Blessed by the Potato

Partly for the laugh, Wayfare gave me a book of mortgage payment tables for Potatomas. For those of you not familiar with these tables, they date from a time before spreadsheets and online java calculators, when if you wanted to know what the monthly payment on a mortgage of a certain amortization at a certain interest rate would come out to, you had to run the calculation by hand. To help, tables were drawn up with the figures pre-calculated so one could just look up the value rather than calculating it. It was published in 1981, and has tables for 9% interest through 30% interest, in 25 bp increments. Interest rates below 9% were so unfathomable that they didn’t bother to print them in the book.

I’m not sure what the lesson there is: whether these current low interest rates are indeed so far below the historical norm that people should be prepared for higher rates in years to come, or the opposite: that times change, and now 9% is unfathomably high, and I shouldn’t keep trying to warn people about rates that aren’t likely to be seen again.

Anyhow, I wanted to explore a little bit the idea of risk and the housing bubble. This is based a bit upon some percolation of recurring themes here, and a bit upon some things people are saying on the internet (because no one in real life wants to talk to me about housing anymore).

First we really have to try to understand risk. Everyone has at least a little bit of gut feel for what risk is, and how some things are riskier than others. But everything has some form of risk to it: even GICs risk not keeping up with inflation, or in large concentrations, outliving your money. Volatility is sometimes used as a proxy for risk, in part because it’s easier to measure. But volatility doesn’t tell the whole story of risk, not by a long shot. If I’m talking about risk being the potential for permanent loss, for turning your life inside-out and just ruining your whole day, then volatility isn’t really a good measure of that at all.

If you look at a graph of the Toronto housing market over a number of years, it’s this incredibly smooth line moving up from the late 90’s to the late 00’s, and even beyond that there’s this smoothed bump in the 80’s and a little wiggle at the end in ’08/’09. So in terms of volatility, housing doesn’t look risky at all. Yet to my mind, it really is. One part of that is how the lack of volatility works against it when there is a crash. Go back to the last crash in ’89. If you were unlucky enough to buy at the top there, you’d see the value of your home decline some 30%, and stay down for years. It would take well over a decade to get back to break-even.

“But,” the people say, “why would I sell then?” And that’s a very strange question, because those same people often don’t have the same pragmatic zen attitude towards stock market corrections. With housing, you can be forced to sell when you’re underwater, for the usual reasons: job loss, move, family circumstances change, etc. When the stock market crashes though, you don’t have to sell your stocks (except for margin calls), unless you’re already retired. Heck, you can even rebalance and buy more.

The stock market by comparison is far more volatile, on any timescale. There have been 3 separate crashes in the Toronto stock market since the 1989 Toronto housing market crash. And the severity can also be frighteningly worse, about 50% top-to-bottom in the last crash. But, the recoveries are far snappier: not even counting dividends, someone unlucky enough to invest at the very peak of the market in 1989 was made whole by what looks* to be 1993; someone concerned with getting back to the 2000 peak found it in 5 years. Though we haven’t quite gotten back to the peak of mid-2008, in just 2.5 years we’re down less than 10%, and I’m pretty sure another 2.5 will find us back up there (and that’s not including dividends). Yeah, stocks are more volatile, but that works both ways, which means those crashes are both more frequent but also transitory. And you don’t have to buy in one chunk and get unlucky and find yourself at the peak (like with a house) — you can buy in year after year, so the real-life situation isn’t even this dire (as one would hope, since your investments are supposed to make you money). With diversification and rebalancing, you can do even better than the straight index.

But there’s still the fairly legitimate idea that stocks are risky: they can go to zero. Nortel went to zero, and that event seems to be burned into the Canadian mindset. “Can you point me to the house that went to zero?” Well, individual stocks are risky, but portfolios much less so. Even in one of the worst stock market declines in recent memory, a diversified portfolio was only down by about half, and much less if you had bonds too, and even then only for a short period of time. Think not so much of the house that went to zero, but the roof, or waterheater, or deck that became worthless. They’re just components of the overall investment, which as a whole is not as risky as the sum of its parts.

Leverage and familiarity of course play into the real and perceived risks: because of the high leverage employed these days (5% down baby), I’m deathly afraid of the potential for real estate to ruin your whole life. Because it’s strange and foreign, people in general are afraid of equities: the concept of distributed ownership in hundreds of companies is alien, and not in the daily experience of most people (or even in their educational readings), but everyone knows about houses (in fact, I’m writing this rant while sitting in one). However, the lack of volatility, and the last crash taking place when my cohort was still in elementary school can lead to some false complacency on the matter.

I’ve mentioned before that if real estate is overvalued by 30%, and if the typical family spends about 30% of their income on housing, then if they buy in too close to that peak, that leads to about 10% less money in the budget — about what people save for retirement. Even though it’s not so expensive that you can’t afford to put a roof over your head (that would probably bring an end to the bubble), it’s pricey enough to impact your financial health for essentially the rest of your life, which is why I waste so many electrons on this. It’s legitimately important, and it can be controlled.

I don’t know how to get people comfortable with stocks though, because it’s a fair point that if you don’t save and invest the difference when renting, the benefit isn’t really there (though even just saving in a savings account may be attractive if housing is overpriced enough relative to rent). On the one hand, equities are the riskiest, most volatile class of investments. Indeed, Mandelbrot suggests they may be even riskier than we first imagine. On the other hand, they’re not all that risky when diversified and held for very long periods of time (and as youngish folks, we have very long periods of time on our hands). Combined with the fact that it’s cheaper to rent right now, renting and investing the difference really looks to be the less risky path. Though the English language has the expression “safe as houses”, it’s not true all the time, and blind faith in real estate is in my mind, one of the most risky notions facing young Torontonians and Vancouverites.

* – Sorry, I just have a (not particularly great) graph for data that old.

The look of Thunderbird has changed a bit in the latest version. One thing I didn’t like too much was the moving of the “reply” buttons to the top of the email reader pane instead of the toolbar at the top of the overall program window, where it lived forever. However, there are two neat new features that I really like: there’s now an “archive” button to quickly move your mail into an archive folder (email takes up so little space compared to today’s harddrives that there’s little sense in ever deleting anything that you might want to get back to), allowing you to get something out of your main inbox without deleting it or doing the ever-so-slightly longer “move to…” process. I find I’m more likely to hit “archive” than I ever was to hit “move to…”.

The other major advancement is a quick key-word checker that looks for words like “attached” in your email. If it sees that and you try to send your message without an attachment, it’ll give you a quick “did you forget to add an attachment?” reminder before final send-off. This is the biggest, epicest, most important advancement to the email client interface since the invention of searching. I can’t believe it’s taken nearly 17 years since the invention of email attachments for someone to come up with this simple, handy checker. Yet, I didn’t come up with it, either, so there we have it.

Whoever developed this deserves an award of some sort, perhaps the Nobel Peace Prize.

“The Peace prize, seriously?”

Yes, imagine all the suffering and wars that could have been averted if people just remembered to include attachments on their emails! Picture it: the North Koreans plan an artillery test, and to set the South Koreans’ minds at ease, they send out a quick email to note the event, with an attached schedule and an invitation pass for an observer… except the attachment isn’t included! The SKs think it’s a deliberate ploy to keep it a secret and launch an attack, so they increase patrols to keep an eye out for suspicious activity. The NKs in their paranoia meanwhile, think that the increased activity to the south is really a prelude to invasion while their artillery is loaded with practice shells, so instead load live ammo into the guns… and it all quickly goes to hell in a hand-basket.

This won’t happen now thanks to the attachment checker in Thunderbird.

I very nearly bought a Honda Civic Hybrid to replace my Accord when it was stolen in 2006. The HCH was every bit as driveable as a regular Civic, got great gas mileage (on par with the 2nd gen Prius), and was cheap enough that it made financial sense even with sub-$1 gas prices (though that was due in large part to the federal and provincial rebates available at the time, and the small-ish markup over the Civic LX model). However, it was stricken from our list of possibilities due to the compromises in storage space: the battery in the trunk ate up about a third of the trunk space, so that sunk the deal right there.

The Prius, being a versatile hatchback and custom-designed around its hybrid system, outsold the pants off the HCH. There was speculation as to why this was, often with people saying that because the Prius was a unique, hybrid-only model, buyers were choosing it for the “statement” it made — it was recognizable as a hybrid. Myself, and others interested in the Prius thought that was hogwash. Indeed, not only do I not care about the “statement” my car makes about me, I’d prefer if it blended in and looked more like say a Matrix. It was simply a practical car that required very few sacrifices for the hybrid technology, unlike the other models. This was largely with respect to trunk space, helped by the hatchback design.

So Honda came out with the Insight-II, a car that at first glance looked like a mini-Prius. Unfortunately, there were some bizarre design decisions: the hybrid system looked to be more primitive than the one Honda had been running on the HCH for a few years: if you came to a stop and the engine turned off, so did the air conditioning. The fuel economy was worse than in the larger HCH. The interior “felt cheap”. The price tag, while lower than a HCH or Prius, was still too high for such a small car, with such a small improvement in rated fuel consumption over its smaller competition (e.g., the Fit). Plus, right around the time it was introduced, the federal government canned the EcoAuto rebates.

Oddly enough, Honda looks to have continued this trend of making their hybrids worse and cheaper with the new 2-seater CR-Z. They also went back to a manual transmission, and while there are some die-hard 2-seater gearheads that simply must have a manual, any failures in the early Insights and HCHs (gen I) were much more likely to occur in manual transmission cars. That decision may bite them in the butt further down the road. It scored so low in their testing that Consumer Reports can’t recommend it. (Though to nit-pick on CR’s post, many cars have absurdly low rated weight capacities, due to how those are calculated and the margins of safety that go into them).

I don’t understand why Honda is not getting this right — why each successive iteration of their hybrid system seems to be worse than what they had in 2006 with the HCH.

Someone made the grievous error of giving me Civ5 for Potatomas before my thesis is finished. Civilization games take hours to play through, even on the fairly fast settings, which is valuable time I should be spending thesising. Nonetheless, I couldn’t help but play a game or two over the holidays here, and I have to say I was fairly disappointed in this entry to the long-running series.

For those unfamiliar with the games, Civilization takes you through the development of a civilization from the stone age (arbitrarily set at 4000 BC) to the modern day (the game ends when game time hits 2050 AD). You explore the planet, found cities, build armies, negotiate with other civilizations, ward off barbarians, and develop the land to become more productive. All along you research new technologies and advance your civilization, so that at the beginning you may send out archers and axe-wielding warriors, and by the end you’re commanding aircraft carriers and tanks (or new to Civ 5, Giant Death Robots). Your diplomatic options also evolve: you can’t share maps before you learn how to draw one, and resource-sharing treaties have to wait until your civilization develops writing abilities.

Anyhow, that’s the gist of it, and each entry in the Civ lineup has tweaked the formula in some way. There are a lot of changes to the formula in Civ 5:

The good: I particularly like the switch to a hex-grid. Sadly, that’s about all I can say was definitely an improvement to Civ 5.

The mixed bag: The game has reformulated the way armies and units work, so that units no longer stack: that is, you can’t have more than one unit on a single game space. This means that armies are generally a lot smaller than the massive forces that were sometimes built up in previous iterations, which saves a bit on the micro-management during war. Adding to the unit count reduction is the fact that cities can quite effectively defend themselves. The game now models a defensive force/militia/garrison of some sort so you don’t need to manually build units to defend your cities. Cities are tough, too: you can’t take one over with a single group of rampaging horsemen. Unfortunately, cities don’t build up that toughness over time very much (there is a bit of improved defense as a city grows), so if an enemy player sneaks in a settler to build a city where you wanted to build one, it’s immediately very tough to get rid of, and you’ll have to summon the whole army up instead of just picking it off with a spare unit or two.

The resource system has changed so that instead of just needing to find a source of a particular strategic resource, those resources are rationed: some iron mines only contain enough ore to outfit two legions of swordsmen, some have enough for eight, but just getting an iron mine is not enough to build strategic units willy-nilly. This isn’t too much of a restriction since I’ve found there are fewer units in play anyway, but one weird twist is that you also require continued access to that resource to keep your units working (if you lose your iron mine, your swordsmen fight at reduced strength).

The broken: Unfortunately, a lot is broken in this instalment of Civ, and it’s now uninstalled (also good for thesis willpower). If I ever get the hankering to play again, I’ll probably go back to Civ IV. Continuing with the changes to the formula first:

The empire happiness scoring has been changed: no longer is it on a city-by-city basis, but you must keep your empire as a whole happy, or the whole thing collapses into unproductive rioting. The collective scoring part isn’t so bad: it actually relieves some of the city micromanagement required to keep cities happy. However, the system is terribly, horribly broken when it comes to conquering cities: a conquered city provides a relatively huge amount of unhappiness to your empire (vs the old way of just the conquered city being unhappy and unproductive). If your empire racks up too many unhappy points, you slip into riots, rebellions, and civil war. The only way I’ve managed to do this so far has been by winning wars. Oddly enough, your citizens seem to be happier when you lose wars, or at least win slowly enough to integrate the new cities one-by-one. One time I was dominating another (AI) civ in battle: he had no army left. He offered peace, surrendering all but one of his cities in the process. Even though the cities were handed over as part of a peace talk process, there was just as much unhappiness as if my tanks had rolled in as conquerors. The collective hit from all those cities at once sent my empire into a civil war — this, the result of winning the war the other player started? So yeah, the happiness system is totally broken as of right now.

The purchase/hurry system from previous Civs is gone. It used to be that you could build stuff in your cities (military units, city improvements, etc) either turn-by-turn based on the productive output of the city, or you could spend gold from your empire’s treasury to have the project finished immediately. If you started building it normally, but wanted it done sooner, you could just pay a small bit of gold to hurry up the completion, depending on how much work had already been completed. No more: now, even if you’re 99% done, it still costs the same amount of gold to hurry production as if you had started from scratch. And, it doesn’t appear as though you get to carry-over production to the next item in your build queue if you do hurry (or cancel) the current project.

Rule changes aside, the game is broken in a number of other ways. For starters, it’s just plain buggy: though I’ve only had two all-out crashes, I’ve had a number of minor game bugs, most notably in the graphics department (ghost images being torn across the screen, etc.), but also a few game bugs (like harbours being blockaded by ghost ships). The game is inexcusably slow too. I have, IMHO, a reasonably bitching quad-core desktop gaming rig. Nonetheless, it takes forever to process a turn. I have all the graphics settings on low, and still sometimes when I scroll the map too fast, I get blank spots that then slowly paint in. That’s just ridiculous, especially since the graphics don’t look any better than they did in Civ IV. The AI has been screwy too: a few times now other civilizations I’ve been nothing but nice to, who are vastly weaker and less advanced than I am, will just up and declare war on me for no reason at all, and then I go out and trounce them. One time, a civ came to me and offered a diplomatic deal. I hit “accept”, without modifying the deal at all, and the AI refused, saying it couldn’t accept “my” terms. Huh?

In the end, I can’t recommend Civ 5 even to Civ fanatics who will probably play it anyway. The game came out a few months ago, and there have been a few patches to fix some of the previous issues… but the game still needs a lot of work before it’s ready.