A January tradition - complaints about rising rents

Looking back at last January, I wrote a post on rising rents in Auckland as it was dominating local news. This January, we see the same complaints. What's going on? Pretty much the same story as last year. Here's what I said then:

A simple market diagram helps explain why rents are increasing in Auckland (see below). House price inflation is high - and the cost of the house (e.g. mortgage repayments, council rates which are linked to increasing house values, and insurances which are similarly linked to increasing house values) is the greatest contributor to the costs of landlords. So, because landlords' costs have increased the supply curve shifts up and to the left from S0 to S1 (which we refer to as a decrease in supply - at each and every level of rent, landlords are willing to supply fewer properties to prospective tenants). On the other side of the market, demand has increased from D0 to D1 - largely because of greatly increased immigration (although there are a large number of students looking for accommodation at the start of the new year, there is probably a similar number of students whose rental contracts are expiring). So, a decreased supply and an increased demand leads the market (in the diagram below) to move from the equilibrium E0 to the new equilibrium E1, where the equilibrium rent is higher (R1 rather than R0). Note that because supply and demand have both shifted, the effect of these changes on the number of rental properties available is ambiguous (it could have increased, decreased, or stayed the same, depending on the relative size of the shifts in supply and demand) - though on my diagram the quantity of rental properties has increased slightly from Q0 to Q1.

The Herald article basically lays out similar issues to last year:

It [Auckland Property Investors Association] said landlords were also being forced to increase rents to cover mortgage repayments, higher council rates and the other costs that came with owning a house.

So decreased supply (from S0 to S1). And:

...this month's expected influx of tenants coming to the city for new jobs, or a new year of study, pushed up demand.

So increased demand (from D0 to D1). The predicable result? Increased rents (from R0 to R1).

Is there something special about January that leads to these stories popping up at this time of year? Possibly in areas that have high student populations. See for example this graph of rents in Wellington and Dunedin from Herald Insights:

However, the general pattern of rent increases is much less seasonal:

I suggest you have a play with the graphs on the Herald Insights page. Perhaps the most surprising thing is that Hamilton doesn't exhibit the same strong seasonality in rents as Wellington and Dunedin. That seems difficult to explain.

Is your FoMO making you do stupid things when drinking?

I'm back after a refreshing holiday break, and back into trying to catch up on my reading. One thing I did read during the break though, which seemed appropriate in the aftermath of New Years Eve drinking, was this new paper by Benjamin Riordan, Jayde Flett, John Hunter, Damian Scarf, and Tamlin Conner (all University of Otago) on the relationship between Fear of Missing Out (FoMO) and drinking behaviour. Otago University put out a press release about the research at the end of November.

Essentially, the authors undertook two studies - one with a group of psychology students (Study 1) that was based on retrospective reporting of behaviour, and one with a more representative group (Study 2) that was based on a daily diary. They found that:

Overall, there was no relationship between FoMOs scores and weekly alcohol use or drinking frequency in either Study 1 or Study 2. There was also no relationship between FoMOs and average drinking session quantity in Study 1; however, there was a significant relationship between FoMOs scores and drinking session quantity in Study 2...

Moreover, in both studies, FoMOs was significantly associated with a higher number of negative alcohol-related consequences participants had experienced in the last three months.

In other words, people who rated higher on the FoMO scale (FoMOs) did not drink more, or drink more often. The significant effect on drinking session quantity for Study 2 is based on a correlation which doesn't control for any other variables so is pretty weak evidence. And yet, even though they didn't consumer more alcohol, people who rated higher on the FoMOs suffered more negative alcohol-related consequences.

One might rightly ask: "What is the mechanism that underlies this result?". Unfortunately, the study doesn't give any guidance on this, although the authors do speculate:

Firstly, given that FoMO is inherently social in its nature, it seems plausible that a higher drive for rewarding social experiences may lead those higher in FoMO to take more risks or engage in higher risk drinking activities in order to maximize socialization opportunities (e.g., playing drinking games, drinking in unfamiliar locations, etc.)...

And yet, those higher in FoMO somehow manage to engage in higher risk behaviour while drinking no more than people who are lower on the FoMO scale? That might be a stretch. What about:

Secondly, those higher in fear of missing out who are motivated by the need for rewarding social experiences may be more sensitive to social information, particularly cues to their social inclusion/exclusion and behaviors that could compromise their social position...

This seems more likely - that people who have higher FoMO are more likely to do stupid things when under the influence of alcohol, which they later regret. So, the takeaway message from this study is to watch out for your FoMO friends during the summer festival season!

The black market in WINZ payment cards

One of the common examples I use in illustrating the role of incentives for my ECON110 class is the black market in WWII Great Britain. In short, many products (e.g. meat) were rationed. Essentially each household registered with their local shops, and the shops were provided with only the amount of meat for their registered customers. However, some households would prefer less meat and more sugar, so a complex system of black market trades started to occur, whereby households could obtain the goods they actually wanted, rather than those the authorities deemed they should have (you can read more here).

Black markets tend to arise whenever the government limits what citizens are allowed to spend their money on. For instance, in the U.S. food stamp programme (a.k.a. Supplemental Nutrition Assistance Program, or SNAP) many recipients sell their SNAP vouchers for cash, often with the complicity of shopkeepers (see here and here for example).

And now we have a local example, with payment cards from Work and Income New Zealand (WINZ) showing up for sale on Facebook. The New Zealand Herald reports:

Work and Income payment cards are showing up for sale on Facebook trading groups.

In a screenshot provided to the Herald, one person offers a $100 payment card for sale for $40 on the "Buy and Sell Hamilton" Facebook group.

And this is in spite of WINZ attempts to make it difficult for this sort of abuse:

When a card is issued, the recipient must sign it and payments are verified by matching the signature on the receipt to the back of the card.

Grants for food and hardship must be used within three days. 

Of course, setting rules on what payment cards can be used for makes them less valuable to the recipients than cash. It also increases the costs to the government because of the need to enforce the rules. And there needs to be some form of sanctions for recipients who break the rules. Having sanctions increases the cost of abuse for the payment card recipients, by making abuse more difficult (increasing the change of being caught). Presumably there are also penalties for the person who buys and tries to use a payment card in the name of someone else (under fraud laws I expect).

The payment card will only be able to be sold for less than face value, partly because the recipient (seller) probably wants cash fast (so is willing to give up some of the face value of the payment card for cash in hand now), and partly to compensate the buyer for the risk they face (of penalties for fraudulently using a payment card in the name of someone else).

The more urgent the sale (within less than three days), or the more costly the penalties for the buyer, the greater the difference will be between the face value of the payment card and the price it will be sold for. And so, we end up with the situation where a $100 WINZ payment card is being sold for $40.

China's zombie companies are playing chicken

Earlier this month, Andrew Batson wrote an interesting blog article about China's zombie companies:

One of the more interesting developments in official Chinese discussions about the economy has been the appearance of the term “zombie companies”... money-losing companies that seem to stay alive far longer than economic fundamentals warrant. This problem is particularly acute in the commodity sectors: a global supply glut has driven down prices of iron ore and coal to multi-year lows, levels where China’s relatively low-quality and high-cost mines have difficulty being competitive. And yet they continue operating despite losing money, because it is easier to keep producing than to completely shut down.

In ECON100 we no longer cover cost curves in detail, so we also don't talk about the section of the firm's marginal cost curve where it makes losses but prefers to continue trading because the losses from trading are smaller than the losses from shutting down. However, this is exactly the situation for China's zombie firms. As Batson notes:

An excellent story this week in the China Economic Times on the woes of the coal heartland of Shanxi quoted one executive saying, “If we produce a ton of coal, we lose a hundred yuan. If we don’t produce, we lose even more.”

Another aspect of the reluctance of China's zombie companies to shut down is strategic, and in this case it may be that the zombie companies continue to operate even if their losses would be smaller by shutting down. What the zombie companies are doing is playing a form of the 'chicken game'. In the classic version of the game of chicken, the two players are driving cars and line up at each end of the street. They accelerate towards each other, and if one of the drivers swerves out of the way, the other wins. If they both swerve, neither wins, and if neither of them swerve then both die horribly in a fiery car accident.

Now consider the game for zombie companies, as expressed in the payoff table below (assuming for simplicity that there are only two zombie firms, A and B). If either firm shuts down, they incur a small loss (including if both firms shut down). However, if either firm continues operating while the other firm shuts down, the remaining firm is able to survive and return to profitability. Finally, if both firms continue operating, both incur a big loss.

Where are the Nash equilibriums in this game? To identify them, we can use the 'best response' method. To do this, we track: for each player, for each strategy, what is the best response of the other player. Where both players are selecting a best response, they are doing the best they can, given the choice of the other player (this is the definition of Nash equilibrium).

For our game outlined above:

1. If Zombie Company A continues operating, Zombie Company B's best response is to shut down (since a small loss is better than a big loss) [we track the best responses with ticks, and not-best-responses with crosses; Note: I'm also tracking which payoffs I am comparing with numbers corresponding to the numbers in this list];
2. If Zombie Company A shuts down, Zombie Company B's best response is to continue operating (since survival and profits is better than a small loss);
3. If Zombie Company B continues operating, Zombie Company A's best response is to shut down (since a small loss is better than a big loss); and
4. If Zombie Company B shuts down, Zombie Company A's best response is to continue operating (since survival and profits is better than a small loss).

Note that there are two Nash equilibriums, where one of the companies shuts down, and the other continues operating. However, both firms want to be the firm that continues operating. This is a type of coordination game, and it is likely that both firms will try to continue operating, in the hopes of being the only one left (but leading both to incur big losses in the meantime!).

What's the solution? To avoid the social costs of the zombie companies continuing to operate and generating large losses, the government probably needs to intervene. Or, as noted at the bottom of the Batson blog article, mergers of these firms will remove (or mitigate) the strategic element, which is the real problem in this case.