want to head north on the Bruce highway from Toowong, wouldn't you take the other tunnel they plan to build to the Inner City Bypass, then get on the other new tunnel to the airport, then get on the Gateway motorway heading north? I would.
It appears that the transport planning community has looked to cities around the world that have similar traffic problems to Brisbane (Los Angeles, Sydney etc), and adopted similar approaches to alleviating traffic congestion. One wonders why transport planners don't instead look to cities that actually don't have severe traffic problems, and instead adopt some of the approaches used in these cities. It is a lot like asking a chronic alcoholic which intervention worked best for him when he still drinks like a fish.
I await a more diversified transport plan for South East Queensland.
Let me make some predictions.
1. This tunnel will not start construction within a decade.
2. If 1 comes true, expect the tunnel never to be built.
The reasons are equally as obvious as the predictions.
1. The State government has no money for ridiculous projects like this.
2. The Federal government will tighten its belt before they are asked to fund this project.
3. The private sector will not fund it - they wouldn't fund a little $250million bridge because of good alternative routes, why would they fund this.
If you want to head north on the Bruce highway from Toowong, wouldn't you take the other tunnel they plan to build to the Inner City Bypass, then get on the other new tunnel to the airport, then get on the Gateway motorway heading north? I would.
It appears that the transport planning community has looked to cities around the world that have similar traffic problems to Brisbane (Los Angeles, Sydney etc), and adopted similar approaches to alleviating traffic congestion. One wonders why transport planners don't instead look to cities that actually don't have severe traffic problems, and instead adopt some of the approaches used in these cities. It is a lot like asking a chronic alcoholic which intervention worked best for him when he still drinks like a fish.
I await a more diversified transport plan for South East Queensland.
Thursday, September 24, 2009
Property bulls take note
The main problem with the housing shortage proponents is that they neglect the existing 8.5million or so existing residential dwellings as a supply of housing. Currently, the average dwelling occupancy rate across the country is 2.53 persons/dwelling. This rate has varied between 2.48 and 2.60 over the last 27 years. In fact, it peaked at 2.6 in 1982 (soon after the second oil crisis). The graph below shows that we are currently heading back to level of occupancy last seen in the 1980s.
But surely, with such a small variation, this issue is minor compared to the 17,000 homes we are currently short of! On the contrary, it is the crux of the whole debate. You see, a change in the occupancy rate occurs for all dwellings, including the 8.5million existing homes. The 43,000 people apparently in need of the 17,000 dwellings can be accommodated in existing dwellings, and the result would be a shift in the occupancy rate of 0.005. If you look at the y-axis scale you can see how small an increment this is (one quarter of one notch), and how quickly we are heading that way.
In fact it only requires 1 in 200 households to welcome another person. Seems realistic to me, considering how popular this trend is amongst my peer group. Also, considering that the average dwelling is much larger now than when the occupancy rate was 2.6 back in 1982, such a shift would barely be noticable.
I have mentioned before how this adjustment in occupancy rate occurs, for example:
So I caution the property bulls to be realistic with their investments. Don’t expect a boom of 6 years to be followed by a six month bust. If you want to get into the market now, buy on the high rental yield and find good tenants. And of course, don’t forget about location.
- youths stay home with parents longer
- group households rent spare rooms
- elderly parents move in with children’s families
- other lone relatives move in
- when families relocate they choose smaller houses… and so on
Wednesday, September 23, 2009
Upon request
Peter Fraser recently commented that I should look a little more closely at the ABS data on housing construction, demolitions, and population growth, as the data I linked to that suggested the was no housing shortage was a bit light on (and outdated). Fair point, so I thought I'd play with the same data as other analysts and see what I make of it.
Below is the graph that apparently makes quite obvious the current housing shortage (the scale is such that the ratio between the two variables is set at the last decades average occupancy rate). I measure shortage first by establishing the underlying demand for new dwellings as change in population divided by occupancy rate (which changes through time as well), then subtracting new dwellings completed. (I wanted to then add demolitions of residential dwellings, but it appears that the ABS does not collect such data, and after a brief chat with them, they don't know of anyone who does collect it. In fact, determining a reliable collection method is one of their current projects. If anyone knows who is collecting it, and how reliable it might be, I would love to know; as would the ABS).
.JPG)
Below is the graph that apparently makes quite obvious the current housing shortage (the scale is such that the ratio between the two variables is set at the last decades average occupancy rate). I measure shortage first by establishing the underlying demand for new dwellings as change in population divided by occupancy rate (which changes through time as well), then subtracting new dwellings completed. (I wanted to then add demolitions of residential dwellings, but it appears that the ABS does not collect such data, and after a brief chat with them, they don't know of anyone who does collect it. In fact, determining a reliable collection method is one of their current projects. If anyone knows who is collecting it, and how reliable it might be, I would love to know; as would the ABS).
At first glance, yes, the housing shortage appears to be getting out of control. But I think what matters is how this comparison of population growth and new housing completions can be useful in forecasting the future behaviour of the market. Below, the ABS capital city price index is also plotted, and shows a surprising relationship with the shortage.
The plot below shows the relationship between change in shortage and change in price. A quick regression shows a significant negative correlation between change in shortage and change in price, even when the shortage is lagged a little.
.JPG)
This is what makes me wonder if we all have this forecasting thing backwards. If the housing shortage declines (by way of adjustments in occupancy rates, conversion of non-residential to residential, dramatic reduction in population growth), would that signal an increase in prices is imminent?
What theory could explain this relationship? My suggestion relies on the fact that the demand and supply of housing are interrelated - that is, they each react to the other, and the price change is a signal for actions by both sides of the equation. Ceteris paribus (including constant incomes), we have a number of reactions to a price change on both the supply and demand side.
1. When the rate of price growth increases, occupancy rates increase, to reduce the effect on a per person housing cost, which in turn decreases demand.
2. When the rate of price growth increases, supply increases as developers can now build more profitably.
3. When rate of price growth declines, occupancy rates decrease as people can afford more space per person.
4. When rate of price growth declines, the supply of new dwellings slows dramatically.
How can that make sense? If we follow this through, an increase in the rate of price growth is a signal that demand is declining but supply is rising! And vice versa. A decline in rate of price change signals a increase in demand and a decrease in supply!
I am pretty sure that the market is not so simple that it can be deciphered by comparison of population growth and dwelling construction.
Those crazy French
The French have a reputation for pursuing the art of living. An appreciation of the finer things in life is a typically French quality. Their government reflects that pursuit back to the people through policies that reduce the hours of work of full time jobs, and that enable plentiful holidays. Their President, Nicolas Sarkosy, percieved as womaniser and playboy by some, embodies the French passion for life.
Sarkosy is now considering redirecting his government to use measures of happiness as a benchmark for progress; much like the quirky Kingdom of Bhutan, whose King Jigme Singye Wangchuck introduced Gross National Happiness as a measure of Bhutans progress in the 1970s.
It makes me wonder how subjective these measures might be, and how they will deal with the problem encountered by economists studying happiness - that after a shock to peoples happiness (death in the family, loss of job etc.), they return back to their equilibrium state rather quickly. As a society, does this mean that this measure may lose validity, as the population has an equilibrium level of happiness that is not determined by external factors? Poor government decisions would quickly drop from the radar as people returned to their previous happiness level.
I can answer that one myself - no. Because the measures being discussed are simply subjective weighted averages of external measures, such as air quality, income inequality etc. The happiness measure therefore faces the problem of reconciling these subject external measurements with peoples actual self reported happiness.
Another interesting problem facing happiness researchers is that they can find very counterintuitive results. For example, a new job actually decreases happiness, rather than increases it as would be expected. An of course there is the Easterlin Paradox, which suggests that wealth is not an important factor in happiness.
But, in the end, what gets measured get managed. If we as a society strive for progress of a kind that reflect our values of fairness, equality and our environmental concern, then maybe Gross Domestic Happiness is the tool for the job. Maybe, it's simple another example of politicians playing politics.
It makes me wonder how subjective these measures might be, and how they will deal with the problem encountered by economists studying happiness - that after a shock to peoples happiness (death in the family, loss of job etc.), they return back to their equilibrium state rather quickly. As a society, does this mean that this measure may lose validity, as the population has an equilibrium level of happiness that is not determined by external factors? Poor government decisions would quickly drop from the radar as people returned to their previous happiness level.
I can answer that one myself - no. Because the measures being discussed are simply subjective weighted averages of external measures, such as air quality, income inequality etc. The happiness measure therefore faces the problem of reconciling these subject external measurements with peoples actual self reported happiness.
Another interesting problem facing happiness researchers is that they can find very counterintuitive results. For example, a new job actually decreases happiness, rather than increases it as would be expected. An of course there is the Easterlin Paradox, which suggests that wealth is not an important factor in happiness.
But, in the end, what gets measured get managed. If we as a society strive for progress of a kind that reflect our values of fairness, equality and our environmental concern, then maybe Gross Domestic Happiness is the tool for the job. Maybe, it's simple another example of politicians playing politics.
Turning points
I declared in July that the turning point in thinking about climate change has arrived. Now it seems one of the world's most renouned climate modelers is questioning the validity of the climate change hypothesis (here).
You see the thing is, complex systems results in perculiar outcomes, and can violently change without apparent reason. I have written in the past that I think N.N. Taleb covers the topic well when he talks of Black Swans. Extrapolating the past does not predict the future.
Wouldn't it be obvious that we should be expecting higher growth in the future? Be if you knew the causes of this growth you could predict that the trend would not continue. It would certainly decline again. And it did.
Additionally, the increase in natural growth due to increasing births in recent year - the baby bonus children - are likely to be the result of couples bringing forward their decision to have a family. Thus, this little boom is likely to fade quickly as all the number of remaining fertile young couples who desire children drastically reduces. I would hope these underlying points did not escape the Treasury.
Put simply, in complex systems, the longer period of time we consider, the more likley we are to gain insights into the behaviour of the system. My bet is that the rate of population growth will fall significantly from this peak over the next few years.
You see the thing is, complex systems results in perculiar outcomes, and can violently change without apparent reason. I have written in the past that I think N.N. Taleb covers the topic well when he talks of Black Swans. Extrapolating the past does not predict the future.
Let us look at some relevant examples. Recently, the population growth predictions from the Treasury were revised upward. But I wonder what the logic behind this revision might be. What new information could change significantly a previous prediction of a century of population growth?
My suggestion is that they make the mistake of extrapolating the past to predict the future. Let's imagine we are Treasury in 1988, and that we have just witnesses population growth like in the graph below.
So I imagine that the current boom in population is the result of two main factors - increased skilled migration, and the baby bonus. The increase in skilled migration could decline drastically at any moment upon political will. Of course, if the douple-dip downturn eventuates, this is more than likely to occur.
Additionally, the increase in natural growth due to increasing births in recent year - the baby bonus children - are likely to be the result of couples bringing forward their decision to have a family. Thus, this little boom is likely to fade quickly as all the number of remaining fertile young couples who desire children drastically reduces. I would hope these underlying points did not escape the Treasury.
Put simply, in complex systems, the longer period of time we consider, the more likley we are to gain insights into the behaviour of the system. My bet is that the rate of population growth will fall significantly from this peak over the next few years.
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