Browsing the archives for the Inflation tag.

Why is Ottawa Overpaying Developers for Land?

Green Reality, South March Highlands

The City’s scarce environmental purchase funds appear to be used to overpay Urbandale and other developers when buying lands designated Urban Natural Area (UNA).

According to the Oct 12, 2012 staff report to the City’s Finance Committee, the going price for environmental land acquisition is $160 K / acre which is up 50% over the originally budgeted amount in 2010.

Considering that UNA lands are already undeveloped and cannot ever be developed, you have to wonder how this exorbitant price increase was justified over only 2 years.

Even if staff are using recent price increases for developed land, the math doesn’t work.

  • According to the Ottawa Real Estate Board, the average price of resale homes in Ottawa increased only 2.3% in 2012 over 2011 compared to 7.7% in 2011 over 2010.
  • Inflating the 2010 budget estimate of $101, 250 / acre x 1.077 x 1.023 = $111,554 / acre  in 2012
  • So why are staff agreeing to pay $160,000 / acre?

But is it even believable that land price increases for developed real estate should be used to justify massive increase in value for land that can never be developed?  On what basis would any reasonable person expect there to be any increase in value at all beyond inflation?

  • Allowing for inflation results in only a compounded increase of only about  4%

So how can a price increase of 50% be rationally justified?

  • It seems that either the process is corrupt  or the City managers that are responsible for these funds are so incompetent that they should be dismissed.

A review of land acquisitions from 1998 – 2010 reveals that the most that the City ever paid in the past was only $86 K /acre and that the only transaction in 2010 was at $71 K / acre.

What seems particularly odious is that the same staff were busy justifying a price ranging between $231 K /acre t0 $363 K / acre in Nov 2010.  The Coalition to Protect the South March Highlands asked the City to purchase 74 acres of KNL’s land in Beaver Pond Forest prior to it being clear-cut:

  • KNL Phase 9 is 110 acres of which KNL had already agreed to convey 40% to the City for free as UNA
  • City staff had estimated the value of the remaining 66 acres at $18 M or $231 K / acre for unserviced land that had previously been designated as NEA prior to granting Campeau development rights in the SMH
  • Note that KNL is a joint venture between Urbandale and Richcraft.  It seems that Urbandale has remarkably good fortune in extracting top-dollar from the City for land acquisitions and that City staff are often willing to pay it.

Since UNA land cannot be developed, and tax assessments are supposed to be never more than 3 years out of date, why does the City ever pay more than the assessed value of the land for taxes multiplied by the appropriate inflation adjustment?

So it appears that staff has misled Council on several occasions:

  • By using an estimate of $100 K /acre in the 2010 budget when the City had only paid $71 K / acre that year
  • By reporting to City Council  in 2010 that a fair price was effectively $231 K / acre or higher when Council was deliberating on the Beaver Pond Forest acquisition
  • By consistently overpaying developers by 50% when acquiring UNA land post-2010
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Demystifying The Price of Gold

Economic Reality, Financial Crisis

Putting long-term savings into GICs is turning out to be riskier than investing in hard asset such as precious metals, land, or other commodities such as oil, copper, etc.

The World Gold Council just published a historical view of central bank “balance sheets” since the 2007 crisis: (click on the chart if you need to make it larger)

A central bank’s “balance sheet’ is a relative measure of money supply.  Although there are more exact measures of money supply, when you see a central bank’s “balance sheet” tripling in the case of the USA, or quadrupling in the case of the UK, it really doesn’t matter which one you use and this one is good enough to understand the price of gold.

The buying power of money over time reflects the forces of supply & demand in an economy.  Basically you have money supply on the one side and economic demand for money on the other (i.e. the size of the economy).  If these are not in balance, then inflation or deflation will occur.

  • Suppose a country has $1 T dollars and an economy measured using a hard asset (like gold) worth $1 T dollars.
  • If the economy grows, as it has since 2007, by roughly 2% compounded per year, it will have grown 10.4% after 5 years – i.e. to $1.1 Trillion.
  • If money supply had stayed constant, each 2007 dollar would be able to buy 10% more in 2012 than it did in 2007 since there is more economic value for the same amount of dollars.
  • But if the money supply tripled over the same time period, as it did in the USA, there would be $3 T dollars to balance that $1.1T in economic activity.
  • So each 2012 dollar is actually worth 1/3 x 1.1 = $0.37 compared to its buying power in 2007.

Can that be true?

  • Consider that the price of gold on Jan 2, 2007 was $639.75 in USD.
  • On Oct 18, 2012 it is $1752 in USD.
  • Deflating back to 2007 dollars, we get $1752 x 0.37 = $642.33!
  • Not quite spot on since we used an average of 2% for economic growth over 5 years instead of individual values.  But you can plainly see what has happened.

By inflating the money supply beyond the natural growth in the economy, the buying power of our long-term savings has dropped by 60%.  The reason why we haven’t seen prices radically increase depends on the type of good:

  • Any commodity which is consumed by economic activity (oil, copper, iron, etc.) will have its price primarily determined by the forces of supply and demand for that commodity (to establish a value) and secondarily by the buying power of money (to establish a price for that value).
  • As an example, we’ve seen a significant increase in the cost of oil & gas but this increase is also affected by global consumption of the fixed supply of oil.  Recently global consumption has been dampened by the global recession being experienced everywhere except Asia, causing a drag on what would otherwise be a soaring price.
  • A manufactured good contains both commodity and labour as inputs.  While the input commodity prices in a manufactured product like a refrigerator or car has increased, the labour cost has decreased since most manufacturing has moved to low cost labour centres such as China, Thailand, and Vietnam.
  • Cheap labour has acted as a brake on inflation in developed economies – effectively exporting the inflation problem to Asian economies.  As an example, the official inflation rate in China has been 2 – 4x the North American rate since 2007 and the actual rate is widely believed to be higher than the official numbers.
  • A precious metal such as gold, or a non-consumable good such as land, will act as a perfect reflector for the buying power of money.  For example, although the value of land in the USA was artificially depressed by the explosion of the housing market bubble in 2007, the price of housing in economies unaffected by that crash, such as Canada, has soared.
  • Much of this increase is not due to another bubble forming, but due to the decline in the buying power of the dollar.  In other words, the house is still worth what it was in 2007, it just takes more 2012 dollars to buy it since a 2012 dollar buys less than a 2007 dollar.

So if you think that the banking crisis is over in Europe and that the USA can afford its ridiculous debt levels without either raising taxes or cutting military spending, then go ahead and invest your hard-earned savings in GICs.

Or you can invest some of your savings in gold as a safe hedge against further erosion of your buying power in future.

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US Inflation Warning

Financial Crisis

Although economists were expecting a $23 billion inflow of capital due to foreign purchases of all US securities, recent Treasury International Capital data showed there was a net outflow of $31.2 billion.

This means that foreign investors are less willing to subsidize the US economy in general.  An important subset of this total is the market for US Treasuries and T-Bills since the market for this debt sets the interest rate benchmark for all other debt.

China is the single largest foreign holder of US Treasury debt – to the tune of $776 Billion out of a total of $3.4 Trillion and China reduced this holding by approx $25 B from May to June 2009. Interestingly  Russia, the 7th largest holder of US Treasuries, has also reduced its holdings by $20 B since March.  Maybe the commies aren’t so dumb when it comes to economics after all.

As China’s appetite for U.S. Treasuries wanes the yield for U.S. Treasuries will have to go up. This will suck more money out of the economy just as the Fed is trying to pump it up to prevent further economic collapse.   The other alternative is for the US to devalue its currency either overtly (not likely) or with the help of inflation (far more politically expedient).

This is bad news for the Canadian high tech and manfacturing sectors that depend heavily on a low Canadian dollar.  A devaluation of the USD means a higher Cdn dollar and also the illusion of higher prices for oil, resources, and gold which are normally denomiated in USD.

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