Why the world is getting better: Views from London’s transit

The London Underground is an amazing system.  It’s expensive at first glance at about £4.50 per trip.  I didn’t manage this well in the NYC system which is much cheaper and ended up spending close to $80 on single fares.  I doesn’t help that I kept going the wrong way and having to re-buy a new ticket …

This motivated me to look for a better deal.  London has a seven-day “all-in” transit swipe card (Oyster) for £30. The break-even is seven rides.  Pretty great  deal.

On the Tube a few days ago I scavenged a newspaper.  It turns out they hand them out for free, but I was still pretty happy at the time.  One interesting headline was that it was “Rent Freedom Day” in London.  Rents on average are £1233 per month, or $1969 Canadian.  It’s June – this means that more than 50% of earnings are dedicated to rent.

http://blogs.independent.co.uk/2013/06/17/london-renters-poorer-and-moving/

Brutal!  It seemed appalling at first glance – and not something that is sustainable.  Where things get interesting however is why it seems to have happened –  the huge relative drop of the expenses for other necessities.  Food and clothing have become massively cheaper.  There is a host of reasons for this, generally all beginning with more efficient: agriculture*, transportation, logistics, manufacturing…

*The major criticism I have of organic farming is that it’s unsustainable to deliberately pursue lower crop yields.

VE-100-YEARS-R6http://visualeconomics.creditloan.com/100-years-of-consumer-spending/

 

It’s tough to argue with good-news trends like this.

My hypothesis is therefore that additional disposable income can be pumped into real estate.  This increases demand, which drives prices.  This is compounded by access to  credit and huge leverage.  This fairly predictable and is impossible to put an adjective to (it’s not good or bad…  or even ugly.)

What I’m curious about is how this trend will reverse.  It cannot continue indefinitely.  I do like the adage by Herbert Stein:

if something cannot go on forever, it will stop.

The common counterpoint is “they  ain’t making more land!”  It’s a good thing I’m going through Holland shortly –  the Dutch may beg to differ.  But more seriously the land argument is short-sighted –  prime land is finite but transportation can cause less useful land to be useful.  It’s driven by density and intelligent city design.  If a high-speed commuter train is built it opens up many options clustered around the stations.    I.e., if you fly of Burnaby it is sure clear where the new Millennium SkyTrain line runs based on the ring on condos surrounding it. This is really cool.

burnaby

I see more land being used.  Increasing density is also practical, efficient but not always popular.  I didn’t know that one of Calgary mayor Naheed Nenshi’s few setbacks was in trying to approve secondary suites until reading the news of the flooding today.

The lack of private investment into affordable housing is remarkable.  This surely will change.  The profit margins are presumably low, but this can be offset by selling in high volumes.  If the demand, legislative environment and preferences (or all three) change, which I think they will as populations evolve, more housing will come.

Going to IKEA I’m fascinated by the tiny (~400 sq. ft.) arrangements that look very liveable. Small, but liveable.  I’d be disinclined to have a small rental at the same cost, but if the price was lower… IKEA’s methods of smart design and efficient manufacturing keep costs low.    The modular and flat-pack systems are very smart.

e11493image1

ikea-391-sq.-ft-room-brooklyn-537x385

I wonder what would happen if IKEA entered the housing market.  I’d love to see huge new supplies of rental housing be introduced.  It would clearly be a social good.  This would drive down costs.  Of course there are always impediments… people’s attitudes towards small places, zoning, skills, etc.  But on the whole it will be interesting to see how the housing cost curve is flatted out into the future.  And deploying labour on creating things (setting up a slew of apartments to bolster supply and drop prices) is an economically better move than sitting around and collecting (flip side: paying) rent.  Rent seeking is by definition is not a creation of wealth, just a transfer.  It’s a significant buzzword in the great Joseph Stigliz book that I’m reading right now, The Price of Inequality, so the concept is top of mind.  Regardless — apolitically — I think it’ll be a good day for society as a whole when rents and mortgages begin to fall much like food and clothing has for the past century.

As prices stabilize then fall, building heights will rise.  The Economist borrowed an unusually cool graphic for the piece titled The Other Mile High Club.  What is usual is the predicable double entendre to appeal to teenage boys.  In sum: awesome new elevators mean that buildings will get a LOT taller.  Take that, “not making more land” argument.

 

 

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