Wednesday, December 30, 2009

Investing the easy way

If I combine the ideas of my land tax post, and my post on Tony Abbott, I end up with a generalised principle of scarce resources.  That is, that productivity gains across the economy accumulate as capital value of scarce resources that have few substitutes, with land being the ultimate example of this principle.

As we find dwindling environmental assets such as wild fish stocks, scarce rights to harvest fish begin to accumulate value due to economy wide productivity gains.  Australia is separating land and water rights as part of National Water Reform, and these finite water rights will also exhibit this general principle.

Most interestingly, and permits from the proposed Carbon Pollution Reduction Scheme will have this characteristic.

We will make a transition from a society where wealth accumulates in land, to one where wealth also accumulates in various rights to other finite resources.  I'm not saying this is bad. In fact the creation of finite rights is the best way I can think to place a value on scarce environmental assets.

I guess my point is that investing in these new finite rights to the environment is one way to invest in the protection of the environment.  Simply buying and holding these rights will accumulate wealth in much the same way that land traditionally has.  Of course, buying land and not developing (or even improving the environmental condition of the land) is a fantastic way to invest in the environment.

*Please note this idea is not yet fully developed.  Any ideas/comments are appreciated.

Tuesday, December 22, 2009

The Christmas gift arms race

I do like Christmas. Maybe it’s the memories of childhood where a simple water pistol was enough to keep the anticipation high for weeks, and then become an object of desire (and destruction) for months.

But these days I feel like Christmas has become more of a burden then a blessing. My experience suggests that the last decade has seen the demise of delayed gratification. Maybe it’s just because as a child you are subject to parental decisions, and so you learn about delayed gratification. Then in adulthood, you realise there is little need for that anymore and are happy to splurge whenever it suits you. But maybe it is a more widespread cultural phenomenon.

The cause of this burden I feel is what I call the Christmas arms race.

For a start, people are all buying themselves whatever goodies take their fancy all through the year. Then at Christmas family members are meant to search for whatever desires of yours remain unquenched and quench them with a thoughtful gift.

Then, one friend or family member goes all out and buys everyone some great gifts, while you, stuck for ideas (possibly suffering decision paralysis), end up giving token gifts such as chocolates or other tasty Christmas treats. The next year you feel the benchmark was been set last year and needs to be exceeded this year. This goes on year in, year out.

The Christmas burden is not usually expressed in this way. Economists mostly believe there is a deadweight loss because of Christmas because gift givers cannot know as much as receivers their tastes. Tests have shown that gift recipients value gifts at only 80-90% of their costs to givers.

So how do we maintain Christmas cheer and eliminate the arms race. Here are my tips for giving gifts that allow you to escape the arms race, but maintain the pleasure of giving.

1. Delay buying some non-urgent things for yourself, and drop them into conversation with you family in early December. “Those whatamacallits look fantastic, I’ve always wanted one but still can’t bring myself to try them.”

2. Find a gift that shows that you know the persons personality well (eg. for nerds a new fangled gadget is good)

3. For any male over 5 year old, one of these is a great idea (I’ve never known anyone to not like them)

4. Go for something practical that the recipient is unlikely to be aware exists – expect a response such as “Wow, that’s such an amazing idea. Why haven’t I seen this before”

5. Don’t fret about recycling gifts. Apparently many people are quite happy to do this, while others hate it. Convince your friends and family to embrace regifting to take the pressure off you gift choices.
Any other tips would by greatly appreciated? Are there any gifts that always impress?

Merry Christmas everyone.  I'll probably take a break from the blog until the 5th January 2010.

UPDATE:  Looks like everyone wants to talk about the inefficiency of Christmas gift giving (see here).  I especially like the last paragraph:

the gifts you received from your family and friends yesterday will probably bring you more satisfaction per dollar spent than the tens of billions the government has spent on our behalf since last Christmas

Sunday, December 20, 2009

Summer Reading


The past few weeks I’ve somehow found time to read.  Here are a few interesting titles that I would recommend.

Christopher McDougall has written an intriguing story amidst a lesson in human evolution which will leave you inspired.  The following things have happened to me since reading this:
  1. I run more
  2. I run bare feet whenever possible
  3. A pair of these are on my Christmas wish list  
  4. I like to talk about human evolution and rabbit skeletons a lot more than I used to
I don't want to give away too much, but I can’t recommend this book enough – READ IT!

I’ll admit that I am a Richard Dawkins fan.  In this book you get a break from his famous anti-religious crusade which was popularised by his documentary Enemies of Reason, and book The God Delusion.  Instead, you get an easy to read account of the emerging evidence for evolution, and a theoretical discussion that crafts often complex and counter-intuitive ideas into accessible analogies.

If you are short of dinner party discussion topics, you will find everything you need this festive season – from how the skull of almost every mammal is made up of the same 28 bones (in a rigid structure), or how the bizarrely long detour of the laryngeal nerve in the neck of the giraffe is exactly what we’d expect from evolution.

Those with a thirst for knowledge and an interest in evolution should read this book.

I was expecting a lot from this book and after reading, felt that I was deceived by the title.  While George Soros may be a spectacularly successful investor, this book is actually about his theory of reflexivity.  

Soros’ theory can be a little philosophical.  Its starting point is fallibility, which is the idea that our understanding is always imperfect because we are part of reality, a part cannot understand the whole.  He says “The human brain cannot grasp reality directly but only through the information it derives from it.”  To translate, there is no such thing as perfect information – the necessary precondition for perfect markets.

What is important in this book is that Soros shows how much economic reasoning is fallacious because money is assumed to be neutral far too often.  One of his key messages is that the state of financial markets has a tangible impact on the real economy.  Of course, this idea itself is not new. 

But his ideas for improving the stability of the economy appear logical.  On the premise that the market is imperfect, and that regulation is imperfect, he suggests that governments set stronger boundaries for financial institutions – I interpret it as a bounded market.  By setting known boundaries to market behaviour he also hopes to avoid the moral hazard inherent in many financial institutions.  The fact that big banks know they can’t be allowed to go broke increases the propensity for risk taking.

Soros believes that there was a bubble riding on a super-bubble, which will both burst in time (it reminded me of Wave Theory).  Of course, like always, the timing can be a problem.

For those budding detectives this book is quite interesting.  It is essentially a lesson in the psychology research of author Sam Gosling on behaviour residue.  What makes this book interesting are the experiments that show how good we are at intuitively knowing the personalities of people from the bedrooms, offices, cars, and websites.  
For example, researchers photographed cars and their owners separately by the side of a toll booth, and asked students to match up car and driver – and they were bloody good at it!  From a waist up photograph and a single external photo of the car, people could guess the personality and lifestyle of the person, and match it with the car that they thought reflected those characteristics. Quite amazing when you realise how difficult it is to deconstruct how we achieve this miraculous feat.

Sunday, December 13, 2009

Tony Abbott...

…believes that a high price of oil will encourage new discoveries, such that the concept of peak oil is not valid.  This is a classic example of what could be called ‘Price religion’.

Could I suggest that Tony Abbott (and I guess many ideological economic zealots) try and apply their logic elsewhere.

For example, if the price of fish goes up, does that mean that we will discover more fish on the Great Barrier Reef?

If the price of land goes up, will we discover more land?

Of course Tony Abbott and other followers of the Price religion don’t believe we will find more fish on the reef if the price goes up. But somehow, they will leave their logic at the door when it comes to oil or other fossil and mineral resources.

Then again, he could just be reiterating his party line – it is probably not a good time to let the media catch a glimpse of anything other than unity in the Liberal party these days.

Best of luck with that Tony.

*Note: I have grown to dislike all the current political parties, although I used to give support to the Greens. Maybe there is an opportunity for a fresh young political party in Australia these days?

Thursday, December 10, 2009

Are the States simply an historical legacy?

Kevin Rudd seems to be taking Federal control wherever he can.  His latest move is take more control over town and regional planning.  (Does that mean more regulation or less?)

But why not scrap the States altogether?  Aren't States just historical happenstance?

It's an old question. As a State employee I have witnessed the inefficiencies of this bureaucracy first hand.  More importantly, I have witnessed the animosity between State and Federal governments where open cooperation should be the order of the day.  The States always complain about the lack of understanding of Federal officers. "They don't understand what it's like in Queensland" - true, they don't understand the getting things down the slowest and most expensive way is the how we do it.

But my questions are, what is holding back Federalism (for want of a better word)?  Is there not enough public frustration with the States, no political will?

If there was the political will, how would one actually start the process of removing State governments?

Maybe in my lifetime I will get a chance to witness these things.

PS.  I'll be in Canberra next week liaising with the Federal government, so the blog may be quite for a while.  Maybe when I'm there I can get some thoughts from Federal government officers on this issue.

Tuesday, December 8, 2009

A graph I promised to make

There is a lot of talk about population and number of new dwellings in the housing market debate.  What is generally overlooked is that at any point in time everybody is living somewhere.  Occupancy rate is fluid, prices change, and in the long term, population growth in an area can't happen without prior construction of housing. 

The graph shows the new dwellings constructed per new person (per person of population growth).  We do notice a recent decline in the number of dwellings being constructed nationwide compared to the population growth, which is reflected in the later graph showing increased occupancy rates.  The direction of causation amongst these variables remains unclear, and in all likelihood, they are interdependent.

Regression with net new dwellings per person of population growth as an explanatory variable for change in the capital city price index gives a negative coefficient (-0.011) but really, has no explanatory power (r2 of 0.006).

That means that analysis of population growth and dwelling construction figures has no power in explaining housing price changes.





Australia's most expensive house

The previous record for Australia's most expensive single dwelling (don't think it falls into the house category, nor even the mansion category) was a measly $45million.  Just this week that record has been smashed by a respectable figure of $57.5million for a Perth waterfront mega/super/ulltra-mansion.


(What was he askin'? $70million - tell him he's dreaming!)


It shouldn't be a surprise that the sale was from one mining baron to another.  In Brisbane mining companies have a reputation for sending lots of cash in a hurry.


What shocked me was the claim from the real estate agent the he had sold Australia's most expensive house back in 1980 - for just $2,150,000.


Times have indeed changed.

Sunday, December 6, 2009

The sleepwalking defence

I state in my profile that we need to turn our ideas on their heads to gain understanding.

So what did I make of this report of a man who strangled his wife in her sleep? His charge of murder was dropped, but I would be surprised if he is not now charged with manslaughter.

But behind the headlines there is an interesting tale about responsibility. We humans are extremely susceptible to external influence. Stanley Milgram’s famous experiment showed many years ago how our rational decision making capabilities can be heavily influenced by our interactions with others. We seem to obey authority figures, and we are known to also conform to group behaviours.

Economists generally assume people behave in a perfectly rational way, and that decisions are made independently. Legal practice certainly seems to take decisions as personal and independent. But we only can make these decisions based on our past education and experiences – past external factors.

But just as we still believe that people are responsible for the decisions and behaviour, even though these arise from past external factors, we should believe that a sleepwalker is responsible for their actions.

Thursday, December 3, 2009

Tax me, please

People hate taxes. But they are necessary, and some are better than others.

Henry George’s arguments in his 1879 book Progress and Poverty are that all benefits from progress accumulate to land owners. He proposed a single tax on land because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses.

I agree. A land tax is by far the least bad tax. Milton Friedman even agreed – “In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

There are many reasons to prefer land taxes.

First, they discourage speculation. They provide a disincentive for land ownership without immediate prospects of productive use. This idea relates closely to the current (and let’s be honest, old and ongoing) debate about housing affordability and housing supply. A land tax would hinder the ability for developers to ‘land bank’ - artificially stifling supply of new dwellings. It will increase competitiveness of supply in the land market. This is one reason even the proponents of a housing shortage should embrace this tax.

Indeed, they may even encourage planning changes by governments (maybe through pressure on local governments by the federal government) to allow greater density to increase their tax base.

Second, a land tax has the effect of encouraging efficient use of land and investment in buildings. Those wishing to increase density in the cities to reduce urban sprawl should also see benefits here. Owners of land in urban areas would have more incentive for subdivision, and increasing density, to avoid this tax.  In fact the economic success of Hong Kong, Taiwan and Singapore has been attributed to high land taxes - a path that Korea is keen to follow.

Third, they are a difficult tax to avoid, and administratively simple (indeed small land taxes are currently enforced in all States for owners with land holdings above a threshold value). Land ownership is well documented, and tax evaders could have their land compulsorily acquired.

What about arguments against such a tax?

One of the main arguments against land taxes is that they discourage investment. For example, when developing a large estate, improving the amenity of the area from the first stage (think of the lake and shopping areas at Forest Lake) will increase the value of surrounding land still held by the developer and increase their tax liability until they can sell. This, it is argued, discourages investment in housing and buildings.

My response to this argument is that it will not, and for an obvious reason. First, the tax liability from these parcels can be fairly accurately known is advance and factored into the original decision to purchase the undeveloped site. The table below shows a stylised development feasibility in the ‘with’ and ‘without’ land tax scenario. Assuming people are willing to pay the same price for the final dwelling (because their tax reduction elsewhere offset their increased land tax liability - although that may not be entirely true, but is unimportant to this particular argument) the developer can still make a profit and has incentives to do so under the ‘with’ scenario. He makes the same profit, has the same total cost, and same revenue – the tax incidence is on the seller of the development site the original landholder, not the developer.


The only problem is harnessing public support for the transition to a higher land tax society. One of the main problems is that the tax falls solely on land owners – generally the wealthier sector of society with the greatest political clout. They can always popularise the argument that land taxes will add costs that will crush land ownership aspirations.

Another problem is that the development lobby will argue that such a tax will sent them broke because they have already committed to a number of projects without factoring in these increased costs. From the perspective of the public, that is perfectly fine – if they go broke their land holdings will make it to the market in a hurry. But I see no reason that a progressing increase in land taxes over a number of years should tip many big developers over the edge.

As a final comment I want to note why land taxes run counter to intuitive logic.  As a rule of thumb, if you increase taxes on a good, you get less of it. If you increase subsidies, you get more of it.  This was demonstrated recently by Andrew Leigh, where he showed that higher stamp duties decrease the number of sales of homes.  Tax selling, and you get less selling.

But a land tax is a holding tax.  To avoid this tax you get less land holding.  Which would encourage selling land to others who may use it more productively.  As the table above shows, the incentive to produce homes and buildings will not deteriorate.

I would appreciate any thoughts.

Tuesday, December 1, 2009

Fuel efficiency insights

I watched a Top Gear episode where Jeremy Clarkson raced a Toyota Prius and a BMW M3 around their test track for 10 laps. It wasn’t a race really. The BMW only had to follow the Prius as it drove the tack as fast as possible.

And what happened? The Prius, with its 1.3L engine used more fuel than the M3 with its 4L V8!


To make matters worse for the pro-hybrid lobby, Clarkson also drove a 1.7 tonne V8 Jaguar XJ6 from Basel in Switzerland to Blackpool in the UK on one tank of fuel – a similar result to the little VW Polo.

So what is going on here with fuel efficiency?

My gut instinct is that weight is the major factor determining fuel consumption. At almost 2 tonnes, the Jaguar seems very impressive. Maybe it’s the weight to torque ratio that is important, as when travelling at a constant speed, power is not so important.

To test this hypothesis I wanted to gather data on vehicle weights, fuel type, engine capacity, number of cylinders, torque, power, and add some dummy variable such as turbo/supercharger, hybrid, 4x4. Then run some regressions with highway mileage and city mileage as independent variables. I found most of the data here, but don’t have the time to add vehicle weights, drivetrain and turbo details into the spreadsheet. When I get a response from the geenvehicle guide with their complete data set I will let you know my findings.

But what does it all mean?  I take away a number of things.

1.  Some of the gains in vehicle fuel efficiency over the past few years may have been offset by and increase in highway speeds and acceleration (more stop-starting).
2.  Don’t scoff at the environmental ignorance of people with V8s
3.  If you buy a hybrid and race it you are just as crazy as Jeremy Clarkson
4.  If you have big car, you can drive slower and save money on fuel
5.  Doing your part for the environment is not as simple as it’s made out by green lobby groups

Sunday, November 29, 2009

Australia, meet Dubai

The property market is Dubai is crashing and burning as we speak.  It was inevitable of course, but never underestimate the perseverance of a property boom.

On that note I want to talk about the future here in Australia.  In 2010 and beyond I foresee the following sequence of events.

1. Rate hikes of another 0.5%
2. Property prices will flatten and fall in some areas
3. The government will run out of ways to keep housing demand propped up – we had more cash injections and foreign buyers (although as yet I can’t imagine what else may be dreamt up).
4.  Inflation will be a major concern again – the USD will recover and the fuel price here will head up.
5.  September 2010 will lead to another correction on the share market, taking the ASX200 down below 4000 again.
6.  But then a strong rebound in November up to 4400
7.  House price will stabilise at 10% below their peak (in nominal terms) but real growth in house prices will not occur until 2015.
8.  A Current Affair and Today Tonight will has specials about house prices crashing in certain areas and people being forced out of their homes by mortgagees.
9.  Even while this is happening, people will continue to shout and scream about a housing shortage and argue for reduced taxes on developers (even though we have the world's biggest houses)
10.  The 2011 census data will show that demolition rates were less than expected and that the total number of dwellings in Australia is higher than expected (the remarks by the RBA’s Ric Battellino seemed a bit pushy on the supply constraint issue).

It’s not a catastrophic forecast, but it seems reasonable to me. Anything I've missed?

Wednesday, November 25, 2009

Why all this property market discussion from an ‘environmentalist’?

I’ve been thinking of changing the title of this blog - mostly because the term environmentalist is associate with fairly extreme views on the protection of ‘natural’ environments and other species, and partly because I also have a keen interest in the property market.

But in my mind, understanding property is the key to a reasoned approach to preserving our quality of life by preserving environmental amenity. Maybe I am more of a ‘quality of life’ economist who believes there are many non-market goods, including the quality of, and accessibility of natural environments, that are major contributors to our well-being.

However the increasing fanaticism I have observed in some areas of the climate change movement, the lack of ability for some environmentalists to see the forest for the trees (pun intended), has lead me to distance myself from some of the core environmentalist views.

Take the topic of the moment, climate change. Why don’t we hear about

- Any potential benefits of climate change
- The statistical reality behind some of the conclusions
- Other important environmental issues that are cheap to address and provide immediate direct benefits

I feel like climate change is crowding out other local environmental concerns that will immediately contribute to quality of life of Australians.

In my mind, a quality combination of land use and environmental controls in our cities and towns can contribute far more to the well-being of society than other popular environmental issues.

So what then of the blog title? Any ideas? Or does the economist part imply a rational approach?

Tuesday, November 24, 2009

Is road congestion the best allocation mechanism?

Congestion is the darling of politics and the media, and a topic of many conversations around the barbeque. But what is it? Is it a bad thing? Do we want more of it or less of it?

I define congestion as a condition of a network (of roads or other conduits) whereby the existence of extra users slows the rate of progress of all other vehicles. Given this definition, there can be a little congestion, where progress of road users is slowed a little, or plenty of congestion, where progress is greatly slowed.

The basic assumptions required for this brief analysis are that travel on the road network consists of a number of costs including vehicle capital and maintenance, fuel, and time, and that congestion affects road users by adding to the time cost of road transport.

However, given that people still choose to drive during times of peak congestion, and assuming that congestion is known in advance, we must assume that each traveller still receives a net benefit from their trip.

We end up with a situation where congestion results in the allocation of road space to users with a higher value of use, and a road system that still provides net benefits to each road user.

So where do the figures about costs of congestion originate?

The other way to look at congestion is that each extra individual who uses the road network incurs a cost to all other users in terms of increasing their travel time. Thus, there is an incentive for people to ‘overuse’ roads, as they receive all their benefits, without incurring all of their costs.

Thus if we have 100 road users and their trip time is 20 minutes (before noticeable congestion begins), and each extra road user after this amount increases everyone’s travel time by say, 1 minute (obviously the relationship is non-linear), then we can estimate the cost of congestion as follows:

With 5 hours per day where 120 users are on the road, we can estimate the cost as 5 hours of the value of time to 120 people, minus the benefit of undertaking the trip to 20 road uses.

The main shortcoming of this traditional approach is that it is assumed the costs borne by other road users are unavoidable, and thus it fails incorporate the benefits accrued by road users even when congestion occurs.

This is where my (I think) realistic assumption of prior knowledge of congestion is important. All 120 road users will know before embarking that their trip will take 40mins instead of 20mins. Other road users are prepared to ‘pay’ the extra time cost of travel, thus we still have a net benefit to society from congested roads.

Congestion charges essentially aim to replace the increased time cost with a hip pocket cost, to keep some users off the road. However, since the time cost of different individuals is greatly different, a congestion charge will benefit the wealthier road users and hinder those who place a lower value on their time.

Alternatively, congestion could be reduced by offering more/better alternative modes of transport, to attract marginal road users to trains, buses, cycling and such transport alternatives.

In my mind, congestion is an extremely functional and efficient mechanism for allocating our finite road space.  I have no problems with introducing a congestion tax, as long as it is complemented with signficant investment in alternative modes of transport.

Sunday, November 22, 2009

Real Estate Review

My colleague is looking for a real estate agent to manage her house after downsizing to an apartment, choosing to keep the house as an investment.

She is facing a conundrum I have faced before. How does one go about comparing the performance of property managers before committing to a management contract?

Can the market for property management services be competitive without reasonable access to information?

I have written before about the lack competitiveness amongst real estate sales agents. A similar trend can be observed in the property management area of the business. I have never heard a property manager claim they can provide better services for a lower price. They all appear to have set a fee around 8.5% of the rental price, with $5.50 ($5 plus GST). Some divide their fee as 5% management, 3.5% rent collection, but in the end, I get the feeling there is some serious collusion, whether intentional or not.

One major piece of evidence for the lack of price competition is the fact that management fees have not declined in a period where rent increases have dramatically outpaced the costs of doing business. Surely in a competitive market one property management agency in an area would reduce their fee to 6% and attract a much larger market share (assuming they all provide the same level of service). This doesn’t happen.

Assuming there is no price competition, is there at least some competition for providing value – same price, better service. Well actually no. And the reason is that the quality of service cannot be measured, nor can reasonable impressions be gathered prior to entering into a management contract. How do I know if the property manager has any knowledge of common maintenance issues? How do I know if they have good relationships with tradesmen, and that repairs are undertaken promptly and at a reasonable price? How do I know how they treat tenant complaints and requests?

To summarise,

1. There is no accessible objective information about the quality of the service provided.

2. It is time consuming to change agents, and you risk getting one equally poor or perhaps even worse (as you don’t know whether they are good either).

3. Landlords generally get very little feedback from the tenants as to how the agent is performing from their perspective.

4. There are barriers to entry. To start an agency you need a rental role, to have something to offer to tenants. Starting from scratch and attracting landlords to shift to your agency may be quite risky.

Given I believe property management agents are not acting competitively, and therefore we are all losing out, I should really offer some suggestions to improve the situation.

My first and only suggestion is some kind of survey system administered by the State, local government or even the State industry association (such as the REIQ) that gets all landlords and tenants to rank the performance of the agent in a number of areas each year. It might consume about 1 minute of time for each landlord and each tenant annually and could be compulsory is agents want to be REIQ members.

The results of this survey can be published against the property manager’s schedule of fees on a simple website – the Real Estate Review. I would think this might spur one some better performance in this industry.

Any other ideas?

Wednesday, November 18, 2009

Are Chinese buyers affecting house prices?

Respected economist Alan Wood notes here why he believes small increases in foreign investment in the Australian real estate market will not have a tangible impact on home prices.

While it is nice to have a little calm to a situation that is sure to encourage exaggerated media spin, I’m not sure whether Wood’s claim holds - that because Chinese investors are a small percentage of buyers there will be little to no impact on prices. If we make one assumption, that Chinese buyers are willing to pay more than local and other foreign buyers, then his claim completely breaks down.

The following stories might help explain why.

Imagine an auction. In the scenario without the Chinese buyer it will sell for $500,000, which is $1,000 more than the second bidder was willing to pay, but is actually $10,000 less than the winning bidder would have paid had they needed to.

Now in the same scenario add a single Chinese buyer also willing to pay $510,000. They will bid up the price to $510,000 against the winner in the previous scenario. There is a chance they will buy it, but also a chance the winner from the previous scenario will buy with a token small bid.

So we can clearly demonstrate that 1) a single buyer entering a market willing to pay more than other potential buyers can drive up prices, and 2) these new buyers do not necessarily have to buy, simply 'bid up the market' to have an impact.

How about another scenario?

Imagine you have a train ready to leave the station. There are one hundred queues (one at each door). Each person must pay the market rate for a ticket which has been established over time to be $5. If they aren't willing to pay the market price, there are plenty of other people willing to pay the market price to take their place.

Now one of those queues (1% of the market - the Chinese buyers perhaps, maybe the first home buyers) decides they are willing to pay $6 so that their queue will move faster and they will get more seats on the train. Now, the market price moves to $6, and any other person from any other queue will have to pay $6 to get on, or let the train fill people from the Chinese/FHB queue. Some people from the remaining Aussie queues pull out, but there are still plenty who are willing to pay the $6 for their spot on the train. Indeed some even believe if they pay $6, they might be able to scalp their ticket for $7 a bit later if the price goes up again.

I believe there is no theoretical basis for the assertion that because buyers willing to pay more are small % of the market they do not impact prices.

Of course, this all rests on the assertion that the small number of Chinese buyers are in fact willing to pay more than other buyers.

Monday, November 16, 2009

Some empirical support for land economics

There has been a paper recently published by Andrew Leigh, Economics Professor at ANU, which empirically estimates the impact of stamp duties on the housing market.  I found out about this paper through Chris Joye’s blog at Business Spectator, although I regularly read the Core Economics blog, where it was also linked with some added thoughts from Andrew.  I mention this only because I have now been involved with discussions about the paper at these sites.

I need to quickly summarise Leigh’s findings before moving on to the important theoretical and political implications.

His main finding is that if stamp duties are raised, house prices will fall by more than in the increase in the tax.  Did you get that?  If you increase stamp duty, the total price of housing (price plus stamp duty) will fall.  Sellers suffer, buyers benefit.  It’s a classic land tax - there is no deadweight loss, as shown in the figure below.




How can such a thing occur?  For any other product, assuming a competitive market, if you add costs to production, prices will have to go up (even if quantity sold goes down), or margins will go down (temporarily at least). 

Land, however, has some characteristics that make it quite different to other goods
1.     1.  There is a fixed supply (vertical supply curve), and
2.   2.  It is costless to produce (the producer surplus starts at a price of zero)

Some would argue that land available to be developed is not in fixed supply, and that town planning regulations can change that supply.  I agree.  But these are regulations, they are not market players, and that does not make supply of land price elastic (although I would suggest the supply curve for serviced residential lots above the intersection with demand is quite elastic as land parcels are brought to market).  I think both sides would agree that from a theoretical standpoint, the supply curve is vertical below the intersection with the demand curve.

It is the second point that is far more important to understanding the land market.  Land itself is costless to produce.  That means that the level of demand determines the price of land at any point in time.  Not supply, demand.  So when you increase a tax on land the total land and tax price stays constant, but the underlying value of the land declines (as shown by the reduced producer surplus in the figure above).

I have been quite baffled by the success of Christopher Joye’s argument that the supply of housing is a major factor determining prices.  He maintains two contradictory positions.  The first is that we have a land price boom, not a house price boom.  The second is that we should elastify the supply of housing to avoid further unnecessary price increases.  Hang on chap.  We don’t have a problem supplying housing. Our problem is that we all decided to pay ridiculously high prices for land.

There are two more characteristics to the land market that make analysis difficult.  There is competitive behaviour in the market for buying land, both development sites and serviced land parcels, but not a competitive market for the sale of land.  

Once a serviced land parcel is developed, there is no price competitiveness exhibited when selling to the final consumer market.   The problem with land is that if prices fall, they can gather momentum as people sell to avoid further falls.  Also, if developers seek to undercut the market price, it reduces the value of all their other land holdings.  There is no incentive to release below market prices.

I also believe Leigh’s findings shed some light on my argument that changes to town planning rules, including increases in height limits and allowable building area, does nothing to affect home prices.   Any site with increased development potential will fetch a higher price, and the resulting dwellings will be released at the market price.

While Leigh’s paper is just one simple analysis of stamp duty rates and house prices, the theoretically sound finding should put to rest some of the illogical arguments of the supply side warriors, and the property development lobby in general.

Sunday, November 15, 2009

In Japan you can glimpse the future

When I first visited Japan in 2004 I saw the future - trains, gadgets, vending machines - but most importantly, I saw some amazing toilets. Even now, when I have a conversation with people returning from Japan they always comment about toilets. If you’ve visited Japan you would know why – they range from traditional squatters, to high tech digital robots. The most best of them all will greet you, automatically lift the lid, warm your seat, wash and dry your backside, play your favourite music, and flush automatically.

Back in 2004 I saw one particular style that was simple and profoundly efficient, where the cistern was filled via a basin so that you could wash your hands with clean water, and then use that same water to flush the toilet.

At the time I saw a market for such a design in Australia. I visited Japanese kitchen and bathroom stores to see the price range for these types of toilets, and investigated possible shipping costs. Alas, I became distracted and never followed through with this idea.

Now it seems that popular toilet maker Caroma is making these very toilets in Australia and the US. Only 25 years after their invention in Japan.

For anyone who likes the idea but is not interested in buying a new toilet, you can get a step by step guide to retrofitting your own throne to have this functionality here.

As an economist I wonder why it took the market so long to adopt this simple innovation in our water starved nation.  Was everyone simply as bad as I am at following through their ideas?  Was there a stigma in Australia about washing your hands with 'toilet water'?  Now that it is available here in Australia, will it even catch on?

Thursday, November 12, 2009

Unthinkable

I read a book that opened my mind recently. It is probably not on the best seller lists (is #53,525 rank in Amazon a best seller?). It is called The Unthinkable: Who survives when disaster strikes – and why.

This book examines the human response to fear in crisis situations and is presented in a very easy to read, non-scientific, yet analytical way.

The book is structured around the three phases of fear that people pass through – denial, deliberation, action.

Author Amanda Ripley weaves a story linking known human responses to evolutionary psychology. For example, the paralysis some people feel during fear is explained by people searching for a subconscious response. The less familiar people are with their environment, the longer it might take to finish searching for a learned response and start being able to think rationally again.

Ripley tells the tale of a school shooting survivor who ‘played dead’ on the ground and was the only one in the classroom not be killed that day.  I was shocked, because I had often thought playing dead might be a great way to survive a crazed shooting spree.

While I probably won’t do the book justice, I want to try and summarise some of the main points that stuck in my mind.

1.  If you are going to rescue a drowning person, you should yell and scream at them as you approach. Many rescuers are themselves dragged into the water by troubled swimmers desperately grabbing at them. You need to get their attention - swearing and threatening not to save them if they touch you is the recommended approach – and by doing so, you lead them into an obedient state of fear. Which leads me to my next point.

2.  People are mostly very obedient in a state of fear. If they do not have a plan of action that they are confident about, they will latch on to any suggestions by others. In many situations, people have been observed evacuating buildings like obedient lemmings.

3.  People are on the whole fairly calm in an emergency situation. In some cases it is due to denial, some cases due to paralysis of fear (their mind is whizzing away but can’t find a pre-programmed response to the emergency)

4.  People who undertake heroic actions, risking their own lives for others, generally do not make a conscious rational decision. They often say that images of their families pop into their mind, and the thought of facing them knowing they cowardly watched people dying springs them into action. Although some reference to evolutionary psychology is made, as males with no children are by far the greatest heroes.

5.  Overconfident people, who are a pain in the backside during normal times, are far more likely to survive a disaster. This is simply due to their ability to breeze through the denial stage and make a decision, no matter how poor, and follow it through with confidence (this reminds me of advice by Bear Grylls – that the secret to survival when stranded in the wilderness is to have a plan and act on it, rather than waste time thinking about it).

6.  The victims of disaster are play the key role in determining the survival rate.  First response teams such as fire fighter and medics generally arrive too late to make a major difference.

What makes this book so interesting is that the explanation of the human response to fear actually provides a solid theory for why different survival rates are seen in different disasters. For example, QUT researcher David Savage has statistically examined determinants of survival on the Titanic, and found that social behaviour, herding, and following the orders of dominant people probably led to high rates of survival for women and children. But in his study of another maritime sinking found that young fit male staff had the greatest survival chance. This boat sank in a mere 8 minutes.

Ripley’s explanation would be comprise a number of factors

a)  there was no time for a group leader to emerge
b)  in the absence of leadership, many people where struck by paralysis of fear
c)  those with the most confidence, maritime experience, and physical fitness got through the denial and deliberation stages much faster
d)  any hero behaviour may have not been successful

I can’t recommend this book enough for anyone who has wondered how they might react in a crisis, a natural disaster, or fire. It should be compulsory reading for legislators who deal with emergency plans, and for anyone involved in the first response team – the medics, firemen, police, and rescue teams.

Tuesday, November 10, 2009

A Redwater diverter for every new home?

Markets and opportunity. Peas and carrots.
Hand in hand go such things, and one would expect that in our new water conscious world, any device that can reduce water use in the home will go hand in hand with the phrase 'in demand'.

Here’s one device that has the benefit of being automatic and energy free.

It diverts the cold water sitting in the pipe between the hot water system and the hot tap to a storage (toilet, rain tank etc), then diverts the water back to the tap as it warms.
For all those whingers who need hot showers in Queensland it is probably a good water saving idea (yes, that's me).

I have, however, seen a nifty alternative. In Budapest I remember staying in an apartment that had a gas water heater bolted to the bathroom wall just one metre from the shower. Not only was the water in the pipe already warm from being inside, but there was hardly any water in the one metre of pipe anyway.

I’m not sure you can actually put gas water heaters indoors in Queensland, but one similar solution would be to have your water heater outside the shower wall.

Of course, if all that is a bit much and you still want to save water, you can just buy a diverter valve.

Wednesday, November 4, 2009

Psychologists at the RBA?

People have instinctual short sightedness. It is a primal trait. Each passing day adds risks to the realisation of future events. Our probability of dying increases, and the waiting time captures multiple risks of the event not occurring at all. In economese, that’s why we discount the future.

However, it is not all that simple. Behavioural economists have shown that people don’t discount in the expected rational way. Instead of treating each year into the future as capturing the same risk, each consecutive year is treated as less risky than the previous year – a concept known as hyperbolic discounting.

For instance, when offered the choice between $50 now and $100 a year from now, many people will choose the immediate $50. However, given the choice between $50 in five years or $100 in six years almost everyone will choose $100 in six years, even though that is the same choice seen at five years' greater distance

Why does the RBA need to know this?

The strategy of a gradual withdrawal of monetary stimulus by incrementally raising interest rates is meant to allow people time to adjust to higher interest rate levels. However, if people discount the likelihood and impact of each further interest rate rise, they will not adjust until it is too late anyway. The instinct of the masses will be to all but ignore the highly probably increases in interest rates in the near future.

This may be one reason for the long lags between execution and outcome in monetary policy.

A quarter of a percent increase in rates every month (1% over four months) is going to hardly register in our animal minds – each change is too marginal, and probability and impact of each future change is heavily discounted. A 1% immediate increase followed by no change for 4 months would actually change behaviour in the way the incremental approach is intended.

Have you heard people who have just bought a new house talk about the inevitable interest rate hikes – “We’ll deal with that when the time comes”. They are simply acting on instinct.

Tuesday, November 3, 2009

Fractal Finance

Ever heard of the Elliot Wave Theory? Maybe you have, but I hadn't until last week. Put simply, this theory suggests that markets behave is a predictable way which is not driven by fundamentals (actual production of goods, actual jobs, etc) but simply by human behaviour in the marketplace – the collective investor psychology.

The image below show the fundamental Elliot wave – 3 peaks (1, 3, 5) and two troughs (2, 4) on the way up, and two troughs (A, C) and one peak (B) on the way down.


While quirky (as an economist I like to think in terms of the fundamental patterns of production) this theory has a lot going for it.


1.  It is fractal and scaleless. That is, the pattern reoccurs over very small and very large time periods.
2.  The theory enables bulls and bears to be correct much of the time. It goes up and down.
3.  It seems irrational and predicable – a good reflection of human behaviour.

However there are some problems.

1.  It is impossible to be wrong if you simply say the market will go up and down (the most basic claim of this thoery).
2.  The theory has nothing to say about the speed and scale of each wave; it therefore does not add to the forecasting arsenal.
3.  It assumes that markets ignore all political and technological change, or it assumes these things change in a wave pattern.
4.  It assumes that markets actually measure something. Should Elliot wave analysts use prices in real terms or nominal terms?

So where are we on the basic wave formation? Did we just have a 3-4 crash, or a 5-A crash?

I have a chart of the All Ordinaries index from 1985 with my amateur attempt at using Elliot waves to forecast the next market move. Umm… down maybe?


While interesting, how anyone uses actually applies this theory to reveal anything useful escapes me. You can read up on Elliot wave analysis of the current market here, or do a google search for commentary by Robert Prechter, the current guru of Elliot waves.

Monday, November 2, 2009

Business stripped bare

This book is Richard Branson’s latest eye opener into the world of Virgin. The one man publicity machine takes the reader on a tour of his business philosophy and how the philosophy actually works in the realms of the Virgin empire.

I am a fan of Branson and the Virgin empire, for the most part because the company seems to bring competition to formerly uncompetitive markets. Virgin Blue is a classic case study – it revolutionised air travel in Australia. The budget carriers in Europe had already been vigorously competing for some years, and it was only a matter of time before the same thing happened down under. But without Virgin, would we have waited another 5-10 years for air travel competition?

Virgin is already in the mobile phone market worldwide, with India a growth area for them. Their entry to this market was launched on the back of simple pre-paid phones with simple prices. I have mentioned before how the complexity of phone and internet plans only benefits the supplier, and it seems that Virgin’s move into the mobile phone market was pinned on price competition rather than price confusion.

They are even moving into financial services and banking.

Richard tells how the Virgin group is now in the business of ‘branded venture capital’. They look to team up with emerging players and offer not only funding, but the goodwill of the brand to go with it. It works for them, but has the major risk that all businesses are exposed to the reputation of the brand. Some bad publicity could take a real toll.

But I’ve been thinking. What other industries need a shake up? I have a shortlist:

1.  Real estate agents – no price competition there. Somehow the industry acts as a cartel, setting commissions at the maximum legal amount. Maybe their slogan could be “Great service – even if it’s not your fist time”.

2.  Supermarkets – the entry of Aldi to the market was significant. But there is still plenty of room for a new entrant here.

Any other ideas?

Sunday, November 1, 2009

Population caps: Social catastrophe or sound planning?

My favourite lobby group, the Property Council of Australia (PCA), have attacked South East Queensland Mayors for starting debate about limiting population growth in the region through town planning restrictions.  The PCA's argument is that restricting development in a region has disastrous social and economic impacts. They wield the crossed supply and demand swords to argue that house prices will sky-rocket in areas with restrictive planning regimes.

Not surprisingly, their arguments are flawed.  Here's why:

The price of housing can only rise relative to housing in other areas by the value added by its location in a restricted planning area.  This may be a small transport cost, or premium for desirable suburbs.  Do you think median value of Brisbane homes would reach $1million while you could live at Ipswich or Caboolture for $300,000?

I would also suggest that the PCA's position is detrimental to the development industry in the long run.  As I have mentioned before, when town planning rules are changed to allow new areas to be developed, these areas are now in competition with existing areas for the finite demand for new housing.  As happened in Noosa, developers began to use the potential population cap as a marketing tool to exact a premium on property prices.  Although experience suggests that this premium may be more marketing hype than reality.

Also, I have yet to find a city or country that has a restrictive planning policy to cap population that has had disastrous social impacts.  Cities across Europe have adopted greenbelt planning controls to limit urban expansion, and there appears to be no significant social problems, but significant public support.  South Korea appears to have adopted a restrictive green belt in Seoul, which appears to have had net benefits.

My gut feeling is that the development lobby is creating a terrible public image for itself simply because they lack a thorough understanding of the economics at play.  There is money to be made with or without planning controls for a population cap, and it gives developers opportunities to be the first mover in emerging areas outside the capped region.

Wednesday, October 28, 2009

Don't let bridge designers near our buses!

It has come to my attention that buses in Brisbane are, by international standards, slow.  There’s really no other way to put it.  And I think I have found a way to improve the speed of bus services at the smallest of costs.

Remove bus stops.

I know it’s a bit counterintuitive, but it needs to be done.  My local bus route to the city is around 3kms.  There are 15 stops.  That’s one every 200m.  In fact, some are so close that you can talk to people at the next stop!  Realistically, half of these stops can be removed.  I have actually walked past 12 stops on this route while waiting for a bus – I was so close to where I was going I simply completed the journey on foot.

This absurd situation is not uncommon around Brisbane. 

And while I’m having a whinge, what is with bridge designers these days?  In the past, a bridge would take you across a river.  Now, designers set you a maze of bollards, loops, and swirling paths at each end as some kind of challenge to ensure that only worthy bridges crossers may pass.  The most recent example is the Tank St Bridge.  Instead of landing the bridge is some central and easily accessible place in front of the art gallery, the entrance is underneath the bridge so that you have to walk past the point where any normal bridge would land, then navigate through a tight corner in the middle of a bike path intersection, squeeze between some funky traffic calming posts, and then walk an extra 100m up a loopy ramp to get you back to where you were before.   

You would think designers would learn.  The UQ Bridge has its own nifty challenges.  To get down to the bike path by the river on the Dutton Park side, cyclists must turn right, right again, then left, left, then left again.  One simple path from the bridge directly to the bike path would have been simpler and much shorter.  At the other end of the bridge, pedestrians are faced with curious challenge.  Instead of a path from the bridge directly to the existing path network, a garden has been planted as an obstacle to navigate.  Walk though the garden and it’s about 10 metres.  Walk the loopy path around, and it’s about 20m.  Not surprisingly, the garden became trampled, and after a year a new direct path was built.

And of course there is the Goodwill Bridge, which has a large garden bed blocking the entrance at the Southbank end funnelling cyclist and pedestrian through narrow congested paths.

Are there people who enjoy these little challenges? 

My theory is that designers like to feel they have power.  When they see their designs forcing people to behave unnaturally it is a sign of success, rather than the reverse, where design would complement human behaviour.

“See how my design guides people through the maze. It’s ingenious!”

Wednesday, October 21, 2009

My economic philosophy of town planning

At the most broad level, the rationale for regulating land use is to minimise negative externalities to neighbouring owners of immobile property assets. This is why even ancient civilisations had strict rules attached to land.

Modern planning continues this tradition. There are few, if any, countries in the world that fail to regulate land uses (maybe the Vatican?) due to town planning’s success in addressing this fundamental externality problem. By regulating land use you can exclude development that will produce impacts such as noise, pollution, traffic, over-shadowing, and other externalities on other land owners. Protecting land rights, and subsequently land values, is essential to a functioning market economy.

This most basic principle is probably forgotten by many 21st century planners. It is one of my reasons for objecting to the proposed South Brisbane / West End plan. Allowing 30 storey developments creates severe externalities in terms of traffic, overshadowing, and use of public space such as parks. Another reason is based on the following second principle.

The second principle links planning and the property market and might be described as flows: the market is the engine and the brakes, while planning is the steering wheel. Development of property is simply one type of capital investment which is driven by broad economic conditions. Planning controls can therefore do little to influence the rate (speed) of development, but have much control on the physical location (direction) of development. While highly successful plans may eliminate some costs and risks associated with investment in property, this elimination of market friction will have only a minor impact on the overall rate of development.

Consider the following situation. The town of Rockhampton rezones the whole city to allow for 20 storey high rise buildings. Will a change to the town plan alone actually generate investment and population growth in Rockhampton? Will we see Rockhampton transform to a densely populated metropolis because the town plan allows it? I would answer these questions in the negative. 

A third principle is that each time planning changes the rights of land owners it chooses winners and losers. Winners are often more easily identified. Those properties where rights to develop have been extended, or those that benefit from restrictions on the use of neighbouring properties, are generally clear beneficiaries in terms of impacts on land value. Losers are often properties that have had restrictions placed on their rights. But many other losers are hard to identify.

Remembering that the growth in demand for ‘space’ occurs at a rate determined broad economic factors external to the plan, allowing an increased density of development to occur in one area may siphon off demand that would have allowed profitable development elsewhere.

This elsewhere can be broad and include many individual parcels of land. A simple example of a remote loser might be Springfield – from the Metroplex development on the former Wacol Army Barracks. If the planning scheme allows Metroplex to go ahead and develop a business park, it will siphon demand for office space in the western corridor away from the Springfield CBD, slowing the rate at which Springfield can profitably develop office space. This effect might flow on to the Ipswich CBD, and other business parks in the Southern and Western corridors.

To reduce politicisation of selecting winners and losers, a plan should be amended infrequently; lest its changes become a continuous stream of political gifts to winners.

So there you have and economist’s view on planning philosophy. At its core, planning should reduce negative externalities. It selects where developments of different types may occur, if in fact the market desires them, and finally, each time a plan is changed it selects winners and losers. Therefore changes should be infrequent. In light of the current practice in Brisbane and South East Queensland, I would suggest that plans (local and regional) last a minimum of 10 years.  There is more to come on how planning may provide fore more organic growth, even in light of the projected rapid population growth in Australia.

Thought of the day

I was intrigued by this question:

What are some examples of successful government bureaucracies?

Defining success in order to answer this question is the same problem that ultimately results in serious inefficiencies within government bureaucracies.  Without clear goals, governments end up stirring the pot but never actually cooking the meal.

To make matters worse, even unclear goals change unexpectedly on a political whim.

Imagine Steve Jobs one day promising in the media that Apple is now going to make running shoes and car tyres.  The whole Apple company would have to learn a new business, and the transition would be costly.  Then 3 years later, he is replaced by a newcomer who declares the shoe and tyre business a failure, and decides instead that Apple should run an airline.  Furthermore, the newcomer decides that the success of the new airline enterprise will not be defined by profits, but instead declares that success will be defined in terms of how much the airline is 'giving back to the community'.  It would be a disaster.

But that's the problem you see.  Tasks that have clear long term goals are no longer implemented by government, but by private contractors.  Governments are left with those tasks that are subject to pot stirring and political whim.  Hence, government bureaucracies never seem to get more efficient relative to private enterprise.

Tuesday, October 20, 2009

Town planning and organic growth – can we reconcile the two?

After a rather challenging discussion with a close friend last week about the necessity of town planning and the degree to which planning constraints impact property markets, I have decided to embark on what might become a detailed rant on the matter. This may the first of many posts on the topic.

The trigger for this planning discussion was a conversation about the proposed increase in height restrictions on former industrial land in the South Brisbane / West End area of Brisbane (see map below). Currently this area is a mix of light and heavy industrial uses, office and warehouse space, and new apartment developments. The area is earmarked as a new growth precinct, in the same vein as Newstead's transition from industrial to a mix of medium density urban uses.
The reason for the ensuing debate is that I oppose the 30 storey height restrictions being proposed in the neighbourhood plan, even though I support densification as a planning strategy. Instead, what I propose is a plan to allow for flexible organic growth.

There are multiple reasons for my objection, for example;
1.  Allowing for greater development scale per lot will not accelerate the rate of development – the absorption rate of new dwellings and commercial space is determined by other factors.

2.  It is a gift to land speculators who currently hold land with development potential of 5 or 7 storeys.

3.  Even if the plan intention is to greatly increase the land values of heavy industry sites to encourage industrial users to relocate, it may still fail to acheive this outcome. 

4.  A plan already exists which allow 5-7 storeys to be built - enough to easily accommodate the proposed future population of the area.

5.  Given uncertainties about the future, we should be hesitant to plan for a single potential future outcome. Imagine in 1979 planning for Brisbane in 2009.

The ideas that lay behind this reasoning I hope to develop further in future blogs.  For today let me just raise my two reasons against this scale of development that are specific to the South Brisbane / West End area.

First, 30 storeys is a big high-rise – the Hitachi building is 30 storeys, for example, and is 110m tall. There are currently only 28 buildings that height in Brisbane, and maybe it is just my taste, but it would be a pity to see this scale of development across the road from 2 storey character housing.

Second, the justification for allowing 30 storey developments is to have the ability to accommodate an extra 25,000 residents. Currently the population in West End is 6,200, and in South Brisbane it's 4,285 - around 10,500 in total. Allowing the ability for the population to triple is fine, but with a developable area of 38Ha and 30 storey limits, an extra 126,000 people could be accommodated (assuming a plot ratio of 20, and 60sqm per person). Seems a little over the top.

There is, however, one more important thing to consider. Stepping up from a 7 storey to a 30 storey limit is a big leap in anyone’s book. I would not be surprised if the dramatic 30 storey figure has been used simply as a negotiating tool. Knowing that the community would reject any further increase in height limits, council planners (under political duress) proposed a ridiculous height, in order for concession of a much lower height, say 15 storeys, to appear reasonable. If they had simply started with 15 storeys, there would have been much less scope for negotiation, and even if they had ended up with 12 storeys, it would have created much community resentment.

There is much more to say about town planning issue - stay tuned.

Sunday, October 18, 2009

Lobbyists: If they are always wrong, why are they so influential?

The Property Council of Australia (PCA) is one of those lobby groups with a blatant disregard of the facts and a history of political influence – the kind we love to hate.

Just yesterday the PCA made a submission to the Queensland government outlining how planning laws that promote densification are likely to increase greenhouse gas emissions compared to planning for more urban sprawl. This is not a joke.

They cite a 2007 Australian Conservation Foundation study to give their position merit, but what the study actually says is that environmental benefits from increased density are wiped away by the wealth and consumption effect. Essentially, the data shows living in smaller dwellings closer to conveniences reduces households’ greenhouse gas emissions, but generally, these households are wealthier, and thus have higher greenhouse gas emissions overall. No surprises really.

But when the PCA get wind of this, they conveniently neglect to mention that fact, and commission a report that produces a number of pretty tables and graphs to show how urban sprawl has positive environmental benefits. They then use this report to lobby the Queensland government to change their Climate Change Management Plan, and no doubt it will be added to the arsenal of biased reports used to influence the development of the SEQ Regional Plan, and planning documents in other states.

I may as well start by stating the obvious. The group commissioned to produce the report are called Wendell Cox Consultancy – I assume it is the same Wendell Cox who wrote the book, War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life. Surely we are to expect a thorough independent analysis of the data from someone who is known as an itinerant anti-public transportation gun-for-hire – surely the outcome of the research was not predetermined! My god!

Second, the report quite simply misrepresents the data. Plotting one variable at a time against per capita or household greenhouse gas emissions (as shown below) neglects all the other variables that have an impact. This type of analysis suffers from omitted variable bias – that is, the key variable that explains the greenhouse gas emissions is left out (that variable in this case is income, by the way).


When we do some actual statistical analysis on the same data we find that income is the main determinant of personal or household greenhouse emissions (when emissions are measured using life-cycle analysis techniques).

After controlling for age, persons per household, State, degree of urbanity (capital city or other), we find that dwelling type (a proxy for sprawl, proximity to CBD etc) is significantly correlated with total household greenhouse gas emissions from consumption – ceteris paribus, the smaller or more dense the housing type, the lower the household greenhouse gas emissions. The table below summarises the potential greenhouse gas benefits of densification when using this type of analysis (where separate house is the baseline).


Clearly, the arguments of the Property Council are based on a misrepresentation of the data by a seasoned pro-urban sprawl, pro-car, gun for hire.

I want to finish with a question. Do our elected officials and senior public servants actually give submissions from lobby groups any credit at all, or are they simply pawns in a much larger strategic game?

Thursday, October 15, 2009

Unbelievable

Only this week I wrote about cyclist resentment in Australia, with a detailed look into the arguments of the emotional cyclist v motorist debate that happens down under (but not in continental Europe I might add).

In today's local rag there is a snippet of news in the business section that epitomises the anti-cycling attitude of the typical Australian. For the life of me I can't find it online, so I will reproduce it here verbatim. 

You have to imagine this accompanied by a cartoon of a smiling Neil Summerson running over a cyclist, with bike parts, helmet and limbs flying out from under a precious collectable antique Mercedes.  It's true I swear - look on p40 of The Curious Snail. 

In the fast lane
Bank of Queensland chairman Neil Summerosn had a traumatic encounter of the cycling variety prior to fronting the media and analysts at the bank's record results presentation yesterday morning.
Summerson, a keen car buff with several automobiles in his garage, suffered the indignity of having a cyclist pass his car as he headed into the city for the press conference, estimating the speed of the cyclist at well over 40km/h.
The BoQ chairman pulled up at a stop sign only to see the cyclist whiz through the sign, prompting Summerson to call out, "Don't you obey road rules?" The two-finger salute followed and Summerson then pulled up alongside the bike rider, smiled, and put his foot full down on the accelerator of his Mercedes E500 V8, leaving our rider behind in a cloud of dust. Sticking to the speed limit of course.

My questions:
1. Why is having a cyclist pass you a 'traumatic event'?
2. Why is Summerson's hooning behaviour promoted as an acceptable response for motorists unhappy with other road users?
3. Is this how Summerson behaves every time he witnesses a road rule being breached?

Honestly, I couldn't believe what I was reading.