Monday's Top 10: Do more houses bring lower prices?; sell Christchurch assets; financial literacy fail; the perils of financial freedom; Gary Becker; George Carlin; Dilbert, and more

Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.

Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. Build, build, build ...
This last week, Auckland Council announced another 18,000 residences can be built in a city that is short of housing supply.

That is on top of some earlier approvals and together with them, now 33,500 more 'houses' have been planned.

What will happen if they are all built in the next few years?

Not everyone agrees the demand is there for such numbers.

Perhaps we can look at what is going on in China right now.

They have had a huge house building boom, with supply rising faster than demand.

And prices are now declining. People and developers are losing money.

I say, bring it on. Much of the 'value' in Auckland housing is in the 'land' price and it has built up to quite silly levels. Over 70% of a house price is now the land scarcity value.

The only way we will know that we are making actual progress toward affordable housing for everyone (as opposed to cheap 'social' housing which relies on most people having to pay more than they need to subsidise it) - the only way we will get sustained affordable housing is if existing homeowners see the value of their 'land' fall, and substantially.

Doing it over a long period is no answer; old expectations that 'money from the sky' will keep falling on homeowners will easily resurface.

We need actual price falls.

Lets hope they build those 33,500 extra houses, and soon.

This is what is happening in China now ... The lesson is, it takes a long commitment to 'overbuild' before prices start to actually fall.

2. Do it now
University of Canterbury economist Eric Crampton calls for Christchurch to sell some assets.

The KordaMentha Report explains pretty reasonably what the Council’s options are. There’s little room to take on more debt, so we either have to spend less, increase tax revenue, or sell other assets.

A mix of the three seems most appropriate. Sorting out the regulatory morass downtown so that we can again start having reasonable property tax revenues from downtown would be rather helpful on the revenue side. I think we should be considering cancelling the new stadium rather than just delaying it: too many property owners have to sit in limbo, under threat of expropriation, not knowing when or whether their businesses will be taken from them to make room for the stadium. And, again, we should be considering selling some of Council’s assets.

Every May since the earthquakes we have talked about Council asset sales. And every year we’ve failed to do it.

Council should be fully divesting itself of assets that are at least as well managed by the private sector in order that the funds can be put towards those things that are really important, like fixing our roads and drainage system.

I worry that, if we do not sell assets like the Lyttelton Port of Christchurch, Council’s substantial financial pressures will instead squeeze excess dividends from those assets and run down their capital stock. And, in a decade’s time, we will have substantial problems arising from deferred maintenance and poor investment.

Selling these assets off now may be the best way of ensuring their future. Selling the family silver so you can afford to re-pile your foundations and avoid having the house fall over is sad but sometimes necessary.

What use is silverware if your house has fallen down?

3. Regenerating plastic grows back after damage
For 20 or so years I worked in the plastic film industry and got exposed to some truly amazing scientific chemistry. It seems things have moved on a long way from there recently.

"We have demonstrated repair of a nonliving, synthetic materials system in a way that is reminiscent of repair-by-regrowth as seen in some living systems," said Moore, a professor of chemistry.

Such self-repair capabilities would be a boon not only for commercial goods - imagine a mangled car bumper that repairs itself within minutes of an accident - but also for parts and products that are difficult to replace or repair, such as those used in aerospace applications.

By the way, don't believe the the scam called 'degradable plastics'.

I am doing a simple experiment at home. I nailed four different types of plastic check-out bags to a fence about 100 days ago. The ordinary clear bag has already 'degraded' to CO₂ and H₂O, the white ordinary one is well on its way with its extra TiO₂, whereas the 'degradable' options are showing no signs yet of degrading.

Unlike paper, HDPE naturally degrades to just the two elements, both essential for plant growth. Paper on the other hand is a veritable cocktail of chemicals whose only 'benefit' is that they degrade quickly spewing them into our environments, enabling people to ignore the consequences. The wood fibers are the least of your worries. In study after study, plastic is best - except in the public's unscientific mind. (That is, LDPE, HDPE, LLDPE at least.)

4. Finance literacy fail
In a quiz reported in The Atlantic, 96% of Russians, 70% of Americans, 79% of Swedes, 75% of Italians, 73% of Japanese, and 69% of French could not respond correctly to these three questions below.

Do you understand money? Let’s see how well you do with the following questions.

1.  Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.

2.  Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

3.  Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

The correct answers are 1-A; 2-C; and 3-B.

How did you do? Did you respond correctly to all three questions? If you did, then you belong to a surprisingly small global minority.

5. The perils of financial freedom
Probably the last thing the Chinese need is some British toff lecturing them about how to run their country's financial system. But he has done it anyway:

Wasteful construction investment is encouraged by the under-pricing of rural land. The lack of a normal ownership relationship between the central government and state-owned enterprises (SOEs) allows the latter to pay minimal dividends and over-invest in business expansion. Caps on interest rates on bank deposits result in household savers supplying a large subsidy to corporate borrowers. And SOEs have better access to credit from state-owned banks than private companies do.

But the belief that financial liberalization will provide an easy route to a balanced and stable economy is a delusion, as Japan’s experience in the 1980’s illustrates. As Joe Studwell argues persuasively in his book How Asia Works, neither Japan nor South Korea based its successful economic development on free markets in credit supply; instead, they relied on the deliberate direction of credit toward industrial development rather than real estate or consumption.

The universal feature in this mix is the fact that banks everywhere can create private credit, money, and purchasing power that did not previously exist, and they have a natural bias, if not constrained by public policy, to allocate it to fund real-estate developments, which drive rising land prices.

These factors will drive construction booms and busts even if obvious market distortions are removed and market discipline is tightened. The pre-crisis Irish and Spanish banking systems proved just as capable as Chinese state-owned banks at funding excessive real-estate construction.

So, even as China introduces greater market discipline to a largely positive effect, it must plan to constrain credit creation with policy tools that were missing in the advanced economies before the 2008 crisis. Caps on loan-to-value or loan-to-income ratios on real-estate loans should be used aggressively. Capital requirements for banks should reflect higher risk weights for real-estate lending than banks’ private assessments of credit risks suggest are appropriate. 

6. China's urban future
The sheer scale of Chinese urbanisation never ceases to amaze me. (Think food requirements ...)

Here is a World Bank honcho discussing what the need to do to pull off a successful urbanisation strategy, something they are only half way through.

Around 100 million Chinese live in extreme poverty, and roughly 275 million spend less than $2 a day. The overwhelming majority of China’s poor live in rural areas, and, for most, hope for a better life lies in the cities, where better-paying jobs are easier to find. Indeed, over the past three and a half decades, a staggering half-billion Chinese have already made the move, raising the urban share of the country’s population from less than 20% in 1980 to one-half today. By 2030, 70% of all Chinese are expected to live in cities.

However, in order to implement land and hukou reforms, China’s fiscal system must be overhauled. Stronger land rights for farmers will deprive city authorities of the land-conversion revenues needed to provide public services to new urban migrants. And more migration will mean more demand for those services.

Cities will therefore have to find new revenue sources. A property tax or a local surcharge on personal income taxes would target those who most benefit from urban living. Environmental charges and levies – such as higher registration fees for motor vehicles, pollution charges, and improved cost recovery on utilities – might also help, while simultaneously addressing urban environmental problems.

There are big potential savings to be gained, too. China’s cities are forecast to spend around $5.3 trillion on infrastructure over the next 15 years; but denser, more efficient cities would save around $1.4 trillion (15% of 2013 GDP) of these costs. This money could then help to finance the additional health care, education, and low-income housing required by new migrants.

China’s citizens, especially its poor, would benefit from a shift in government policy from the physical expansion of cities and infrastructure to the delivery of better, more fairly distributed public services. Achieving this would truly represent the people-oriented urbanization that the authorities seek to achieve.

7. Cold turkey
Forty percent of Germany's energy comes from Russia in delivery systems owned by Russian billionaires. Germany has a big energy problem, especially because it has shunned nuclear.

But it actually has options, although the more it dithers, the more expensive those options become. And it doesn't help when one of your prominent political parties has been 'captured' by Russia.

Spiegel Online has been analysing their enormous problem.

There is, however, no shortage of LNG reception terminals. In Europe, there are already 22 LNG ports with more under construction. Indeed, the EU theoretically has the infrastructure capacity to cover two-thirds of its natural gas needs with LNG.

But there is another factor which has kept liquefied natural gas from playing a greater role in satisfying European energy needs: Price. For large exporters such as Qatar, it is much more lucrative to sell LNG in the Far East than to ship it to Europe. Suppliers are able to charge more than $15 per million British Thermal Units (BTUs) in Asia whereas the price in Europe is around $10. Since the nuclear meltdown in Fukushima in 2011, the price difference has become even larger as a result of Japan's increased need for natural gas.

As such, while it is certainly conceivable that LNG could become a greater part of the mix in Europe, it would mean higher energy prices. And the construction of further LNG terminals.

8. Affordable for whom?
The new and very left-of-centre mayor of New York City is tackling housing affordability in his very unaffordable and rent-controlled city. His plan relies on US$41 billion being spent over ten years to upgrade 175,000 existing units and building 80,000 new residences. He's going all-out to increase supply. His NIMBYs are going to have a field day - or at least their lawyers are.

Some think his ambition is 'untenable optimism'. Bill de Blasio, meet Nick Smith (and his side-kick Len Brown).

Janette Sadik-Khan and the self-appointed style elite will have a lot to say - most of which will balloon the costs. The whole process of getting someone else to pay makes it a dead-end, unsustainable solution. Rent-seeking writ large. More from the NYTimes:

Implicit in this paradigm is the idea that affluent New Yorkers living in well-tended corners of the city would also open themselves up to neighbors who might be less privileged. It was telling that the mayor announced his plan in the gentrified, multimillion-dollar brownstone world of Fort Greene, Brooklyn. At every point along the spectrum, including the high end, the only way to have cheaper housing is to have more of it, an idea that many New Yorkers are happy to embrace until submission to the principles of supply and demand means looking out at a 30-story tower 15 feet away.

Within days of the plan’s release, residents in and around One Brooklyn Bridge Park, an expensive condominium complex converted from an old printing plant on the Brooklyn Heights waterfront, drafted a petition objecting to a proposal for a high-rise complex next door, where the city is considering placing middle-income housing alongside luxury properties. The dissenters appeared to see no irony in the fact that they held out the Pierhouse, a low-rise building going up in the north end of the park, where the smallest apartments are selling for $2 million and the larger ones closer to $11 million, as an example of more mindful development.

9. A great trailblazer
The man who developed the concept of 'human capital', and concepts of rent seeking is being remembered. It seems his contributions will last much longer than his critics, of whom there were many. The Economist reports:

If there is one person to blame for economists’ habit of opining on everything, it is Gary Becker, who died on May 3rd.

Not content with studying the world’s economies, he was the first prominent economist to apply economic tools to all aspects of life. His revelation was the sort that seems obvious only in hindsight: that people are often purposeful and rational in their decisions, whether they are changing jobs, taking drugs or divorcing their spouses. This insight, and the work that followed from it, earned him a Nobel prize in 1992. No less an eminence than Milton Friedman declared in 2001 that Mr Becker was “the greatest social scientist who has lived and worked in the last half-century”.

At the heart of Mr Becker’s work was the view that “individuals maximise welfare as they conceive it.” Welfare need not mean income; it could derive from the pleasure of altruism or the thrill of deviancy. But critically, this thesis implied that people respond to incentives - a realisation that opened the door to insights across the whole range of human activity.

10. Today's quote
"What if there were no hypothetical questions?" - George Carlin