Friday, 29 May 2015

Rental rationing equilibria?

The only way I can make sense of Lee Suckling's renting experience in Auckland is that we're in a rental rationing equilibrium.

What does that mean?

In credit rationing models, too high an interest rate will only attract bad borrowers. When the lender can't tell enough about the borrower's creditworthiness, he'll ration credit: charge a bit less interest and give the loans to the most credible borrowers. Demand for loans will exceed supply at the going rate, but nobody does better by increasing interest rates to clear the market. Tyler and I discussed these models a while back; the implications for market efficiency aren't as clear-cut as you might think.

What does that have to do with the price of rental accommodation in Auckland?

First, note that it can be hard for landlords to evict bad tenants. Or, at least, lots of landlords believe that to be the case. Here is one recent horror story. Another another; the government has a hard time with it tooOne property management company lists a best-case of a 7-week process to evict a tenant that has stopped paying rent.

Now here's Suckling's account:
At every viewing you'll be one of at least 20 people. You'll wait patiently outside, eyeing up the competition, then will line up like sheep, shoes off, ready to file in five-at-a-time.

The reality is never as good as what TradeMe presents - especially if the listing used overexposed real estate photos, complete with fisheye angles that make 50 square metres look like 80. If you're looking in a city-fringe suburb, you will be met with grottiness. Auckland landlords, you seriously need to have your houses professionally cleaned. Last time we checked, $500 a week didn't buy us mould.

Still, such filth seems not to deter most. Four or five people will fill out applications then and there, before greasing up to the agent to find out how they're going to "win" this grubby, fungus-friendly house.

The answer? Be a white couple (yes, it seems race matters in agents' eyes), not a group of potential flatmates. Come with no kids, no pets, your own whiteware, and full-time jobs in a stable industry like law. Good references are vital, and you can't have a current lease - you need to be able to move in, well, tomorrow, so the landlord doesn't lose any money.

If such qualifiers are not already ridiculous enough, you'll also need to be flexible on your budget. I started with a price range the $450-$500 vicinity. Every week, my husband and I renegotiated the ceiling on our accommodation allocation. Last week, the budget had reached $600 per week.

Oh, and you'll need $3500 in the bank to give away as move-in costs to seal the deal - inclusive of the ever-ridiculous "letting fee", which seldom exists outside of Auckland and goes straight into the agency's pocket alongside five or 10 per cent of your weekly rent.

Viewing after viewing, application after application, your spirits will sink low. Really low. Finding a rental is like applying for jobs: you're excited and hopeful in the beginning, but come week three of rejections you think there's something seriously undesirable about you.

Rental-hunting depression is also fuelled by the sheer lack of decent houses out there - those you'd never thought you'd live in, but now, somehow, are actually considering.
Suppose you had a queue of 20 potential renters at a $600/week rent. At a higher rent, you'd have a shorter queue, but you'd have a worse pool from which to draw and less ability to be selective. So keep the rent lower and pick-and-choose.

If your basic model is that landlords are trying to eke out as much in rent as possible and that they'll hike the rent at any chance, why aren't they charging more if they're getting queues of dozens of potential tenants? A rental-rationing equilibrium could explain part of it.

Sure, maybe they're lowballing things to draw in a bigger pool for the at-house auction, but the additional anecdotal hurdles are all characteristics-based, not offer price. The tenants' expected financial stability matters a lot more when it's hard to evict non-paying tenants.

The rental-rationing story is also consistent with other odd accounts you'd hear, like that longer-term tenancies induce the landlord to charge more rather than less. If the rental-rationing story is right, a long-term tenancy subsequent to a short-term tenancy would be preferred by the landlord who's then learned tenant type, but the initial request for a long-term tenancy is riskier because you have fewer opportunities to be easily rid of a bad tenant. I don't know whether that's the case: I'm neither a landlord nor a tenant.

On the other side, Tenancy Tribunal decisions are already publicly searchable; landlords can find out about the riskiest tenants. This limits the extent of any rental-rationing equilibrium by knocking out the tenants who've recently had judgements against them and who are applying for your place under the same variant of their name that they used at their last place.

Potential solutions?

Making it easier to evict problem tenants can help, but that comes at the risk of empowering bad landlords.

Best solution would be to allow sufficient increases in housing supply that landlords had to compete a bit harder for tenants - while also making it fairly easy to evict bad ones.

I wonder too whether some of the grottiness and lack of upkeep is explained not only by the tight market for rentals but also by regulatory uncertainty around zoning. If you think the unitary plan might let you bowl a run-down property in a couple of years to put up townhouses, why invest in upkeep?

Thursday, 28 May 2015

Migration targets

Suppose that all of the following are true.

  1. Auckland land use policies restricting both densification and expansion on the fringes make Auckland house prices highly subject to migration pressure. If you run a vertical supply curve, any shift in demand translates into moves up and down that curve.
  2. Migrants will go to the place that best suits them; that will depend on things like having an established community from their home country and on their likely wages in the different places.
  3. Many rural regions would really really like to have more migrants; it's easier to fund existing infrastructure if population isn't declining.
  4. Migrants prefer to go to Auckland and so current immigration policy is hitting on 1; that will continue until housing costs are so high that migrants are indifferent between moving to Auckland and moving elsewhere. This means that productivity differences between Auckland and the regions are capitalised into house prices.
The Immigration Minister's contemplating adding more extra points for those migrants willing to live outside of Auckland. This puts less pressure on Auckland housing prices, but does mean that migrants are forced to go to places were they would be less productive than they otherwise could be - or where they're worse off as they view things for want of Auckland-specific amenities. 

Best would be to fix Auckland land use policy so that more people could live there. Without that, we're in second-best worlds where the alternative to "migrants have to go to not-Auckland" could well be "well, then, we won't let so many migrants in."

While we're in this second-best world, I wonder whether there could be option for Councils to say how many points they'd like to award for migrants willing to come to their regions. The "Not Auckland" space is pretty heterogenous.

Wednesday, 27 May 2015

So what *is* the most misleading term in Economics?

On Monday, I wrote disagreeing with John Quiggan’s piece on “Pareto optimality” being the most misleading term in economics. My disagreement was more with his argument than his conclusion, but nevertheless, it got me thinking about what is the most misleading term in Economics. I have four favourites, which I will list in reverses order. These are all misleading in some way, but to different audiences.

4. Efficiency.

As I said, I don’t entirely disagree with John’s conclusion. I believe that when economists use the term efficiency without an adjective, it (nearly) always refers to Pareto efficiency, which properly understood is a fairly innocuous concept. It simply refers to a situation where no-one can be made better off in terms of the things he or she values (more stuff, cleaner environment, better civic amenities, living in a civil society, whatever) without making anyone else worse off in terms of the the things they value.  But I always advise my students to never use the word efficiency when talking with non-economists. Exhibit A to explain why is the following quote from the 1962 verison of mutiny on the bounty. Captain Bligh (Trevor Howard) is explaining to Fletcher Christian (Marlon Brando) why he just had a sailor flogged for something he didn’t do, saying that it won’t be possible to run the ship in bad weather if sailors don’t fear their captain more than they fear the weather. He goes on to say: 
Now don’t mistake me. I’m not advising cruelty or brutality with no purpose. My point is that cruelty with purpose is not cruelty—it’s efficiency
This scene, which happens early in the movie, is important for setting up Bligh as a horrible person in the minds of the movie watchers (much like Joffrey’s encounter with the diawolf and the butcher’s boy in the second episode of Game of Thrones). The screenwriters knew that having Bligh use the word efficiency to describe the treatment of people would be chilling to viewers. It invokes notions of Dickensian eight-year-olds up chimney, of sacrificing human values to the end of maximising material production, the total opposite of the totally human-values-centric approach to welfare that Pareto efficiency invokes.

3. Aggregate Demand

Efficiency is a problematic term as it can mislead those outside the subject. Aggregate Demand is worse as it misleads our own students. I complained about this one here. A standard demand curve is a statement of intentions. It shows how much buyers would buy if they could buy as much as they wanted at a given price. At the equilibrium price, the desired demand will equal actual purchases. It is also possible, however, to be on the demand curve at points where desired demand and actual purchases are different (say as the result of a legislated maximum price). The so-called aggregate demand curve is not analogous. It shows different equilibrium combinations of price and quantity such that demand for output equals actual output. It is possible to be out of this equilibrium, through undesired changed in inventories or other quantity buffers, but that implies being completely off the curve. The aggregate demand curve is a useful graphical device for teaching some basic macro concepts, but its name pretty much guarantees that the majority of first-year students will misunderstand its properties.

2. Investment

Here we have a term that, I think, misleads even seasoned economists. Investment in economics, refers to the accumulation of capital goods. The term in general usage is often used to mean particular mechanisms that consumers use to save. So, for instance, buying a rental property is investment in this everyday use, but, if it is an existing house, it is not “investment” in the economics sense. I am convinced that slippage in the meaning of the word investment mid-sentence is the reason for some half-baked justifications for a capital gains tax, as in statements like “we need a capital gains tax so that people will switch from investing in houses to more productive investments”. As I noted here, buying an existing house is not “unproductive investment”; it isn’t investment at all. Once that is noted, the link between a capital gains tax and productive use of savings becomes extremely tenuous.

But these three misleading terms are trivial compared to the granddaddy of them all:

1. NAIRU

That is, the "non-accelerating-inflation rate of unemployment". This is just embarrassing. As a profession, we like to get smug and despondent about innumeracy in the press with respect to the number of derivatives, sighing every time we read statements “inflation rose by 3% in the year to March”, when what is meant is either that “prices rose by 3%” or “inflation was 3%”. But then we do the same thing ourselves with one of our technical terms. 

For goodness sake, it should be the non-accelerating-prices rate of unemployment (NAPRU) or the non-increasing-inflation rate of unemployment (NIIPRU). There is an alternative term—the natural rate of unemployment. If it weren’t for the existence of NAIRU, I would have the natural rate in my list of misleading terms. It conveys a notion of unemployment being something that is just given to us, not something that can be affected by policy, and certainly not something that has very real human consequences. Again, it is a term that misleadingly conveys economics as a cold, heartless subject. But I would rather our profession was incorrectly perceived as cold and heartless than correctly perceived as innumerate. So as long as NAIRU is the only alternative, I will champion the natural rate!

Stories that are probably linked...

The latest General Social Survey has Kiwis pretty happy:
  • The majority of New Zealanders rated their overall life satisfaction and sense of purpose highly in 2014.
  • Just over 8 in 10 people reported high levels of overall life satisfaction and almost 9 in 10 felt a sense of purpose in the things they did. 
  • Some population groups had lower levels of both overall life satisfaction and sense of purpose: sole parents, unemployed people, and people with no qualifications. 
  • Other population groups had notably lower levels of overall life satisfaction but their sense of purpose ratings were still similar to other groups’ – people who didn’t live in families, had incomes of $30,000 and under, needed an extra bedroom in their home, or identified as Māori or Pacific peoples.
  • Age differences had a strong effect on the different well-being rates reported by different population groups.
The data tables are interesting, but would be more interesting if we had by-respondent data.

For example, those outside the labour force had greater happiness than those working and those on the highest incomes were less likely to report "overall life satisfaction" scores of 10, the highest, than were those earning $30-70k in household income. And higher degrees are associated with far less life satisfaction and sense of purpose than having no qualifications at all. I expect retirees are affecting all those results. But we'd need some regressions to show it.

Meanwhile, John Key's National Party is polling well north of 50% support. Generalised happiness and life satisfaction is good for incumbents. Even the unemployed report a median "overall life satisfaction" score only one point below those in employment.

Tuesday, 26 May 2015

Rebuild apportionment

The Press's opener here is pretty terrible:
More than half the $1.4 billion spent so far on fixing Christchurch's damaged infrastructure has been used for the eastern suburbs, but frustrated residents want authorities to do more.
The money gets spent where the roads are most broken. Bromley, New Brighton, Aranui and Bexley were wrecked; Fendalton and Ilam rather less so.

Meanwhile, central government contemplates selling off downtown land it never should have taken in the first place.

The place is maddening. Fortunately, you can't beat Wellington on a good day. And today is a good day.



If you believe the study...

If Christchurch Council believes the report it commissioned into the wider economic benefits of long-haul flights into Christchurch, it could pay its airport to adjust its slotting fees to ensure that long-haul routes are maintained.

Here's The Press:
Air New Zealand is pulling its last remaining long haul flights from Christchurch, cancelling direct seasonal flights to Tokyo.

After questions from Fairfax Media on Monday night, the airline began contacting the industry warning it of plans to end the flights, which currently operate over the summer months from Christchurch to Narita International Airport.

It later confirmed that the flights would not be operated next summer, saying it was putting on more flights from Tokyo to Auckland in response to research which said consumers had "no clear preference to fly into Christchurch".

"While we accept this decision is disappointing for Christchurch tourism stakeholders, the impact on the total number of seats the airline will operate into Christchurch is minimal," Air NZ said in a statement.

...Peter Townsend, chief executive of the Canterbury Employers' Chamber of Commerce, said Christchurch needed airport links to Asia both to cater to freight demands and bring in tourists to travel throughout the region.

"Air New Zealand need to consider the overall economic impact of their decisions. This isn't just about plane landings or passenger numbers into a particular airport, it's about the economic benefit that accrues from having direct international linkages into the South Island and into the regions of the South Island consequently," he said.

In 2010 a report commissioned for Christchurch Airport by Berl Economics estimated that direct flights from Singapore to the city created more than 2100 full time jobs and added $243.7 million in output to the region.
If Townsend believes those kinds of numbers, he should be asking Council to provide a special levy on businesses that benefit from those flights to subsidise continued routings - not asking Air NZ to turn into a regional development agency.

The continued decline in long-haul traffic into Christchurch must surely be giving Wellington Council second thoughts about expensive runway extensions, mustn't it?

Kiwisaver Tweaks

I was a bit surprised to see Labour complaining about changes to Kiwisaver in last week's budget. The $1000 start-up payment's been abandoned, with the savings put to programmes better targeted at the poor.

Both analyses I'd seen on the programme showed that it did nothing to change overall savings rates. Here's the 2011 analysis using limited survey data.  Here's the 2014 version using SOFIE and IRD administrative data.

The NBR points to Treasury's RIS, which recommended bolder changes: 
The Treasury's preferred option would have been a fundamental review of the KiwiSaver legislation's purpose to deal with the "imprecise definition of a target population" for the scheme, which is meant to be help Kiwis prepare for retirement. That option was out of scope for the advice the government sought from the Treasury on identifying measures to "improve KiwiSaver effectiveness ... and reduce the fiscal cost."
Here's the full Regulatory Impact Statement. Only 7% of scheme participants are in its target group. What a waste.