Category: Economics and Finance

Life Isn’t Monopoly

Published by Graham on June 3, 2017

It’s been almost a year since I wrote Hell, Titles, and Houses in July 2016. In this amount of time things have gone from crazy to ludicrous and now, finally, to precarious. I’ve been a fan of Garth Turner’s blog The Greater Fool for a while now, much longer than it has been fashionable to question the sustainability of an economy based on perpetually increasing house prices. Reading that blog every day might be a weird thing to be passionate about, but it helped me build confidence in the belief that not being in a position to buy a house doesn’t make me a loser or a victim. I had to change my beliefs. I knew the “responsible adult” thing to do was to get an education and a good job, pay back debt as fast as possible, then make the most important purchase of my life. But after putting in the work to get the education, the job, and slay the debt I came to realize that I had been doing the right things for the wrong reasons. I was being a responsible adult because I saw a game with winners and losers, and I intended to be a winner: the guy who owns a modest-but-nice house and therefore never has to suffer the indignities of pet restrictions and rent increases. I was to become wealthy over many years by virtue of owning, a sort of petit-bourgeois privilege afforded to me on account of being smarter and more clever than my less responsible peers (aka the losers).

Of course, a number of things are wrong with that way of thinking. It was based on erroneous assumptions about economics, as the month of May 2017 has shown us that things are starting to turn sour for everyone who has gone all-in on real estate in Canada’s hottest markets. But even if it remains the case that buying a house at any cost is a sure way to win, I now have to admit that it would be morally repugnant to “win” that way. Think of the board game that every self-respecting board game geek loves to scoff at: Monopoly. That’s the game where you throw dice and compete to see who can extract the most wealth just by being lucky to land on the right places at the right time but passing your combination of malice and good luck off as big league business savvy.

*Nobody admits to liking Monopoly, yet it’s ubiquitous and continues to sell copies without an end in sight. It’s basically the Nickelback of board games.*

The object of the game is to bankrupt the other players through charging ever-increasing rents. There are a lot of things that make this game less fun, and one of them includes keeping other players in play. To properly play the game, it’s not enough to “add value” to the board by assembling your sets and building houses. You have to kick the ladder out from underneath you if you want to score a timely victory. This is all fine at the board game table; nothing is wrong with some make-believe wheeling and dealing among friends and family. But could you really feel good about yourself if, in real life, you aspired to play like a Monopoly player, whether by swift domination or by squeezing your opponents slowly by keeping them in the game just so you can get more from them later? I wouldn’t think so. I would give you the benefit of the doubt and assume that you don’t wish that reality was more similar to Monopoly than it is. If managing to buy real estate meant winning, and being among those who never caught the right break meant destitution, that’s not a game I would want to win.

Fortunately, the economic game in the real world doesn’t work like that. I am writing about this topic now because the markets in Vancouver and Toronto are faltering. May 2017 looks like the zenith of the madness that inspired people to blame foreigners for domestic problems in Vancouver, push and shove each other to scramble into an open house guarded by a police officer in Greater Toronto, and for people my age to feel like this music video is the most relatable thing we have heard in a long time. It is a cultural sickness we have in Canada that enables us to rationalize that behaviour in the face of a reality that is quite unlike Monopoly. It makes me hope that Garth Turner’s daily posts in this past month are accurately chronicling the unravelling of the economic assumptions that fuel the madness of this Monopoly mindset.

It wasn’t too long ago that conventional wisdom held that rants such as this one were pointless and esoteric. But nowadays, Canadian politicians (especially in BC and Ontario) seeking to maintain their positions in their own political game are scrambling to be seen as “doing something” to cool the market. Of course, I doubt that they want to succeed: almost 70% of Canadians own homes now. Successfully bringing prices back in line with incomes would be logical, fair, and absolute political suicide due to the number of people who have a lot to lose if the measures actually work. I don’t know what the politically tenable solution to our national housing crisis is. All I can do is take care of my own home, stay grounded, and hope that the storm of fear and greed eventually subsides and people start seeing houses as places to live again rather than get rich quick schemes. Life isn’t Monopoly.

Gifts

Published by Graham on December 24, 2016

What is a gift? A gift is different than an incentive. An incentive is not strictly quid pro quo, that’s a transaction. An incentive is freely given but with an expectation attached. For instance, in EVE Online this week I received a new ship as a gift from the owner of a player-owned corporation. If it were to come with the expectation that I join the corporation, this would not have been a gift. It would not be a transaction, as I would be required to take a specific action in exchange. In the case of an incentive, I am still not obligated to work with this corporation in any specific capacity for any specific length of time. However, it does come with an implicit ask. I would consider this to be of a much different nature than a gift in honour of a celebration. It would, after all, be somewhat tacky for me to give my fiancée a mundane household or kitchen appliance unless a particular desire for a certain item was expressed. The implication is that I expect her to use the item to do something for the benefit of the household. As it stands in EVE, though, the ship seemed to veer towards the side of being a gift because I wasn’t specifically asked to join the corporation, though I applied anyway. I will be writing more about corporations and the social side of that game as I continue the series in 2017.

Another example of an incentive is the recent news that the BC government is going to *ahem* “help” people, mostly in my age bracket, feel like real adults by giving them an incentive to buy real estate. This is anything but a gift, as it is so intricately tied to a future obligation. If you’ve been reading this blog for a while you will know that I’ve got some opinions on the meaning of the title of homeowner. Likewise, a “gift” from the Bank of Mom and Dad for this purpose is similarly an incentive to take a specific course of action, no matter how it’s dressed up. If they’ve got money to give, and your alternative plans to invest in your kid’s RESP and/or travel abroad and/or have a great big wedding and/or whatever else you would do with it just aren’t good enough, it’s an incentive. Don’t take my word for it, just please go ask someone who is qualified to give specific advice on financial matters before you offer or accept any “gifts” of this nature. And please, think twice before supporting a political party that is willing to play a political game like that, brazenly stoking the FOMO of my generation.

A gift is different than a perk. A perk is a small token of reward given to someone with an existing title. The winter jackets I received as service awards from companies I have worked for, company lunches, volunteer appreciation events… all of these relate to something accomplished in the past and point backward in time to what we have already done. I appreciate staff lunches and service award jackets as much as any working person, but these are not gifts from employers. If you receive something because of a title you hold, it’s likely a perk rather than a gift.

So what, then, is a true gift? It is one given without expectation and not as a reward. There can be a sense of obligation to give a gift of some kind, as it would be a little bit odd if I gave gifts to relatively distant friends and skipped one for my brother or my partner. That does not, however, invalidate the gifts I might give to these people as long as it’s not seen as an incentive or a perk. An ideal gift is one you would give regardless of the terms of your relationship with the recipient, and in an ideal relationship one would be happy to give gifts of an appropriate nature. Even if “giving gifts” is not your love language, there is likely some kind of non-material gift that someone you love would appreciate.

*What does it mean to give or receive a gift?*

Perhaps you were lying in bed on the night of the 21st of December, listening for the sound of hooves on your rooftop, wondering what gifts Woden has brought for the children as he rides through town on Sleipnir’s back. Perhaps tonight and tomorrow you will be contemplating the benevolence of a God who so loved the world He gave His only son to us. Maybe you are looking forward to the airing of grievances around the Festivus pole. Or maybe all your holidays are at other times of the year and you’re just looking forward to stat holiday pay. In any case, go ahead be grateful for those conditional gifts such as perks and incentives. But I implore you: celebrate and treasure the experience of giving and receiving true gifts. That’s something I think we can all do at this time of year.

Don’t forget to vote in the Steam awards for the “Test of Time” award today.

Broken

Published by Graham on October 8, 2016

When I say a game is broken, I don’t mean that there are faults or errors in its execution. Whether it’s a chess set that ships without any bishop pieces or a video game that crashes without a series of post-release patches, the game itself as conceived by the designers is not broken. The media are faulty, but the underlying game is intact.

What I consider to be a truly broken game is one that “works” in the technical sense but where the rules are so contrary to our standards of fairness, enjoyability, or sense of the spirit of the game that we simply cannot abide with it until the rules are changed. This can often be the result of the overpowered nature (or as one of my friends once called it for short, OP-ness) of certain cards or strategies that almost certainly lead to victory over any alternative plays (where one or more alternatives are seen as having inherent legitimacy rather than just being blunders to avoid).

Earlier this week, Canadian Minister of Finance Bill Morneau announced an updated set of rules for mortgages which may alter the Canadian real estate game. I am delighted by this because I see it as a solid attempt to prevent a game that is anything but trivial or recreational from becoming broken. It’s not a good thing when people see the only way to get ahead is to load up on debt.

*Either way you look at it, something needs to be done when a runaway market breaks the game.*

In this post I won’t be making any arguments for or against the timing of a correction or a crash, nor whether it’s a good idea for any individual to be able to buy right now. I don’t have the expertise to give specific advice and I am not going to try to predict the future. What I will be talking about is risk vs. reward in a game; I am of the opinion that it’s a good idea to adopt rules which dissuade Canadians from going all-in betting on real estate, regardless of whether or not it’s a “good investment” in any individual case.

First, let us consider the possibility that what goes up must come down. Not everyone agrees that prices are unsustainably high. Some people believe for a number of reasons that house prices will continue to rise for decades to come (with only an occasional hiccup) and that it only makes sense to get onto the train as soon as one can. It would then seem unfair to millennial renters trying to get on board to have to do more to qualify for a mortgage. Some people would say we are losing while we wait. But consider for a moment that the price of a typical house blasting past the million dollar mark without a corresponding boom in wages and salaries is the sign of something very unhealthy. If it doesn’t go up forever, then the game isn’t as broken as it could be. Those who gamble will eventually lose, with the magnitude of the risk increasing as the stakes get higher and higher. However, even if the game is not broken in that sense it’s still the case that the higher prices climb, the bigger the fall. Having had front row seats to what happened in the USA ten years ago, we Canadians should know better than to keep on raising the stakes until catastrophe strikes. New rules that bring us down slowly are a welcome alternative.

Now, suppose the average millennial’s dad is right when, over Thanksgiving dinner, he channels the Lex Luthor from the 1978 film Superman and tells them to buy land because it’s the one thing that nobody is making any more of. After all, it worked for him when he bought a house in the 1970’s. But for a moment let’s put aside any skepticism and imagine for a moment a world where Canadian cities, lead by Vancouver and Toronto, never see a meaningful correction or crash. Those priced out now can never afford to buy there again and both prices and rents get launched into the stratosphere. Vancouver becomes Manhattan. This is what happens if the game is broken and it stays broken. The logical end of this scenario is a new aristocracy where the only good way to get into the market is to be born into a family that is already in the market. This is much, much worse than having a bubble burst. If such a thing was possible and it really is buy now or buy never, then it would be time to change the rules before the commoners start getting agitated.

So, one does not need to know much at all about the finer details of finance to reach the logical conclusion that regardless of what happens in the market, average people looking to make the most of what they’ve got are in for trouble when the game is broken. In order to sustain itself, any gamble (whether it is an investment or a betting game) will have to find its place in the following triangle:

Caption — A modified risk triangle to illustrate that an investment can’t be all three at once. The problem is that when other kinds of investment can be shunned when unaffordable, we can’t just say no to shelter.

A runaway market will eventually fix itself, but the human consequences might be hard to take. It’s all fine and dandy to be priced out of the market for Dutch tulips or for the returns on Beanie Babies to crater, but when we are talking about places to live and life savings it becomes necessary to try and mitigate the extreme consequences. And so we come back to the new rules. They transfer more risk onto the lenders and less onto the taxpayer, reducing the moral hazard of banks being able to lend out increasingly outrageous amounts of money to people whose ability to repay is dubious if anything goes wrong. They crack down on people hoping to get around paying taxes on rental income by misusing principal residence exceptions, putting them on a more even field with other kinds of investments/income streams. They ensures that people take on less risk when they sign up for 20+ years of debt. Are the new rules enough? Will they yield the desired outcomes? I don’t know. But I find it encouraging that we have a government that is making an attempt and signalling that there may be more to come.

It’s bad news if your finite game involved becoming rich by jumping on the train at just the right time and laughing at people like me when we still have to pay rent when we are old. Good news, however, if your infinite game involves changing the rules mid-stream to allow as many players into the game as possible. In changing the rules to not favour real estate over other kinds of investment as much, we are not just encouraging the market to calm down to the point where people aren’t priced out of the market just because they can’t get a small loan of a million dollars from the bank of mom and dad. We are also creating the conditions where a young person can get ahead by investing in other things. Boomers may have coveted the garage and the yard and encouraged their children to do the same, but the post-millennial generations may instead choose a future that involves participation in the sharing economy rather than owning cars, investing in companies that create and implement the technologies of the future rather than counting on real estate equity for economic security, and retaining flexibility by living in a housing co-op rather than having to spend previous time mowing the lawn. The economic game of the future needs rules that don’t unfairly advantage the holders of the homeowner title, as that boomer dream may not last forever.

So whatever strategy we employ to invest in our future prosperity, let it not depend on the game being broken in a way that gives us an unfair advantage over our peers. Let us seek to play by rules which allow as many players as possible to be a part of the game. If the history of wealth inequality is any indication, our survival as a nation may very well depend on changing the rules when the game is broken.

Hell, Titles, and Houses

Published by Graham on July 9, 2016

Four blocks, I should mention in a song if I want to get along with change, who doesn’t wanna change this? – Tegan and Sara, “Hell” (2010)

Ten years ago, circa 2006, Tegan and Sara wrote “Hell” about a neighbourhood that was part of the infamous downtown east side in Vancouver. It’s a song about a place with some real social and economic suffering going on. If I were to ask you where in Canada you’d pay a king’s ransom to live, you’d think that a place once dubbed “Hell” by the Vancouver Sun wouldn’t make the list. But now it’s 2016, and it costs over a million dollars to buy a house there. Or, if you are lucky, you can spend $300,000 on a condo there. And no, there was no rampant increase in wages and salary nor a magic cure for poverty and homelessness applied in the last decade. Housing prices and rents have skyrocketed and income has not. This in turn creates upward pressure in the suburbs, with the area of effect slowly increasing as people have to go farther and farther to where they can afford to buy. Meanwhile, it becomes harder and harder for regular people to put a roof over their heads. It’s crazy unsustainable.

But what does the outrageous inflation of a real estate bubble in Canada’s most famous city on the west coast have to do with my thoughts about games? In a word, title. What do you get your name on when you buy a slice of dirt with a house on top? A title. What does a person win in a finite game? A title. Considering this aspect of personal finance as a game might sound like a really odd thing to do, but remember that I’m the sort of person who chooses to write ~1000 words per week comparing games to obscure philosophy texts. And one of the reasons I do that is to look at things from a different angle in order to understand them better. So, home ownership vs. renting as a finite game. This helps me make sense of what would otherwise be an inscrutable case of people desperate to sink their own financial futures. I don’t live in Vancouver or Toronto, so I don’t feel the effects of this nearly as much. Yet even here I can hear the marketers and salespeople singing the siren’s song: stop throwing your money away on rent. The effects are less spectacular and headline-grabbing outside of Canada’s two hottest markets, but the sickness exists here too.

My preciousssssss... — *My preciousssssss…*

So why is it that the title of homeowner is so coveted? It’s considered uncouth to obsess about expensive clothes, big flashy jewellery, and luxury cars. Sure, it’s not necessarily unfashionable to buy those things if you’ve got the cash, but to focus your life on acquiring those things will earn you labels like materialistic. And so too will obsessing about ensuring your house is gigantic with all kinds of features unimaginable to middle income families in the 20th century. Yet it seems there is something magical and different about owning your dwelling rather than renting it. Taking on large debt to buy a car is considered irresponsible while going into epic debt to buy a house is rationalized as “good debt.” That makes sense, since the expensive car is usually an accessory for the title of rich while homeowner is a title unto itself. It is a title won in a game of life rather than a recreational game or other form of structured play. I think of it this way:

The beginning: A person has to accumulate enough money for a down payment, which is presumed to be a reasonable measure of one’s value to society. Obviously a problematic one, but for the purposes of this game, people who have lots of money are presumed to be hard working savers and people who don’t are presumed to be on their way to that state, suffering as a result of poverty, or maybe they are just hard partying wastrels. In any event, we all start with nothing then begin accruing through various means.
Consent to play: We consent to play this game by addressing issues of income inequality by looking for ways in which people who can’t afford to buy houses become able to rather than questioning the premise in the first place. When we congratulate our friends on their (illusory) equity gains. When we weep and gnash our teeth because affordability is a train to success that is about to leave without us, and consider long term tenancy as a state of failure.
Rules are externally defined: we play by the rules of the industry and the banks, and can know what they are, though many choose to remain oblivious.
Played within boundaries: houses in New Glasgow just aren’t coveted like they are in Kitsilano. Your title, in both senses, is worth more in Vancouver.
The purpose of the game is to win: by being clever in your choice and timing, having the right stuff to be able to secure the deal, and being diligent and determined while you pay off the mortgage leads to you being a winner while I am a loser because I will never escape making a monthly payment. Nobody pays over a million dollars for a crappy house just because they just need a place to sleep.
The game ends when someone wins: when the person who has captured the homeowner title either sells and pockets huge capital gains, or they hang on forever and reap the benefits of never having to make a monthly payment for their shelter again and the equity becomes a treasure hoard for their heirs. Assuming, of course, that a correction or crash does not wipe out the gains.

This aspect of life fits the characteristics of a finite game. The big question that I would like everyone to consider is this: should we consent to play this game? And if the answer is no, what does that look like? I choose not to play. Regardless of whether I remain a renter or somehow become a homeowner, it will never be my goal in life to own a house. My personal financial stability will remain paramount and I will not sacrifice it on the altar of real estate. Shelter is a need; owning is not. I am not saying there is inherently anything bad or wrong about buying a house, especially if you think of your house as a place to live rather than a guaranteed source of wealth and prestige. There are lots of good reasons and circumstances where it makes perfect sense to buy. I am saying there is something inherently wrong when prices start flying away from wages and salaries because of FOMO.

It’s been hard for me to come to the conclusion that never buying a house isn’t a fail condition. It’s been hard to listen to people talk about real estate like it’s a magic wealth machine that never fails to deliver long term wealth and happiness. But I’m up and over it and over them.