Friday, 29 September 2017

Can it keep going?

There was good news today about the volume of new housing consents in Auckland: as Stats pointed out in the release, "Monthly building consents for new homes reached a 13-year-high in August 2017, driven by a spike in apartments and retirement village units in Auckland...Some 10,265 new homes were consented in Auckland region in the August 2017 year. This compares with a peak of 12,937 new homes consented in the June 2004 year (the highest number since the series began in 1991)".

Stats included long-term graphs which put the latest numbers in some perspective, but I've gone back a bit further again (as far as the data series go on Stats' Infoshare database). Here's what the story looks like.

The 'actual' numbers in the graph are an excitable series, mainly because of chunky apartment block consents  turning up in some months but not others. They're volatile enough to turn the seasonally adjusted and trend series into best stabs at what's going on behind the noise, rather than definitive sightings of the underlying reality, so you can't be entirely sure they're on the right track. But after some wavering around the start of this year the trend series (also shown in the graph) now looks to be definitely heading in the right direction.

I've been trying to guess - no stronger - whether the numbers tell us anything about whether we can up the pace any further or whether we've hit capacity constraints. 

On the downside, over the past 25 years we've only briefly been able to keep up 1,000+ periods of monthly consenting.  Something or other has always knocked it back again. Either we've hit some sort of capacity constraint, or the business cycle has put the kibosh on it, with the GFC in particular decimating activity. The latest ANZ business survey wasn't much fun in that regard: only one month, the election and all that, but I particularly didn't like the finding that "A net 26% of businesses expect it to be tougher to get credit". That's bad news for housing developers.

On the plus side, the Auckland labour force has grown quite a bit, and there are more people around these days with building trades skills. Here's what the Household Labour Force Survey shows for people employed in construction in Auckland since 2009 (as far back as Infoshare went, and I haven't time to fossick the Census if it's got longer/better figures).

There wasn't a lot of movement till 2014, but since then employment has lifted from around 50,000 to around 80,000. Recent immigration probably plays some part in this (and maybe people shifting back from Canterbury building sites): where we live on Auckland's North Shore, a good deal of the in-fill development is by Asian developers with Asian crews, including the one literally across the road.

The unknown unknown is probably the impact of the planning process. I've no idea whether the number of consent-approvers is keeping pace with consent applications; I can surmise that (certainly over a time-scale of 25 years) the regulatory requirements to get a consent have risen; I would bet that land-use constraints have got a lot tighter. Net net - who knows, but I'd lean towards a view that planning is at a minimum no less a constraint than previously.

Overall, I'm glad to see the recent pick-up in consents to over 1,000 a month, and it might be a bit curmudgeonly to add "at long bleeding last": it's here, and it's something. But I'm not exactly jumping for joy yet. At this pace (12,000 dwelling units a year) we're still a little adrift of the numbers (14,000-ish?) that people think we need to meet new demand, let along eat into the existing shortfall (20,000-ish?). And while I'd be pleased to be proved wrong this time round, our recent track record suggests we can't keep delivering, or are blown off course from delivering, before we get the job fully done.

Monday, 25 September 2017

When agencies clash

There's a quip you sometimes hear in the competition game: why do countries have only one Monopolies Commission?

Now that the tears of merriment have dried on your cheeks and you've got your breath back, you can actually turn to a real-life example of what happens when you do indeed have two competition authorities. And they fall out with each other.

Australia's got the ACCC: if you've got a merger for 'clearance' (no competition issues), you go to them. And it's got the Australian Competition Tribunal: if you've got a merger for 'authorisation' (competition issues, but overall net benefit), they'll handle it. And then along comes the "mega-merger of the nation's two biggest gambling companies", as the Sydney Morning Herald called it here (possibly $): Tabcorp and Tatts Group, both ASX-listed.

You'll find the full history of what happened next if you google, but save yourself the bother and go to Melbourne Law School Professor Julie Clarke and her very useful Australian Competition Law blog, especially this post about the Tabcorp/Tatts deal. It helpfully includes links to media coverage, too.

The gist: Tabcorp/Tatts tried the ACCC first. No deal, the ACCC saw actual or potential competition problems (here's the Statement of Issues). So Tabcorp/Tatts bailed out and went to the Tribunal.

"Competition problems? What competition problems?" - the Tribunal didn't see them. Au contraire: "The creation of the Merged Entity will lead to greater competition particularly in online wagering" (my emphasis, from para [540] of the judgement). On net benefits, it saw at [539] assorted ups and no downs: "The benefits to the public which the Tribunal has found to exist, and which it has taken into account, are substantial. There are no material detriments weighed in the balance which are of significance or likely to arise that outweigh the benefits". Slam dunk - authorisation approved.

I can only imagine the gasket-blowing within the ACCC. But once the little red dots in front of their eyes had cleared, they took the Tribunal to the Full Federal Court for judicial review, on three grounds. CrownBet, a Tabcorp/Tatts competitor, added a fourth: it was a courageous (in the Sir Humphrey Appleby sense) claim that the Tribunal had lost its mind. Predictably, that claim crashed and burned, some bits burning more fiercely than others (at [80],"We have experienced some difficulty in distilling CrownBet’s submission about this into a readily comprehensible form").

Not so the ACCC's. Two of its claims got knocked back, but one made it, as you can read in paras [4] to [54] of the judgement: the Tribunal missed a detriment (reduced competition between Tabcorp and Tatts in online betting), and you can't be sure of the overall net benefit if you've missed a detriment. So it's back to the Tribunal to fix, and in the meantime the merger is in limbo.

So it's been an interesting exercise. As a general principle, I like the idea of more checks and balances when it comes to the exercise of regulatory (or any other) powers: as one example our High Court 'inputs methodology merits review' of how the Commerce Commission goes about the business of price control was well worth doing. But you wonder when you see two competition authorities slugging it out. That's beginning to look like overkill in a country already liberally equipped with multiple layers of governments and regulators - not that we in New Zealand can point fingers too vigorously, with our 78 territorial authorities for a total population the size of Melbourne.

By the by, we may hear a little more of this case, as it had something useful to say about how regulators should go about the weighing up of benefits and detriments, which is one of the bigger issues in the current NZME/Fairfax merger appeal.

You'll recall that the Commerce Commission took the view that the merger would involve a loss of 'plurality', less variety in the range of opinions on offer in the mainstream media. And while it didn't know what the value of that detriment was, it looked to be significantly larger than the claimed merger benefits.

Can that rough and ready, 'in the round' assessment fly? Or are you prohibited from saying one thing is bigger than another, if you have no real clue how big the first thing is?

Here I'm straying well off the economists' reservation into the lawyers' farmland, but I reckon the Federal Court's judgement is helpful to the 'in the round' approach. Here's what it said (shorn of unnecessary bits):
[7] Having examined the benefits and detriments resulting from, or likely to result from, the proposed acquisition, the Tribunal is then to determine whether the overall benefit is ‘such’ that the acquisition should be permitted. This requires a balancing exercise to determine the public benefit. The Tribunal has referred to this as a balance-sheet approach ... and this is an informative metaphor. It may suggest, however, that the detriments are to be deducted from the benefits leaving only a net benefit. This is informative but may be likely to be a little unrealistic. Many of the benefits and detriments will be incommensurable and possibly unmeasurable as well. To take an example from this case: how does one weigh the improved efficiency of the wagering market against the perils of problem gambling? It seems to us that the benefits and detriments may more usefully be assayed by means of a process of ‘instinctive synthesis’ sometimes referred to in the law surrounding the formulation of criminal sentences where a similar problem is encountered ...This may be referred to as weighing, but to refer to balancing, or a balance-sheet approach, may suggest that the essential qualitative assessment has a greater degree of precision than the statutory subject-matter permits ...
[68] ... much administrative decision making involves the weighing of imponderables or incommensurables. It would be unworkable to require the Tribunal explicitly to give a weight to each benefit and we would strain to avoid such a construction were it necessary. It is not, however, necessary so to strain. Section 95AZH(1) does not require what the ACCC suggests. The assessment of benefits and detriments must be complete and the Tribunal must, no doubt, weigh them. This is not necessarily, however, an arithmetical or accounting process. As we have said above, it may involve an instinctive synthesis of otherwise incommensurable factors.
"An instinctive synthesis of otherwise incommensurable factors": I like it, and so I imagine will the Commerce Commission's lawyers. Though I have to point out that we beat the Aussie Federal Court to the concept: back in 2011 many of us were already "internalising a really complicated situation in my head".

Friday, 22 September 2017

Who pays?

On Tuesday evening Harshal Chitale, senior economist in Auckland's Chief Economist Unit, spoke at the latest LEANZ seminar on 'Funding Auckland’s greenfield infrastructure: 'Efficiency, incentives, risk and fairness'. Tell you what - the chair for the evening, Richard Meade, didn't have to do much to encourage debate: this was one fired up audience. In a  nice way: our infrastructure deficit, especially in Auckland, is one of the hottest current issues for the economy, and gets at least a best supporting role nomination in the national slow productivity debate. Plus Harshal's talk raised knotty back-pocket and equity issues on who pays for what.

Harshal's paper will go up on the Auckland Council website in the near future* - probably here - and I should add (as he said) that the talk reflected Harshal's views and not necessarily those of the Council.

The key points I took away (and from here it's as much me as Harshal talking) were that there's a massive $20 billion infrastructural bill coming up to service greenfield development, of which the Council's share for the likes of water, waste, local roads and community spaces is some $13 billion (NZTA road funding pays for a lot of the rest). But Auckland Council's own ability to pay for this greenfield infrastructure is severely constrained. Putting the bill on the rates faces a political commitment not to raise rates more than 2.5% a year. Borrowing faces a credit rating limit: debt beyond some 270% of revenue (and it's currently 255%-ish) jeopardises the Council's AA/Aa credit ratings.

The political constraint may reflect electoral reality: my suggestion that rates should be a fixed proportion (0.25% a year?) of the market value of a house, which has the pleasant property that those who've benefited most from the housing shortage will pay most to relieve it, was not met with universal delight. So we're lumbered with inadequate rates revenue: if the Council's costs are mostly wages (I'd guess they are), 2.5% rates increases will struggle to keep capex spending constant in real terms let alone boost it. And we're lumbered with the debt ceiling, too, as the ratings agencies are unlikely to buy the argument (though it's correct) that the spend today will boost the debt servicing tomorrow, plus it's not silly for the Council to stay a highly rated borrower.

So Harshal's talk looked at what other options there might be - the big ones being developer 'contributions', targeted rates, and off-balance-sheet vehicles - and how they stack up on various criteria including efficiency, having the beneficiaries pay their full whack, and incentivising development rather than land banking. Of that lot, targeted rates maybe scrubbed up best, but it's not an easy area. Apportioning the benefits created and costs incurred, for example, is not straightforward. If new Suburb A gets developed alongside existing Suburb B, for example, it may make it feasible for a new bus route to service both A and B. Who is credited with the benefit? Who ought to pay? And who actually pays in the end: will developers simply pass on all 'their' costs to the housebuyer? And are finely calibrated but expensive and complex attributions any better at the end of the day than cheap and cheerful approximations?

Personally I was left with the impression that local resourcing won't cut it, and some central government funding may be required beyond the Housing Infrastructure Fund (announced here, updated here), which while helpful doesn't get past the debt ceiling problem, since it counts against councils' debt. Relatively limited-scope entities like territorial authorities may not be well equipped to handle step-change demands like these. And Auckland's issues are an outcome in substantial part of the country's national immigration policy (a policy which I don't have an issue with, just to be clear).

Here, and everywhere else where we're short of infrastructure, the government ought to use its considerable leeway to borrow internationally on once in a lifetime cheap terms. Take a look at the chart below: at a wild guess, would you say this looks a good time to tank up? And not just on an interest rate basis, either: we could ease the capital repayments, too, by borrowing for a longer maturity. Last week Austria, a country rated similarly to us (AA+/Aa1 with S&P/Moody's, while we're AA/Aaa), issued 100-year debt. We're getting a bit better at getting longer stuff away than we used to be, but our longest current maturity is 23 years (the September 2040 issue).

Which, by the way, is also what the latest (June) OECD report on the New Zealand economy said:
The government is aiming to reduce net core Crown debt as a share of GDP from 24% in 2016-17 to 10-15% by 2025 to help cope with future periodic global shocks and natural disasters. Nevertheless, it should be possible to finance some high-priority tax reductions or expenditure increases without compromising its fiscal strategy.
So full marks to Harshal for a thoughtful presentation, to Richard for organising, and especially to David Walker of PriceWaterhouseCoopers who generously provided the venue and hosted the drinks and nibbles. Keep an eye out for future meetings: if you've got an interest in the intersection of law and economics, there's bound to be something that'll interest you.

*Update - Harshal's paper was indeed published online, on September 27

Tuesday, 19 September 2017

Big discount! Get it here!

This year's Competition Law and Policy Institute of New Zealand annual workshop is coming up on Saturday October 14 in Auckland. It's got a class act of topics and speakers, as you can see from the programme and the bio of the keynote speaker, Timothy Cowen, who among other things has been heavily involved in the big EU case against Google, and who will be speaking on 'Curbing Big Data/ Big Tech: Lessons from Europe on misuse of market power, anti-competitive agreements and remedies against this growing worldwide digital-age problem'.

Now, academics and students, listen up. Do you know of students, or are you one, who would benefit from the workshop? CLPINZ has a new and heavily discounted student rate to make the workshop more accessible to students of competition law and policy. It's - wait for it - 75% off the standard non-CLPINZ-member rate, and brings the student cost down from $900 to an affordable $225. Sorry, there's no discount off CLPINZ membership, or off the after-workshop dinner if people would like to go, but the conference itself is now much more within reach of a student budget.

You'll want to take it up, won't you? So email to get the discount code, and register here. See you at the workshop.

Thursday, 14 September 2017

Another part of the house price story

Housing is understandably high on the political agenda at the moment. But amidst all the blame-seeking and potential policy responses, one of the big drivers of our high house prices seems to be largely ignored, in part because it doesn't give the pollies any room to point the finger at their opponents.

The reason it doesn't is because it's a circumstance almost completely out of our own hands: the cost of our longer-term fixed rate mortgages is very low by historical standards, and that's almost completely because of international trends. We essentially import world bond yields - as the RBNZ's economists documented here - plus a risk premium for being New Zealand, and the banks onlend to fixed rate borrowers at that rate plus a commercial margin.

Here's a chart of current benchmark (10 year) bond yields across a range of the developed economies, using data from the Financial Times.

Long term interest rates are unusually low mainly because four of the major central banks - in the US, the Eurozone, Japan and the UK - have been keeping them very low by buying bonds (sending their price up and hence their yield down), a policy often known as 'quantitative easing' or QE. It's been part of their plan to give post-GFC monetary policy more oomph: traditionally, central banks have only bothered with short-term interest rates, whereas QE also gives them a good deal of control over longer term ones as well. Low yields in the QE countries have had knock-on effects on yields in non-QE ones like Switzerland.

And 'unusually low' doesn't even begin to describe the outcome. There are now literally trillions of dollars' worth of bonds (some US$9 trillion according to the FT) trading on negative yields: you pay the borrower for the privilege of investing in its debt. You can see in the chart, for example, that the Swiss and Japanese governments can borrow money for as long as 10 years where the investors end up paying the government. Just this week the Austrian government raised five year debt at a 'cost' of -0.165% a year.

We know that our own central bank is keeping short-term rates low - "Monetary policy will remain accommodative for a considerable period" as the latest policy decision put it - and that has been one of the elements in the recent price boom. As floating rates linked to the RBNZ's policy dropped, and household incomes kept growing, there was a surge in mortgage serviceability, which has been one of the big moving parts in the consequent boom in prices. But you knew that.

What's been less emphasised if that even if the RBNZ hadn't cut short term rates to where it has, the rest of the world's central banks dealt us substantially lower longer-term fixed rate mortgages in any event. And that boost to the demand side of the market isn't going away anytime soon. In the US the Fed is getting close to easing back on the scale of its QE (still buying bonds, but not as many), and the Bank of England and the European Central Bank may start heading the same way later this year or (more likely) next, while Japan looks set to keep its current QE going into the indefinite future. Whatever unwinding of QE that eventually materialises is going to be a slow, careful, gradual, medium-term process. There could well be local five year fixed rate mortgages around the 6% mark for quite a while yet.

There's another element to this imported easy monetary policy. Around the world there's been what the investment professionals have been calling "the hunt for yield" or, in more purple moments, "the craze for yield". The traditional widows-and-orphans assets of money in the bank and government bonds have been yielding little or nothing (indeed, US$9 trillion worth of less than nothing). So even conservative investors have been forced either to swallow the unattractive terms on their usual fare - this week Austria sold €3.5 billion of bonds with a hundred year maturity on a preposterously low 2.1% yield - or instead to head into income-yielding assets like property that offer something better.

The local  investor is making the same calculation. Even at current high prices you can still get a 3.5% to 4.0% rental yield on an Auckland house, according to the (very useful) data compiled by It's not what a conservative investor would normally be looking for from an investment property, but it beats the bank deposit and government stock alternatives. In our own little way we've got the same hunt for yield: it's not as extreme as in some places  - as the graph shows, our bond yields haven't dropped to Japanese or Eurozone levels - but it's another part of the picture.

And if you think the link between loose overseas monetary policy and New Zealand house prices sounds like the abstract reasoning only an economist could come up with, then you haven't paid enough attention to the Irish house price boom and bust. Ireland, which had been growing like topsy, was gifted eurozone interest rates that were too low for its circumstances. House prices exploded.

Speaking of adding fuel to flames, why would you increase subsidies for first home buyers? As an elementary bit of sketching supply and demand curves on the back of a shopping receipt would show you, the only immediate effect of subsidising the demand for something in fixed supply is to raise its price by the full amount of the subsidy. And it's not only ineffective, it's regressive - a straight transfer from the taxpayer (including all the low earners who pay tax from dollar one) to the house owner. In the longer run, it fattens the margins from housing development, so it could encourage more supply (assuming the binding constraint isn't land-use planning or construction capacity, and it might be), but in the long run we have all joined the bleeding choir invisible, we have snuffed it, we are no more. As a short-term policy it's worse than useless.

But that's this election for you. I'd thought we'd got past the worst of elections as they used to be, but this all-party lollyscramble, with its side dishes of daftness and deceit, is pure 1970s.

Wednesday, 6 September 2017

Competition is good for women's pay

Motu's recent paper 'What drives the gender gap', has rightly got a lot of attention: full marks to its authors Isabelle Sin, Steven Stillman and Richard Fabling. Motu has gathered a broad selection of the coverage here and if you haven't yet read the piece for yourself then here's a longish executive summary and the whole caboodle. And if you want the whole thing boiled down to 17 syllables, Motu's executive summary haiku said
Women are paid less,
but aren’t less valuable.
We blame sexism.
There's one aspect that hasn't caught much of the headlines, however, and that's the link between how competitive a marketplace a business is in, and the extent of gender discrimination it goes in for. In sum, the link is strong, and it means that if an industry is more down the monopoly end, women get treated even worse than usual.

As the paper reminds us (page 27),
Starting with [Nobel Prize winning economist Gary] Becker (1957), the argument has been made that taste discrimination [i.e. discrimination in the negative sense we use in everyday English] cannot persist in a perfectly competitive product market because firms that discriminate will lose money compared to those that do not and will be driven out of the market. This has led a number of papers to focus on the relationship between product market competition and discrimination.
The corollary to that however is that if markets aren't competitive, there aren't the same pressures on employers to make most efficient use of their staff, and can afford to pander to whatever prejudices they've got without taking much of a hit to the bottom line.

Does this happen in real life? When I was a financial journalist in Tokyo, one American banker told me that he had the pick of the Japanese labour market, because Japanese banks strongly preferred to hire men for the important jobs, leaving him a clear run at the best women graduates. Conversely I remember a Japanese banker proudly showing off his state of the art foreign exchange dealing room, and telling me that "Yes, we've got 23 people here - 17 dealers, and six women".

In New Zealand, Motu devised a measure of how competitive each industry is (if you're of the wonkish tendency, I'm about to add a technical footnote - here it is * - and the rest of us can now carry on). While they were at it, they also devised measures of how much skilled labour each industry uses, and how tight the labour market was for each industry at any point in time, which they needed to try to sort out different explanations for the gender wage gaps.

And with that out of the way, here's what they found (page 31):
There are a number of key findings. First, industry-years with a one standard deviation more skilled workforce have a gender wage-productivity gap that is 19.2 percentage points higher if they have the mean level of product market competition and difficulty hiring. Second, this gap is doubled if the industry-year is one standard deviation less competitive, or is eliminated if the industry-year is one standard deviation more competitive than average. Third, this additional effect of lower levels of competition is eliminated if the industry-year has a one standard deviation higher difficulty in hiring. Overall, we find that the gender wage-productivity gap is larger in industry-years with higher skilled workers, lower levels of product market competition, and more competitive hiring markets ['competitive' in this sentence means lots of people looking for jobs].
Let's unpack this a bit. Firms with an unusually high level of skilled workforce pay men a stonking 19.2% more than women for the same productivity contribution to the business. That's on the basis that the firm is in an industry that is about average for the level of competition going on in the sector, and also when the labour market in that sector at the time is nothing unusual. That's a whole story in itself.

But look again at that second finding. That already large pay difference is doubled - doubled! - if there's lots less competition among businesses in the sector. However the large difference goes away completely - to be consistent, completely! - if there's lots more business competition. It also goes away completely if a tight labour market is holding employers' feet to the fire and forcing them to make gender-blind hiring decisions, which is what you'd expect. We routinely see employers, for example, hiring more people from minority groups when there's been a sustained business cycle and hirers can no longer pick and choose the way they might have done.

There are people who don't like competition - the hand-wringing types who don't like the Schumpeterian real world and who'd prefer collaboration or cooperation. Get real, folks: if women want fairer pay, one highly effective approach would be to use markets to work for them. Insist on gales of competition in every industry (and, incidentally, support initiatives like the Commerce Commission being allowed to look at the competitive state of play). That way, there'll be fewer guys with cozy jobs in dozy industries ripping you off - because you'll have the real choice of going to his competitor and getting what you're worth.

* The measure of competition comes from a principal components analysis (love it as a technique) run over four measures of competition from the Business Operations Survey (eg firms reporting no competition, or only one or two competitors), plus a capital/labour ratio. Personally I can't see the relevance of the capital/labour ratio to competition or (excess) profitability - airlines for example might well have a high capital/labour ratio because of the planes but I'm not sure that tells me a lot about whether the airline game is competitive or hyperprofitable - but in any event their measure of competition (the first component) has stronger links with the competition measures than with the capital/labour ratio, so that's all right.