Wednesday, December 06, 2006

growing pains

source

Ow. It is beginning to hurt here.

This is another article exerpted from the December 2006 issue of BC Business. More indication of a gutted city?

Could B.C.’s economy overheat?

Bill Good

Have you noticed the signs in windows lately? “Help wanted.” “Now hiring.” They are everywhere. And just a few years ago, there were no jobs...even highly qualified university grads were having to line up for jobs driving cabs or flipping burgers. In 2001, the government introduced the six-dollar-an-hour training wage, much to the horror of the labour movement. It was a move intended to encourage companies to hire students...but today the tables have turned. It’s employers who are desperate for workers, and not many can attract them by paying a measly six bucks an hour. In fact, the government is now contemplating dropping the training wage because it has become irrelevant. Who’d have thought an economy could be too hot? When you have an unemployment rate of about five per cent, it means nearly everyone who wants to work, or can work, is working.


Problem is, they are working for peanuts. Can housing costs hit the stratosphere without all else following? This carousel is broken. Note - I earlier made a comment about housing and fuel not being calculated in the CPI. That was erroneous. Thanks to VHB for pointing that out to me.

Come to Vancouver and buy a sickeningly over-priced home, just don't expect to be able to get a pizza, or a burger, or a coffee, because there is no one to serve you. The only solution that businesses have is to crank up prices - which will put them out of business.

People have been thrilled by their paper gains on RE, but that vision is myopic. People cannot afford to run businesses here, so what will our city become? A hollow shell, me thinks. A bunch of RE perched on the edge of the Pacific.

Nat Bastone, president of Nat’s New York Pizzeria, fears he’s going to lose his business because he can’t find staff. He hasn’t received a single application for a much-advertised job. Positions that used to be filled by word of mouth are getting no response. Nat’s hasn’t been a struggling business, anything but: his sales have increased every year since 1992. But his shop is in Kitsilano, and that’s expensive real estate. Young people can’t afford to live there, at least not on service-industry wages.


So what is so great about this booming economy? Young people are the back-bone, and the future of our society. I see a ghost town in the cards if something doesn't give. freako speaks of zero-sum games, but this is looking an awful lot like a negative-sum gain.

B.C. Federation of Labour president Jim Sinclair wants the minimum wage raised by two bucks. But are you willing to pay a lot more for pizza? I’m sure Tim Hortons could raise the wage it pays, and so could Starbucks or Blenz, but how much more do you want to pay for your latte or sandwich? The owners of the pizza shop work 14-hour days, six days a week and are worried sick that they can’t make it work. What are the answers? Higher minimum wages and the higher prices that come with them? Encouraging seniors to come back to work to help fill labour shortages?


Well, if a crack-shack on the East side is worth a half-million dollars, surely we can pony up ten bucks for a coffee. We can just crank up the rent on the basement suite to cover that. Then, they'll need to raise those wages even more, and a cuppa joe will be fifteen bucks. Hell, if the housing prices can increase ad infinitum, why not everything else? Growth is good - right?

I don’t know how many seniors feel like flipping burgers, but perhaps some might be bored or in need of some extra money to top up their pensions. We might have to encourage more unskilled immigration, too, but those immigrants are still going to face the challenge of living in Canada’s most expensive city.


Seniors will flock to Vancouver to fill those jobs, and to buy up Shaughnessy while they are at it. Bring the grandkids. They can only make so much working in the cheaper cities of Toronto, Montreal, etc. I'm sure that they will be pulled here by our higher wages. If that doesn't work, we can pull in unskilled immigrants. They will be glad to come here to McJobs. Hindus might have a bit of an issue with flipping burgers though.

I spoke with the premier recently, who told me one of his concerns is that we will have a million new jobs coming down the road in the next decade, but lack the population to fill them.


A million new jobs? Is the premier smoking Basi's weed? Or is he still drunk from one of his Hawaiian vacations? A million jobs on the way? I'm speechless at that mendacity. Mind you, I haven't been drinking the water.

The front end of the baby boom is now hitting 60, and as those people move through the next five years, most will be planning to retire. Already, we have a shortage of doctors, and nurses. That’s going to get worse over the next decade right when most of us will start needing far more medical care than we’ve ever needed before. University professors will be retiring in record numbers. Police and firefighters are aging and the next generation just doesn’t have the numbers necessary to replace them. Have you looked at the lineup of motorcycles on a B.C. ferry lately? Even the bikers have grey hair, if they have any left. It looks like even the Hells Angels are going to face a demographic problem.


But I'm sure all of those seniors won't need any services. Plus, they will be easily cowed into taking what they can get.

How can this keep going? It can't. The only logical outcome is a reversal of "fortune". That means a severe correction in RE prices.

My head hurts.

17 comments:

Babybull40 said...

I will be freezing in hell before I would work for a mere $6.00 an hr.. shame.. shame.. regardless of this program to hire students.. that is still considered to be way under the poverty line..Ontario is over $8.00 an hr for mininum wage as sof Feb/07 and that is still not good enough.. There are jobs everywhere.. but the pay does not equate with the work load for most businesses.Most places are about $8-10 dollars an hour.. unlike Mcdonalds.. but they offer incentive programs for students..So unless you want to make that amount you will never get ahead..

noturaveragebear said...

I don't think it matters what the minimum wage is. It isn't the boom creating these problems. there is a free market if Nat needs help he needs to pay more. He isn't a prisoner to minimum wage. Also who says prices have to go up. The premium on starbucks and other business' are high. There is room to raise wages and still make profits. If there is no margin then yes prices go up. But this is not what dictates prices at those places again the free market does. IF they could raise prices and lose no customers they would already have no matter what their labour situation is. The problems outlined are not a result of a boom but of a false one. The jobs mostly created are service jobs. It goes to show we have mostly a recreational economy. Come to vancouver to ski and hang out at starbucks. If we had real industry being created then hey the inflation would be justified. Rising prices with rising wages nothing wrong with that. But this boom is a false one and that is why it seems like a lose lose situation.

solipsist said...

Good point n.a.b.

The thing is that the stock-holders expect ever-increasing profits, and if they start paying higher wages, those profits will lessen. Obviously Nat would not be in such a predicament, but would see his own standard of living pinched to some degree.

Coffee and pizza both have fairly hefty profit margins (amongst the best in fact), but still, someone, somewhere will have to pay.

In the long run, housing (especially) and fuel are not really discretionary expenditures, and when they become "unaffordable", something has to give.

It is a false boom. No argument there at all.

Van Housing Blogger said...

Housing and fuel are in the CPI.

Van Housing Blogger said...

PDF source for above claim.

solipsist said...

Thanks VHB. I guess I got "core" CPI mixed up with CPI?

I'm no economist.

Details always annoy me so. It's so much more fun living in my own little world...

Freako said...

"I don't think it matters what the minimum wage is. It isn't the boom creating these problems. there is a free market if Nat needs help he needs to pay more"

Yes, that is the point. This is similar to the Whistler situation with the local businesses pointing the finger at greedy landlords.

If they can't fill their vacancies, they aren't paying enough. That simple. The "I can't afford to pay above minimum" argument is utter crap. You pay what you have to pay to get what you need. What you want to be and what is are different things.

"Obviously Nat would not be in such a predicament, but would see his own standard of living pinched to some degree."

Nat is oblivious to market forces (or pretending to be). He is not paying the going wage. Refusing to do so WILL NOT stop his own standard of living from being pinched. That is pure denial of reality, much as RE sellers may refuse to accept a loss by not selling.
As for housing and CPI, I am in total agreement with the American model which looks only at rent equivalents. It is called the CONSUMER price index. Renting is consumption. Owning is renting and investing. CPI cannot possibly include investment assets or the numbers will be meaningless.

solipsist said...

CPI cannot possibly include investment assets or the numbers will be meaningless.

Thanks for posting freako.

Could you elaborate on the above statement?

I have obviously never made the effort to understand CPI, etc. (I tend to look at the big picture - it is a lot more peaceful out here on Neptune).

Are you saying that all of the investments condo's and such are calculated in CPI, and thus skewing the numbers? Would this make inflation appear to be higher? Or lower?

I agree about Nat, Whistler, etc. I think that it is ridiculous that people pay the minimum wage mandated by law. Employers have the choice between paying enough to attract workers, or not having workers - especially in businesses that have high profit margins. We pay casual labour $20/hour. Because they do not get reliable hours (or long ones), we have to make it "worth their while".

I ought to get back to the funnier side of things and leave this esoterica of economics alone (hear my self-deprecating laugh).

the pope said...

I spoke with the premier recently, who told me one of his concerns is that we will have a million new jobs coming down the road in the next decade, but lack the population to fill them.

If they don't pay enough to live they aren't jobs, they're hobbies.

Freako said...

"Could you elaborate on the above statement?"

When you own a house you are only "consuming" the equivalent of the rent. CPI measures the cost of living. Houses appreciate because it carries benefits far into the future. Therefore, house prices going up does not represent conumer inflation any more than Google stock going up does.

"Are you saying that all of the investments condo's and such are calculated in CPI, and thus skewing the numbers? Would this make inflation appear to be higher? Or lower?"

No, prices are not included. Canadian CPI has some uses a combination of factors, the main one being ownership costs (I think). Neither country uses direct price levels in CPI calculation, so they are probably fair in that sense.

solipsist said...

Thanks for posting Your Eminence The Pontiff.

I'm sure you are absolutely correct about the hobby thing.

That's why seniors flipping burgers and slinging java makes so much sense. They need hobbies, and macrame is sooo 1970's.

Thanks to you too freako, for your elaboration.

Therefore, house prices going up does not represent conumer inflation...

Maybe not represent consumer inflation, but surely it has an effect on it. i.e. - increasing house prices are reflected by assessments, and the rise in asessments is reflected by a rise in property taxes, which will be allayed by an increase in rents, which will necessitate an increase in wages, which will be reflected by an increase in the prices of other things in "the basket".

This is where I get lost in how inflation is calculated, and controlled.

I do understand that the value the dollar is contingent on controlling interest rates (adjusting either way), which also controls unemployment, etc. I read somewhere, some years ago, that the gov't likes to keep unemployment levels at a certain percentage (through interest rate movements) in order to control the dollar. I never took the time to muddle through that, but it seems as if the gov't (BoC?) may be meddling a bit too much(?), or that other (market) forces that cannot be controlled are exerting influences. Is the grip that the gov't has more tenuous than simpletons like me understand?

Is it that the globalization of economies is lessening the influence of the central banks?

Freako said...

increasing house prices are reflected by assessments, and the rise in asessments is reflected by a rise in property taxes, which will be allayed by an increase in rents, which will necessitate an increase in wages, which will be reflected by an increase in the prices of other things in "the basket".


I am no fan of cost plus economic arguments. The pricing power isn't there. Landlords cannot simply add on expenses. And even if that was possible, why would he would he feel that he has a cost to pass on if his property is up x dollars, and the tax bill is up a small fraction of that. By that logic, he should give the renter a discount.

Second, while no expert on property taxes, I believe they are relative. ie. rising property values by themselves should not increase property taxes.

solipsist said...

Landlords cannot simply add on expenses.

Perhaps not, but it looks as if some of the rental rates are an attempt to do so. It was used as part of the rationale of "my" landlord for trying to crank my rent by over 10%. I did shut him down, and suggested that I was entitled to a rent concession, and received no increase in the end.

Second, while no expert on property taxes, I believe they are relative. ie. rising property values by themselves should not increase property taxes.

I'm no expert either, but I do know that prop. taxes are relatively "cheap" in Vancouver as compared to municipalities in the GTA.

I also know that Vancouver was talking about a 6% increase, which I agree is negligible. I read somewhere too, that the city is not permitted to run surpluses, and only tax to cover operating expenses. I'm not sure of the exact mechanics of that.

So, I'm don't what weight assessed values have anyway, as they never seem to reflect the market price of the property, and seem to be consistently lower.

patriotz said...

increasing house prices are reflected by assessments, and the rise in asessments is reflected by a rise in property taxes,

Time to beat back this fallacy again.

You are assuming that taxes are a function of assessments. They're not. Taxes are simply based on local government spending for a given year. In other words, taxes are an independent variable.

The other independent variable is the assessment base. So what's the dependent variable - the mill rate , which is (taxes)/(assessment base).

If the local authorities hike spending (in aggregate) 6% next year, that's the tax increase you're going to see. Doesn't matter which way assessments go. Anyone who has owned RE over the last few cycles knows this quite well.

I think the problem is people listen a lot to US media, and in many US jurisdictions taxes really are a function of assessment.

solipsist said...

Thanks for commenting patriotz.

I really was not taking any assumptions. I do not know what the point of assessments are. I am glad to read others' views on it. What is the point of assessed values? Discerning the share of taxes that each property pays?

I wonder too if prop. taxes in the GTA are markedly higher because of things like snow removal, and repairs to infrastructure related to climatic extremes - which we don't experience here to the same degree. It is also more costly to provide potable water in those jurisdictions, as it is mostly recycled lake water, etc.

For the record, I am not much influenced by American media (or the more popular, mainstream Canadian media - such as CanWest/Global). My only news source (besides the internet) is the CBC. Every preset on the radio in my car is set there. I just find American media to be insipid and hollow.

patriotz said...

What is the point of assessed values? Discerning the share of taxes that each property pays?

Exactly. If your house is worth the same as Joe's house, you will pay the same amount of taxes.

Of course this results in West Side houses paying more than East Side houses of the same size, but I think that's quite fair. Because the market (both sales and rentals) is saying the occupant is getting more utility from the West Side house. Which is largely because there are more taxpayer-funded amenities on the West Side.

Alpha_Bear said...

Are you aware that Municipal taxes in the GVRD would be higher if property taxes were charged at the same rate as the rest of the province?

In the interior we pay for capital health projects (like acute care hospitals and extended care facilities) within the GVRD, while those who actually live in the GVRD do not contribute.