Crawl Across the Ocean

Thursday, March 18, 2010

Odds and Ends

Just a few links that don't really merit a post of their own...

A somewhat dated paper from the OECD on global housing prices. What's most interesting is that it has a longer set of historical data across a wider range of countries than you usually see.

A few things to note:

As at 2003 mortgage debt as a percentage of disposable income was the same for Canada and the U.S. at 77%. I'm guessing it must be a fair bit higher in Canada by now.

post edited to add: Well maybe not, only because the denominator, disposable income, hasn't been doing so well in the U.S. over the last few years.

Looking at table III.1 you can see that over the period 1970-1995, house price appreciation was greater in Canada than in most of the developed world. Over the period 1970-2005, appreciation in Canada was in the middle of the pack, behind places like Ireland, Spain, the U.K., Holland, Australia and New Zealand which had massive run-ups in housing prices (prices generally tripled or quadrupled in these places even after adjusting for inflation), similar to European countries such as France, Norway and Italy (where prices roughly doubled after inflation) and ahead of the U.S., Sweden, Finland and Denmark (where prices were up 50-75% or so), and a group of countries where house prices peaked in the early 90's and never recovered (in real terms), including Japan, Germany, Switzerland and Korea (little if any increase in real housing prices over the period).

As a complement to the previous article, here's a well-written piece from the IMF on the global housing market that is more up-to-date. The article suggests that one of the best metrics of valuation in the housing market is the price-rent ratio and notes that the 2 countries where the price-rent ratio exceeds long run averages the most are Sweden and Canada. The Price-Income ratio is also well above the long run average in Canada, but on this metric we trail the countries which showed the huge price appreciation in the OECD report above (Ireland, U.K., Australia, New Zealand, Holland, Spain).

I'd speculate that the reason Canada ranks higher on price-rent is that the countries with the huge appreciation suffered from both a housing bubble and a housing shortage that drove up rents as well. Unlike Canada where the boom led to many years where housing starts far exceeded estimates of household formation, there was little increase in housing starts in places like Australia and the U.K.

The report concludes, "That leads to an uncomfortable conclusion: house prices in many countries still have room to fall."

An article in the telegraph detailing some research supporting Fred Hirsch's contention that as society grows wealthier we are drawn into intensifying zero-sum competition for positional goods which means the greater wealth isn't increasing our happiness.

Malcolm Gladwell writes about how civil behaviour in politics has the form of a Prisoner's Dilemma and employs some arguments that will sound quite familiar to anyone who has read through my posts on ethics.

"Here’s a suggestion, borrowed from game theory. What is incivility but a species of collective action problem? A collective action problem is generated whenever a situation's rational opportunities at the individual level generate, at the systemic level, outcomes that are bad for everybody. Consider the familiar example of status-seeking via acquisition of a luxury sport utility vehicle. As consumers compete for this particular clump of positional goods — the feelings of safety that come from a ride bigger than the other guy's, plus the bmw or Mercedes logo over the grille — they have to shoulder mounting personal costs. The competition then turns into a 'race to the bottom,' in which every move to advance my position (larger car, fancier logo) creates a new incentive for you to invest more in pursuit of the same combination of size and status. Because these goods function by position, there is no theoretical upper limit to the ratcheted spending of our competition. Ultimately, the mounting opportunity costs mean we all end up poorer, even as the ends of 'safety' are obliterated by the fleet of urban tanks surging through the city streets.

How and when the exercise of rational self-interest generates system-wide defeats has been the subject of much investigation and analysis. Some scholars have suggested, for example, that individual rationality, amped by greed and cleverness, led to the collective self-defeat we know as the economic meltdown of 2008 — though this analysis says little about the uneven distribution of the costs of that meltdown, whereby the greediest somehow ended up losing the least. But relatively little attention has been given to discursive versions of collective action problems, perhaps because we naively assume that transparency will govern political exchanges; we think we know what the other person's interests and actions are. This assumption is false. Discourse, no less than consumption, has positional and hence competitive aspects. Indeed, winning the argument — or, rather, being seen to win it — is the essence of many discursive exchanges, especially political ones. If politics is reduced to elections or debates, it goes from being a shared undertaking of articulating ends and means and becomes a game of status and one-upmanship."

David Olive writes about the housing bubble in the Star.

Perhaps oblivious to the fact that almost every metric shows Canadian housing prices and debt levels to be near or higher relative to fundamentals such as incomes and rents than U.S. prices were at the peak of the U.S. bubble, Olive opens by saying that, "Finance Minister Jim Flaherty has headed off any last chance of a housing bubble developing in Canada."

Olive legitimately appears to believe that people who warn about a housing bubble are concerned that housing prices are about to *start* increasing at a rapid rate, seemingly unaware that those warning about a bubble are concerned that prices already *have* risen at a rapid rate and the concern is that they might fall.

So Olive sets forth a number of facts meant to reassure the reader: Ottawa is toughening mortgage rules, taxes on housing are going up, interest rates have nowhere to go but up, etc. and then concludes that we don't have to worry about a bubble because "the fundamentals of our economy don't support another leap in prices."

Aside from his complete obliviousness to the arguments *on both sides* of the housing bubble debate, Olive also puts forth an incredibly weak argument that, "One of the classic characteristics of a bubble is that in the midst of one, no one thinks it's a bubble. If they did, they'd quickly clear their winnings off the table. That fears of an emerging Canadian housing bubble have preoccupied economists, lenders, policymakers and buyers since last fall is a sure indication that the market is not caught up in an irrational buying frenzy."

Obviously the people who matter - those who are buying the houses and driving up prices - don't think it's a bubble. Per Olive's argument, the fact that prices continue to go up should mean that it *is* a bubble. Aside from that, he seems completely unaware how similar the situation is here to what happened in the U.S. In the U.S. a few pundits (e.g. Robert Shiller, Paul Krugman, Dean Baker) raised concerns about a housing bubble, but the vast majority bought into a 'this time is different' argument. Here in Canada, the situation is the same, the government, the Bank of Canada, economists etc. are all on board with the argument that there is no Canadian housing bubble, with a few exceptions (again Robert Shiller, David Rosenberg, Garth Turner).

A blog on the Science of Cooperation, and from that blog, a recent paper on 'Costly Punishment.' Costly punishment is one of the roads people go down when they twist themselves into pretzels trying to argue that an economy could work just fine if every person was purely self-interested. Of course if people are purely self-interested, they will rip each other off, but if there are sufficient punishments for bad behaviour, it will be in everyone's self-interest to act nice. But what about the self-interest of the people doing the punishment. Taking the time and effort to mete out justice has a cost of its own (hence costly punishment) so the problem of motivating self-interested people remains. The paper in questions suggests that if people are given a choice of entering or leaving a particular collective undertaking (rather than participation being compulsory), the population is more likely to end up being comprised of people who will punish those who fail to cooperate in a group effort.

I'll probably spend some more time on this sort of research a little ways down the line in the series on ethics.

A couple of interesting posts from Rajiv Sethi on the economic theories of Hyman Minsky. Not much comment from me other than to note that I generally agree with Minsky's argument that an economic boom contains the seeds of its own destruction in that, the longer the boom lasts, the more people behave in ways that make sense during a boom but are unsustainable through a full cycle (e.g. subprime mortgage lending).

Penultimately, from Economist's View, an article detailing research on the human brain's response to inequality (we appear to be 'hardwired' to dislike inequality - shocking, I know...)

One does feel like banging one's head against the wall reading this part of the article,
"[the result of the experiment] O'Doherty notes, is somewhat contrary to the prevailing views about human nature. "As a psychologist and cognitive neuroscientist who works on reward and motivation, I very much view the brain as a device designed to maximize one's own self interest," says O'Doherty. "The fact that these basic brain structures appear to be so readily modulated in response to rewards obtained by others highlights the idea that even the basic reward structures in the human brain are not purely self-oriented."

Camerer, too, found the results thought provoking. "We economists have a widespread view that most people are basically self-interested, and won't try to help other people," he says. "But if that were true, you wouldn't see these sort of reactions to other people getting money."

Still, he says, it's likely that the reactions of the "rich" participants were at least partly motivated by self-interest—or a reduction of their own discomfort. "We think that, for the people who start out rich, seeing another person get money reduces their guilt over having more than the others."

Here's what David Hume wrote on the topic, in 17 frickin 77 - i.e. 233 years ago.

"the voice of nature and experience seems plainly to oppose the selfish theory.

We frequently bestow praise on virtuous actions, performed in very distant ages and remote countries; where the utmost subtilty of imagination would not discover any appearance of self-interest, or find any connexion of our present happiness and security with events so widely separated from us.

A generous, a brave, a noble deed, performed by an adversary, commands our approbation; while in its consequences it may be acknowledged prejudicial to our particular interest.

Where private advantage concurs with general affection for virtue, we readily perceive and avow the mixture of these distinct sentiments, which have a very different feeling and influence on the mind."

"It is but a weak subterfuge, when pressed by these facts and arguments, to say, that we transport ourselves, by the force of imagination, into distant ages and countries, and consider the advantage, which we should have reaped from these characters, had we been contemporaries, and had any commerce with the persons. It is not conceivable, how a REAL sentiment or passion can ever arise from a known IMAGINARY interest; especially when our REAL interest is still kept in view, and is often acknowledged to be entirely distinct from the imaginary, and even sometimes opposite to it."

This really should be, in my opinion, just as obvious now as it was over 200 years ago, and it's sad to see the presumably intelligent and well educated researchers in the article still holding to the absurd belief that people are only motivated by self-interest.

And finally, on the same topic (more nails in the empty coffins of zombie ideas) here's a paper which shows that people can distinguish historical price patterns in financial markets from randomly generated patterns. The abstract notes that this refutes, "the widespread belief that financial markets 'look random.'" but don't expect any of the people (economists) who subscribe to this theory to change their mind any time soon, any more than the findings on brain response to inequality will affect those who cling, against all evidence, to the notion that people are only motivated by self-interest.

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