The other day I went out to dinner with my family and a family friend, and we all had a bit of a conversation about the economy. The friend put forth a couple of myths which are quite common, so I'm going to try to debunk them in the next couple of posts. First up:
The primary (agricultural/ mining) and secondary (manufacturing) sectors of the economy are the only sectors where real value is created. The tertiary (services) sector is essentially sponging off the other sectors.
This statement has been refuted by people who are smarter and better at writing than your humble blogger. A quick google, for example, brought up this article http://www.economist.com/blogs/buttonwood/2011/08/wealth-creation-and-macroeconomics. There'd be plenty more out there for those who are interested.
A little bit of (economic) history here. For most of the history of humankind, most of our time was spent making sure we had enough to eat. Advances in technology - the plough, crop rotation, fertiliser etc meant that humans could get by without all having to work in the fields, which enabled the growth of the secondary sector. Cue the Industrial Revolution, and the rapid rise of cities.
The services sector was always around to some extent - people often say that prostitution was the world's oldest profession, although I am therefore quite confused about how anyone else was able to pay for it - but really came into its own in the last century, or maybe a bit longer.
It's also worth pointing out that modern life is possible because of the tertiary sector. It created the technological advances which revolutionised the other sectors, it gave us modern medicine and longer lifetimes, and it's how most of us earn a crust too.
Today, the tertiary sector takes centre stage in most (all?) developed countries. NZ is unusual in having such a large proportion of our economy in agriculture, and it could probably be argued that this is holding us back - there are limits to how much we can increase our agricultural output. Whereas, at the risk of sounding cheesy, the tertiary sector is only limited by the power of our imagination.
Besides, even NZ's economy is mainly driven by the tertiary sector. For the year to March 2010, the primary sector made up 10% of GDP, the secondary made up 22%, and the tertiary sector made up the remaining 68% (source: Infoshare, nominal GDP tables). If you looked at nearly any other developed economy, you'd see less in primary, you might see more in secondary, and it might be either more or less in tertiary but I'd be surprised if it was less than 50%.
It's also worth pointing out that GDP gets criticised as a measure of economic activity, in part because it doesn't include all the valuable work which people do but which isn't paid for by anyone. Think: volunteering, assisting older family members, mowing your lawns, washing your car, etc. Most of this "invisible" economic activity would form part of the tertiary sector, so it's even more important than the figures suggest.
Doctors, the opticians that help correct our vision so that we can work more productively, scientists, engineers, accountants, lawyers, economists, architects, IT professionals, teachers, lecturers, the retailers who provide a conduit for the distribution of goods - all part of the tertiary sector.
The primary sector is more important when it comes to exports, but even these are only given so much weight because NZ is a small, open economy that sends a lot of money, stuff and services in and out of the country. But NZ has a persistent current account deficit, i.e. our exports are consistently less than our imports, and the primary sector alone won't save us.
Tuesday, 7 May 2013
Tuesday, 5 February 2013
The Eagle Has Landings
I rent a nice little apartment in a complex called The Landings, which is on leasehold land. The land under this building, and under a lot of other buildings (Vector Arena, the Quay St Countdown supermarket, the Scene apartments and many more), is owned by Ngati Whatua O Orakei.
There's been a lot of media coverage on this part of Auckland, including a series of articles in the New Zealand Herald written by Anne Gibson - check those for more info. Anyway, a lot of apartment owners have complained that the value of their apartment has gone down.
The drop in value isn't surprising - in fact it's exactly what you'd expect - and here's why.
When Ngati Whatua O Orakei came into possession of this land in 1996, they enacted a "rent holiday" over most of it for fifteen years. They allowed developers to come along and build on the land, resulting in the various developments that we've got today. Buildings were built and occupied - apartments, offices, shops. For the most part, the occupiers didn't pay any "ground rent" to the landowner; they just paid for what they were getting in the building (in theory, at least).
Apartment renters like me paid rent to the apartment owners, and the owners were able to keep this money without having to pay any to the landowner, at least until 2011. The "rent holiday" was a clear financial benefit for the apartment owners.
Think of it like this. You've got a financial liability to pay someone $5,000 a year for 15 years. Taking the net present value of that at 8%, this is equivalent to a debt of $46,221 that you have to pay now.
OK, so say that was your ground rent over 15 years. When you buy a leasehold apartment, you have to figure out how much you'll pay in ground rent over time, and adjust the price you pay as a result.
Now say you get a rent holiday instead. You're essentially $46,221 better off. And if you bought an apartment back in 1996 - whatever you might have paid for it - you would be happy to pay up to an extra $46,221 for it as a result.
Of course, the apartments down here weren't built then, so let's say it's 2003 when you bought, and you get a 8-year rent holiday instead. $31,031 is the net present value this time. You could still pay this much more for a leasehold apartment than you would otherwise, because of the rent holiday. Looking at it another way, if you're considering two identical leasehold apartments, except that one of them has an 8-year rent holiday, you should be happy to pay $31,031 more for that one as a result.
Fast forward to 2012. The rent holiday is over. Back when the apartments were first built, the owners could have capitalised their savings into the purchase price, based on what they didn't have to pay. Today, owners will be paying market rent for the land. If I buy an apartment today, I'm going to expect to pay $31,031 less than the guy who bought it in 2003 (all else remaining equal), because he got eight years rent-free and I'll be paying from day one.
Anyway, so I made this graph below as an example (and because I wanted a picture of an eagle). There's an Excel file which goes with this, which I'll attach when I can figure out how. Essentially, the market value of my apartment today would be somewhere around $170,000 (except for leaky building issues - that's another story). If the market rent paid by the tenant grows at the rate of inflation, and so does the ground rent, then the real value will be flat from now on - but the nominal value will rise. The apartment would have been worth more in the 90s thanks to that rent holiday, either in nominal terms or (especially) in real terms. And hopefully it's clear why that is the case!
There's been a lot of media coverage on this part of Auckland, including a series of articles in the New Zealand Herald written by Anne Gibson - check those for more info. Anyway, a lot of apartment owners have complained that the value of their apartment has gone down.
The drop in value isn't surprising - in fact it's exactly what you'd expect - and here's why.
When Ngati Whatua O Orakei came into possession of this land in 1996, they enacted a "rent holiday" over most of it for fifteen years. They allowed developers to come along and build on the land, resulting in the various developments that we've got today. Buildings were built and occupied - apartments, offices, shops. For the most part, the occupiers didn't pay any "ground rent" to the landowner; they just paid for what they were getting in the building (in theory, at least).
Apartment renters like me paid rent to the apartment owners, and the owners were able to keep this money without having to pay any to the landowner, at least until 2011. The "rent holiday" was a clear financial benefit for the apartment owners.
Think of it like this. You've got a financial liability to pay someone $5,000 a year for 15 years. Taking the net present value of that at 8%, this is equivalent to a debt of $46,221 that you have to pay now.
OK, so say that was your ground rent over 15 years. When you buy a leasehold apartment, you have to figure out how much you'll pay in ground rent over time, and adjust the price you pay as a result.
Now say you get a rent holiday instead. You're essentially $46,221 better off. And if you bought an apartment back in 1996 - whatever you might have paid for it - you would be happy to pay up to an extra $46,221 for it as a result.
Of course, the apartments down here weren't built then, so let's say it's 2003 when you bought, and you get a 8-year rent holiday instead. $31,031 is the net present value this time. You could still pay this much more for a leasehold apartment than you would otherwise, because of the rent holiday. Looking at it another way, if you're considering two identical leasehold apartments, except that one of them has an 8-year rent holiday, you should be happy to pay $31,031 more for that one as a result.
Fast forward to 2012. The rent holiday is over. Back when the apartments were first built, the owners could have capitalised their savings into the purchase price, based on what they didn't have to pay. Today, owners will be paying market rent for the land. If I buy an apartment today, I'm going to expect to pay $31,031 less than the guy who bought it in 2003 (all else remaining equal), because he got eight years rent-free and I'll be paying from day one.
Anyway, so I made this graph below as an example (and because I wanted a picture of an eagle). There's an Excel file which goes with this, which I'll attach when I can figure out how. Essentially, the market value of my apartment today would be somewhere around $170,000 (except for leaky building issues - that's another story). If the market rent paid by the tenant grows at the rate of inflation, and so does the ground rent, then the real value will be flat from now on - but the nominal value will rise. The apartment would have been worth more in the 90s thanks to that rent holiday, either in nominal terms or (especially) in real terms. And hopefully it's clear why that is the case!
Wednesday, 14 November 2012
Introductismo
And so, I step out of the shadows and into the light of the Interweb. Although, depending on the time zone you're reading from, maybe the other way around.
I can't imagine I'll ever think of myself as a blogger, but I do like to write things sometimes. And these days, there's no excuse for keeping it to yourself when you can share your insights with, potentially, several - even dozens! - of interested readers.
I'm interested in economics, energy, climate change, retail, transport, governments, revolutions and people. I'm sure these topics will all surface on this blog at some point or another. I'm also going to apply my economic analysis and geeky love of data to houses/ apartments. I'm not interested in these as a general thing, so much, but I am interested insofar as they affect me (selfishly) or other things that I am generally interested in.
In fact, apartments will be the topic of my first proper blog post, which I will call The Eagle Has Landings. I made myself laugh when I thought of that name, which probably reflects my lame-at-times sense of humour.
In parting, I will say the thing which is traditionally said at times when one is in the public arena:
Hi Mum!
I can't imagine I'll ever think of myself as a blogger, but I do like to write things sometimes. And these days, there's no excuse for keeping it to yourself when you can share your insights with, potentially, several - even dozens! - of interested readers.
I'm interested in economics, energy, climate change, retail, transport, governments, revolutions and people. I'm sure these topics will all surface on this blog at some point or another. I'm also going to apply my economic analysis and geeky love of data to houses/ apartments. I'm not interested in these as a general thing, so much, but I am interested insofar as they affect me (selfishly) or other things that I am generally interested in.
In fact, apartments will be the topic of my first proper blog post, which I will call The Eagle Has Landings. I made myself laugh when I thought of that name, which probably reflects my lame-at-times sense of humour.
In parting, I will say the thing which is traditionally said at times when one is in the public arena:
Hi Mum!
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