Should mortgage interest costs be tax deductable?

On my first day of vacation, traveling from Halifax to Calgary (on my way to Tofino), I began reading the Friday copy of the Globe and Mail and I found a small (and rather hollow) article, “ Actuaries call for tax breaks on home mortgage interest ”, as a way to increase the net wealth of babyboomers. For fun, let’s walk through the implications of the actuaries’ suggestion.

On a $200,000 home, with a borrowing cost of 6.0%, the interest paid on a 25 year mortgage pays about $183,293; multiply that number by your tax rate (say 35%) and you have a whopping amount of savings (just over $64,000 over 25 years). This type of plan would have several effects (follow the step by step causality): (i) it would lower the cost of purchasing homes because the effective interest paid (and thus the mortgage) is lower; (ii) this would increase the demand for housing (for a given level of income), (iii) which would intern increase the price of the new and existing housing stock; as demand responds to the lower carrying cost of owning a home, higher demand would increase prices. Homeowners, therefore, would win! Not only do they now have a huge tax deduction, but the net worth of their home would rise, increasing their net wealth. How much would housing prices rise by such a policy? Well, I would think it would rise by exactly the amount of the savings from the tax deduction once the change has been fully priced in … which could take anywhere for 2 to 4 years.

Overall, this policy would effectively transfer wealth from the government, or equivocally from every tax payer, to every homeowner. Because this policy would make homes more expensive, it would only benefit existing homeowners over time (and in the very short-term new home owners would get a deal until demand pressures pushed up prices).

Furthermore, it would (over time) increase rental costs. Although the tax deduction is only on primary residence, overtime, the price increases of primary residence would change the opportunity cost of renting units or selling them as primary residences – just think of the transformation of apartments to condos as an example.

In the end, what this looks like is a transfer of wealth from non-homeowners and corporations (or stock-holders) to homeowners. Does this sound like taking from the poor and giving to the rich? Well, I think it does a little. Perhaps think about it this way: instead of giving homeowners a $64K refund on their mortgage costs, we could use that money to pay a nurse's full year’s salary (for ever 25 homes we could employ one RN for 25 years), or even better increase the Old Age Security payments to the poorest elderly? If we are really concerned about helping babyboomers who have not saved enough money for retirement, I think we can think of better policies then this one. Personally, I think that Government programs like the Old Age Security could be broadened or beefed up.

Carbon Tax in Quebec: Go Pigou!

As I have said over and over again , I am supportive of putting a tax on fossil fuel consumption to reflect the cost (the public cost) of consuming fossil fuels. I think we need to raise the price of gas, and funnel the funds into public transit, research, and playing around with incentive structures (that would be fun!). Well, Greg Mankiw's Pigou Club got a reason to celebrate (a least a little) last week when Quebec added a tax on gasoline and electricity! Mankiw was impressed ( see here ). As nicely reported on Bloomberg : " Refiners including Valero Energy Corp.'s Ultramar unit and Royal Dutch Shell Plc's Canadian unit will start paying a tax of 0.8 cent a liter on gasoline and 0.9 cent on diesel on Oct. 1. Power producers such as state-owned Hydro- Quebec and gas companies will also be taxed. " (should that say province-owned?) Although this is not a large tax by any means, it is a start that will generate $200 million a year for measures to reduce greenhouse gas emissions.

Although, to be honest, I do not think that 0.8 cents a liter will do very much in the way of reducing consumption, this is the first of its kind in Canada and I hope that Quebec voters are supportive of the idea. As for me, I hope to walk to work tomorrow (if the rain ever stops ... O'Halifax).

Where to eat in Halifax!

The Canadian Economics Association conference was in Halifax (at Dalhousie) a couple of weeks ago. I send the following email to a few fellow modellers, and I thought I would also share it with you (to get me back on the blogging bandwagon). Please note the Tom's Little Havana did not make the list of places to visit because of limited seating or maybe because I wanted to keep it for myself (unless you know it is there you might never find it).

Here is a short list of my favourite places in Halifax. I hope it is helpful to all future visitors to the city.
Doing something at Dalhousie? Here are two places near campus:
Saege has won The Coast's (the weekly what-where of Halifax) award for the best new restaurant and is labelled "Where to Eat in Canada". I suggest that you book in advance. It is about 10 mins on foot from campus, but worth the hustle (5883 Spring Garden Road , 429-1882). http://www.saege.ca/

A distant second is the Coburg Coffee House: if a hummus and cucumber bagel and a free trade coffee is your taste, this is your best choice for lunch near campus (6085 Coburg Rd, 429-2326).
Every where else on my list is downtown (about a 20 mins walk from Dalhousie Campus). All of these places also serve dinner and lunch.

Three choices in the medium-end price range:
(1) I am a fan of Greek food and, in Halifax, OPA is the place. Reserve in advance; try the lamb and the taramasalata. (1565 Argyle St, 492-7999)
(2) The Wooden Monkey: this restaurant is a local gem. The food is top of the line; all organic; the wooden tables are from fallen trees in Point Pleasant Park <http://www.halifax.ca/parks/PPP.html>; they make a special effort to source locally. Also, it's a little hip. (1685 Argyle St, 444-3844) http://www.thewoodenmonkey.ca/
(3) Sweat Basel is a little more costly; a little fancy; well worth it. It offers some unique dishes in a variety of tastes. If you go here, plan to have dessert (locally made by the people that made my wedding cake). (1866 Upper Water St., 425-2133 ) http://www.scanwaycatering.com/SweetBasil/index.html

A TOPPER
Here are a few places that I have gone for dinner, and stayed all night. All of these places: (i) are located downtown; (ii) serve great beer; (iii) serve good food; and (iv) are my favourite places to go on a Friday or Saturday night. You may want to visit them all, or stay one place for a whole evening discussing price-level targeting.
The Henry House: An old style pub. Go downstairs for even more atmosphere (I love old stone); and yes: order the Ringwood (brewed on location). On a quiet night, I can play darts here: sadly, it is often too full to play. (1222 Barrington Street, 423-5660) http://www.thehenryhouse.ca/
The Old Triangle: my favourite bar in Halifax . Why? The Belfast Burger; it's an Irish pub (they pour a mean Guinness); and it's the best place to hear Nova Scotian music. This place is busy; sometimes standing room only. (5136 Prince St., 492-4900)
The Economy Shoe Shop: the atmosphere is artsy; cool; relaxed. When Sean Penn comes to down, this is where he goes (if you like nachos late on a Saturday night: this is the place). (1661-1663 Argyle St, 423-7463) http://www.economyshoeshop.ca/

I would recommend also consulting the list provided here http://economics.ca/2007/en/eating.php). It provides a nice selection of places.

Let's talk about mergers and aquisitions: Colbert style! or "For Whom the Bell Tolls" (a suggested revision by Gandharva)

Via: VideoSift

In the air (part 2 of 2): Forecasting flight fees? Cool facts and current problems

farecast.com is new. The idea: by understanding the pricing formula airlines use (you may of heard of 'yield management techniques'), farecast.com can tell you if fares will fall, rise, or not change, in price. And, accordingly to reports, they are really good at it! A 75% success rate is something to be proud of.

How does it work? Airlines' change prices based on how fast the flight is filling-up. For example, if the flight is only 50% full a week before departure, one can expect the price to fall because airlines' will try to persuade travelers to fly with them with lower fees. On the other hand, if a flight is 50% full a month before departure, the price might rise because there is strong demand to travel on that day.

An Example - Toronto to New York (JFK Airport)
Just say that that want to go to NY this summer, and you are flexible with departure times and the duration of the trip. Can farecast help us? Let's see. Once you arrive at the farecast website, scroll down to the part that says "Flexible Travel Graph Search: See low airline tickets over the next 30 days". Select your departure city - ok, well it says "Ontario, CA" which means Toronto in farecast talk - and your U.S. destination.

COOL FEATURE 1: The first screen shows the price of a flight over the next thirty days between TO and NY: it shows the lowest fare on each day; they depart at all different times and for different durations. The lowest price over the next 30 days: 9 June, returning 12 June. When I select that flight, it tells you the airline (US Airlines in this case) and the departure dates.

COOL FEATURE 2: For the above-mentioned flight, facecast.com tells me to wait: the price is expected to drop by $31 in the next 7 days, and with a confidence level of 58%.

COOl FEATURE 3: If you want to go to NY in June, and you are willing to wait for a cheaper price, you may consider taking the "Fare Gard" - for $9.95 they will guarantee a price for 7 days.

PROBLEMS: (i) Most importantly, I was unable to find the prices cited farecast.com on the airlines website. (ii) Because farecast.com only gives you the lowest price for one flight at a time, and not the combined departure and return fare, it is not a perfect system - you still need to do a lot of searching. In fact, expedia.ca does a better job at pricing the return trip between TO and NY for the same dates (June 9-12, $460).

Suggestion:
Use both expedia and farecast! Both offer useful services: farecast for the trend in prices and expedia for the total trip pricing. If I was the CEO of expedia.com, I would get the forecasting technology used by facecast.com to enhance my services.

Special Note: For some reason Zoom Airline flights do not appear on either expedia.com or farecast.com.

In the air (part 1 of 2): Paris anyone?

WARNING: A sudden longing for French wine, crêpe, 300 different types of cheese may overtake you!

If you left Halifax on September 5th, and returned September 26th, you could go to Paris for just over $600 (in comparison, a trip to Toronto costs just under $500 in September). This is new (and very dangerous to our budget): Zoom Airlines just added a direct flight to Paris. Prices start as low as $199 each way plus surcharges and taxes. This is the first time since I arrived in Halifax that the price of domestic and international fights have been so close.

Two trends have led to this convergence: (i) in the domestic market, Canjet's and Jetsgo's closure have lead to higher prices: fewer suppliers have increased the market power of Air Canada and Westjet; (ii) Zoom, a welcome addition, has been adding flights from Canada to Europe (Tasya and I flew with them in 2005 via Montreal, and it was great!): they want more global market share and lower prices will give them my business.

Most Canadians love Europe (or at least some mystical idea of Europe); cheap and high quality wines, cheeses, museums and architecture. A place that many of us have only encountered through our grade 10 history text or maybe Google Earth. Now: it is cheaper than ever to be snubbed by a French waiter ("I sat there in this little cafe, I tried to speak but nothing came out, then he said: 'What do you want?' - it was cold") The combination of the high Canadian dollar and cheaper flights to Europe mean it's possible to go to Paris for short holiday. Back home, Canadian tourism destinations will have to work harder to keep domestic travelers coming to their coastal B&Bs or to see a Jays' game. Europe is calling.

Appendix:
Iceland Air resumed service to Halifax as of May 17th.
Zoom Airlines also offers flights to Belfast, London and Glasgow out of Halifax for the same rock bottom prices.

Northend of Halifax: Uniacke Squre and the New Halifax

The north-end of Halifax: How is new development changing the city and what does it mean? Like many major Canadian cities, the landscape of Halifax is changing - rising land values and the trend towards condo-living is changing the Halifax landscape. A lack of opportunity in international real estates markets have landed international investors to Halifax. The best example of this is the newly painted Brunswick Towers - now call Ocean Towers .

Over the last couple of months The Coast has written two articles about Halifax's northend. I found both of these articles interesting and educational. First, before talking about the new Halifax, I wanted to share with you this article about the old - or at least the not to so new.

The first is an article by King's College's own Stephen Kimber: "Inside the square" . This article give a short history of the Uniacke Square housing project and aims to present the views of residences. I must admit, I think about the issues surrounding housing development more often then most economists; perhaps because I walk by Uniacke Square each day on my way to work and again on the way home. For anyone that is, or wants to be, a policymaker - or who is a past, present or even future Haligonian - this article provides a difference perspective. A community lives in Uniacke Square.

Take two: New Construction and Middle Class Push ... Lis van Berkel points to 'gentrification' in "Where goes the neighbourhood?" . As referred to in the above article, the new building in the north-end of Halifax is generating a push: tear it down and build a new one: each construction replaces an older one and, over time, will remove affordable housing from the city's core - unless policy steps-in! Although so-called 'gentrification' does price people out a given market, it is not all bad: rising housing prices generate wealth for home owners; new construction changes the stock of housing to meet the needs of todays consumers; construction creates jobs; higher prices generate higher property tax for the city to provide services. I think the answer is in mixed development - the problem is that when we build low-income housing some people win (those who live downtown at a below market price) and some people will loose (via lower land values or otherwise). Mixed development needed; politicians with a backbone wanted.

Give me your thought.