Category Archives: Money

Venture capitalism, getting funding, investment

Josh on Housing – Part 2

My local library has magazine back issues. I was reading a Money, August 2004 article by Paul Citheroe, entitled am I better off Renting or buying a home? on pg 22.

Virgin home loans are now available at 7.34%pa. That’s pretty darn cheap. But still not as cheap as my preferred lender, HomePath (a Commonwealth bank subsidiary). All this cheap money, someone should buy a house, right?

I advocate two positions. One I advance to those people I know that are good savers. That is, buying a home is for suckers. The other I push on those whose money management… leaves something to be desired. Perhaps they show the kind of financial restraint that the Enron accountants did. Anyways, to them, I say “buy a house. Now. Are you still here? Go on, get!”

Paul agrees with me, sort of. He thinks that we’re all spendthrifts, just because our country is going into the hole at $2b/month:

Given our poor track record as savers, I fear that you won’t “rent and buy shares.” You’ll rent and blow the money on lifestyle, leaving you in the situation at retirement with no house and no investments.

But, he says, that’s irrelevant, because of the figures in the article which show you’re better off buying real estate, regardless of the alternative of saving while renting. He give enough hints in the article that I might be able to reproduce his (well, the Macquarie Bank’s) workings and then refute his proposition.

Let’s see:

Buy and repay Rent and invest
Capital Gain 8.7%pa 8.1%pa
Income 4.12% dividend (what’s the franking level?)
Txn costs in $8586 1 month’s bond ($14,300),
1% on shares
Txn costs out 2%? 1%
CGT 50%?
Holding costs $30,543pa interest +
~$3,700pa rates, insurance, etc
$14,300pa indexed

Shares at 8.1% capital gain, 4.12% dividend (what’s the franking level?). Actually, the long term average is about 10% gain; perhaps that’s with taxes paid and dividends re-invested. Don’t know about average dividends or franking levels. 8.1%pa growth for property matches my understanding, which is a long term average of 8%.

Shares with a 1% broker fee (you’d be hard pressed to pay that kind of fee, it ought to be more in the $50 range).

CGT at the marginal rate – I wonder if they 50% discounted it? CGT will only be payable on realization of the asset, which might not happen.

Strata levis (etc) increasing at 3%pa ($19,219 total by year 5), rental of $14300 (figure from NSW dept of housing for 2br flat) increasing at 5%pa ($78,890 total by year 5). I presume these figures are reasonable. Except, $337,500 property (average Sydney property) – is this the same property as the 2br flat used to calculate rent, or is it a better property?

Already I can see a problem – the yield on the property is incomparable to reality. I don’t think they’re comparing apples with oranges – $14,300 rental on a $337,500 flat is about a 4% yield, and you generally don’t see that high a gross yield. More like 2%, perhaps 3%.

30% marginal tax rate, $39086 in savings (questionable), $7K First Home Owner Grant (you might get more than that), acquisition/loan establishment costs of $8586, no stamp duty – (Flash stamp duty calculator, or non-flash) – but no stamp duty is unlikely.

1 month’s rent as bond. Agent fees on property realization 2% (this assumes no advertising etc costs, which is highly unlikely) – I don’t know why they’re indexed at 3%.

Initial mortgage of 337,500 at 7.6%pa fixed for 25yrs $30,543pa.

As he stated, he ignored reno costs of IBISWorld estimated $500pa – a lot on the low side by my figuring, and something your landlord picks up the tab on. You’re going to lose the hot water service every ten or twenty years, a new fence, new carpets, kitchen cabinets, curtains, a lick of paint every five years, new taps every twenty, light fittings, etc. Every 50-100 years you’re going to need to replace the whole house. It all adds up, even if all you’re paying for is materials.

Okay, what about HECS and Medicare? As your taxable income goes down, so do these components.

The analysis wasn’t controlled so that the take-home was the same for both parties. It would have allowed a tax-deductible margin loan to ramp up the share exposure. Apples with apples!

So, after all these random bullet points, I’ve decided that the analysis was flawed, and heavily biased towards home purchase. I did a similar analysis six years ago, and renting came out ahead of borrowing to buy. But the real money was in buying, and then mortgaging to purchase shares. But the spread between margin loans and home loans was a lot larger back then.

For a US-centric view on things, read Misconception: Renting is for Suckers. There, home loan interest is deductible from tax (you can get a similar arrangement here, if you are able to jump through the significantly large hoops).

Josh on Housing – Part 1

Wandering around the web, I found this article on the economics of housing:

Home Economics – New York Times

In 2000, Glaeser took a sabbatical from Harvard and began to spend a few days a week in Philadelphia working with Joseph Gyourko, a real-estate economist at the Wharton School of the University of Pennsylvania. Glaeser had already been thinking about the relationship between housing and urban poverty when one day he and Gyourko began to discuss why cities like Philadelphia and Detroit — places with poor future prospects, both economists believed — weren’t doing even worse in terms of population. Why didn’t everyone leave, Gyourko wondered, and go to a place like Charlotte, N.C., that had a fast-growing economy? This question addresses a puzzle of urban economics. Cities (think of Las Vegas or Phoenix) can grow at a very fast rate, exploding overnight with businesses and residents. Some can increase in population by 50 or even 60 percent in a decade. But cities lose their residents very slowly and almost never at a pace of more than 10 percent in a decade. What’s more, when cities grow, they expand significantly in population, but housing prices tend to rise slowly; even as Las Vegas grew by leaps and bounds in the 1990’s, for instance, the average home there cost well under $200,000. When cities decline, however, the trends get flipped around. Population diminishes slowly, but housing prices tend to drop markedly.

Fascinating observation: When a location becomes undesirable, house prices collapse quickly – but the affordability of housing keeps people living in them. Rural Australia exhibits this kind of behaviour in droughts, and generally. Basically, only poor people live where noone really wants to:

Glaeser and Gyourko determined that the durable nature of housing itself explains this phenomenon. People can flee, but houses can take a century or more to finally fall to pieces. “These places still exist,” Glaeser says of Detroit and St. Louis, “because the housing is permanent. And if you want to understand why they’re poor, it’s actually also in part because the housing is permanent.” For Glaeser, this is the story not only of these two places but also of Buffalo, Baltimore, Cleveland, Philadelphia and Pittsburgh — the powerhouse cities of America in 1950 that consistently and inexorably lost population over the next 50 years. It is not just that there were poor people and the jobs left and the poor people were stuck there. “Thousands of poor come to Detroit each year and live in places that are cheaper than any other place to live in part because they’ve got durable housing still around,” Glaeser says. The net population of Detroit usually decreases each year, in other words, but the city still attracts plenty of people drawn by its extreme affordability. As Gyourko points out, in the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it was $63,600. Those prices are well below the actual construction costs of the homes. “To build them new, it would cost at least $80,000,” Gyourko says, “so there’s no builder who would build those today. And as long as those houses remain, the people remain.”

So, houses can be bought for less than they be constructed for – kind of paying full price for the house, then getting a discount because of the dirt they’re built on. The prices are very attractive, but they’re that cheap for a reason – you don’t want to live there. The only people who will live there are those that can’t afford to live elsewhere. You get a massive supply of housing (that doesn’t get smaller – not quickly anyway) that is insensitive to price, so basically demand drives prices in a falling market. If the demand is falling because the place is no good to live in, prices will fall like a stone as everyone who can afford to live elsewhere does.

Buying in an environment like this, the price you pay needs to work on the assumption of $0 residual value at the end of the economic life of the house on the property. So rental returns have to compensate you for the forgone income (i.e. provide a return on your investment) and holding costs (rates, insurance, etc) plus compensate you for the depreciation of your investment. This would imply that rents in these kinds of environments have high yields compared to markets where the property is expected in increase – or at least not decrease – in value.

What I’m taking away from this is that old adage – you’re buying the dirt, not the house. Also, location location location. Plus, yield alone is a bad thing to chase.

As a guide for purchasing, the article seems to say that you want to go where there’s a natural upper limit on housing, and better yet a rapidly depreciating house stock.

Glaeser likes to point out the close correlation between a city’s average January temperature and its urban growth; he also notes that cars per capita in 1990 is among the best indicators of how well a city has fared over the past 15 years. The more cars, the better — a conclusion that seems perfectly logical to Glaeser. Car-based cities enable residents to buy cheaper, bigger houses. And commuters in car-based cities tend to get to work faster than commuters in cities that rely on public transit. (The average car commute is about 24 minutes; on public transportation, it is around 48 minutes.) While many of his academic peers were looking at, and denigrating, how the majority of Americans have chosen to live, Glaeser (though no fan of the aesthetics of sprawl himself) didn’t think an economist should allow taste to affect judgment. “You shouldn’t go around thinking that all these people are just jackasses for deciding to drive an automobile,” he says.

I wonder if Melbourne commuting is longer because it’s difficult to move house closer to your job? Also, Melbourne is a huge city compared to many US cities, there’s only a handful of American cities larger than a couple of million people, and most are sub 500K.

Digital TV takeup

Absolutely superb article in today’s Age.

The federal government wants to close down the analog TV signal. It can’t do that until enough people have digital TV receivers. People don’t particularly want to spend the time or money purchasing a digital TV set top box. So the government is going to have to spend a couple of billion dollars to continue broadcasting the analog signal for longer.

Sony have even suggested spending $200 million on consumer education, I guess to tell us why we should buy digital set-top boxes.

Alex Encel thinks we should just spend $150 million to give everyone a digital set top box for every TV they own.

What a brilliant solution! It’s not often you get to achieve your goals and also save a couple of billion dollars at the same time!

Where are the aliens?

Coffee drinkers are easier to persuade.

Fermi’s Paradox is explained by aliens getting adicited to computer gaming.

Strom reckons he knows how to make money with a website: ads! Plus a little other stuff.

An Irishman has a rather good summery of how to negotiate an intial salary.

Cross-platform rounded corners without images, extra markup nor CSS. The holy grail of web-design dweebs.

Economics of Digital Cameras

I was reading a backissue of Money magazine where Paul Clitheroe made a remarkably insightful analysis of film vs digital cameras (Money, June 2005, pg 20 am I better off With a digital or film camera?).

One thing he noted is that acquiring a digital camera turns you into a shutterbug; I would suggest spending hundreds or thousands of dollars on a camera has that effect, but the zero-cost of each individual photo certainly does help. He notes that in bangs-per-buck, film beats digital – and he’s right. Not only are digital cameras more expensive to acquire for the features you get, but (at the time of the article) processing costs were higher too. Couple that with the poorer image resolution you get from digital images (super high-end digital cameras are only now approaching the image resolution of $20 compact cameras) and you would have to be nuts to go digital.

Unless you don’t actually process your images. As a general rule, I don’t. In the last eleven months I’ve taken… let’s see… 10,327 images (I was wondering what would happen to the camera when it rolled over 10K images, because the manual hints that you might have to re-format your media; turns out that’s not the case). Recently Cathy and I took advantage of a Harvey Norman promotion and trebbled the number of images we’d printed, to a total of 200. We might have spent $50 on printing all up. That would have bough 240 frames of analogue film in processing costs, but we only printed out the winners. If the full 10K images had been processed we may have spent $2000 on processing. That’s a bunch of money. I suspect I would have husbanded my shots more if I’d spent the same amount of money on a film camera. In fact, there’s no way on God’s green Earth I would have spent that much money on a film camera. Something about perceived value differences. Anyways, the camera has been fun, and I think given the thrashing it’s been getting, I’ve been getting value for money from it. Which I’m a little surprised by, because it was a lot of money.

For me, the big advantage of digital is that I can learn to be a better photographer at no marginal cost. And Paul says that at National Geographic, photographers average 350 rolls of film (almost 12600 frames) per story, with an average of 10 published. So, if I was a professional grade photographer using professional equipment, one in twenty of the photos I’ve printed would be magazine quality.

CityLink eTags to be used for a reverse-toll

There’s a proposal to have Melbournians use their CityLink eTags for a reverse-toll on public transport by a economist-type guy from Melbourne Uni. I can just see homeless guys making a living by taking sackfuls of eTags around the city on trams while their owners are at work, to make the day’s commute in to work and back again net-free.

It’s an attempt to address the free rider problem of vehicular road use; he’s also proposed that the charging should be demand driven – so road tolls are higher in peak hour, and might be free in the middle of the night. But we have a crude version of this proposed roaduse charge already – it’s called fuel excise. Cars idling in traffic jams keep burning petrol, and thus their owners paying tax, as an added bonus, SUVs/4WDs burn a whole lot more of it. If you want to hike the charges up, I’m all in favour of, say, tripling the excise on fuel. That should make public transport more attractive – especially as there won’t be homeless guys with sacks!

Enormous house valuation leaves owner unimpressed

Even governments have to live within their means. But the nice thing about taxation, where you figure out how much tax (or rates) someone owes you, is that revenues are pretty predicatable. You say it, they owe it. Nice. I wish I had that kind of lock on my ‘customers’.

Unless you stuff up.

If you stuff up, suddenly the USD$8m you were counting on isn’t coming in, and you have to start sacking public servants. Read the link, that’s what this rant is about. I’m not going to recount it at length. Let’s just say there was a single character typo and leave it at that.

The nifty thing about this stuff up is that it was via a records enquiry system, by an external operator, who accidentally activated a retired program that shouldn’t have been able to affect property prices anyway (what with being retired and all). Valuation on the property went from USD$150K to… tray lots: USD$400m. Any reasonable system would have said “wow, that’s a fairly heafty increase in valuation, you’re going to have to enter several ‘no, seriously, I’m not kidding‘ codes before I actually believe you.”

Daniel, where’s our “risks” category?

I put it to you that few system developers would have considered this could ever happen, acidentally or otherwise, and that when offered the opportunity to spec a system like this it’d be rare that anyone would suggest a check like “if the rate of increase was more than twice that of any other property in the system, or the increase more than ten times the value of any other property in the system, get it checked by a human other than the one entering the data”. But there was no checking, and with today’s inconnected computer systems, the new valuation cascaded into other systems. Such as the county’s budgeting system, thus the surprise sackings to lower costs.

Please, someone tell me I’m wrong. Tell me that this failure has got to be a one-off, that I’m a cowboy, and the industry I work for is fine.

Ad blocking begins to have an economic effect

So I was checking out copper (as you do), and followed the wikipedia copper entry link to’s copper data, and I discovered that ad blockers are beginning to change the economics of the web. The web site whinged that they had detected ad blocking, and if I wanted to get the content I’d have to turn it off (and provided directions – which I followed, but it just turned out to be a bunch of atomic numbers and covalent bonds and useless crap like that).

The economics of a lot of the web are not dissimilar to those of free-to-air television; there’s a covenant between the producers (broadcasters/webauthors) and the consumers – we will let this stuff out to anyone, and you will consume our advertising. Advertisers give the producers cash to cover the costs of publishing. There’s a profit in it, and everyone’s happy.

Except that consumers have decided they don’t like the deal anymore. People are taping TV shows, and skipping the ads. People are using ad blockers in their browsers. The economics of the model are breaking down. I personally am behaving this way because I find the advertising increasingly intrusive and irrelevant, and thus annoying. The ads suck, for products that suck, and they’re shoved down my throat. So I avoid them. This is how a character in Carl Sagan’s novel Contact became the richest man on earth – by selling TV ad blockers.

The three outcomes I can forecast from this are:

  1. increased relevance of advertising (unlikely, the reason advertising is necessary is because of an inherent suckiness of the products, otherwise they’d be compelling)
  2. decreased expenditure on content provision (on TV, cheaper nastier shows – if that’s possible; on the web, uneconomic sites being pulled or at least not updated)
  3. product placement, which is a bit like 1, ‘cept different because it’s more about appropriate products in appropriate places

I for one have no idea how this will play out, but I’m sure advertising will get more subtle. It’s done that over the last century, and will continue to in response to increasing consumer sophistication. Perhaps advertisers will find a way to back off, and only offer their products to customers who want them; they certainly want to act that way, because it’s a waste of money advertising women’s sanitary napkins to the gay male viewers of Friends — unless they’re planning to fix their car’s leaky roof with one.

BTW, how did they figure out I was blocking their ads?

VoIP ain’t gonna happen this month

I’ve just moved houses and thought it would be a grand idea to replace our fixed phone line with a VoIP phone like that supplied by Engin. Save the $30/month fixed line rental, skip the $60 connection fee and also upgrade our net connection to broadband, come out ahead with features and finances. Everything would be great.

What a stupid idea.

The VoIP service offered by Engin is $20/mo, so you are saving $10/mo on connectivity. Our ISP costs $10/mo, so the most we can afford to pay for an ISP and come out equal is $20/mo. But if we pay only that then we are effectively getting broadband for free. The VoIP is $150, but we’ll just ignore that cost. It’s only $90 more than hooking up a fixed line.

Obviously, to use a VoIP phone you need IP connectivity – an ISP. Okay, so we’ll just sign up to one of those $20 / 200meg plans ADSL and that’ll be great; I did some figuring and we’d use nothing like that kind of traffic, even with voice calls consuming 1K/sec (all figuring based on Engin’s figures, supplied in the user forum, which has been pulled – methinks because the users were slagging them off). No problem signing up for a couple of years, no worries, I’ll be in the new place for at least that long.

You can’t have ADSL without a fixed line phone.

You Freaking WHAT?!

Fine. Cable, I’ll have cable. Call one of the two cable providers, the house has been cabled up by both. Except they’ve merged, to increase competition. No worries, I’ll call the only monopolistic cable provider, hook up (ought to be cheap, the house is already cabled up) and away we go. $279 to connect to your cable service?!?! $40/month to stay connected?!?! You Freaking WHAT?!

Fine. I happen to know that although cable and ADSL are widely regarded as your two options for broadband, there’s a third option here in Melbourne – radio. Alphalink provide superfast wireless access for only $33/mo; but connection is $286. But guess what? $33 is greater than $20. So we come out Losers.

So I resigned myself and we got a fixed line. And that’s why VoIP isn’t gonna happen this month, and I suspect won’t be happening for a long time yet.