Authorities Want a Housing Bubble

Skyrocketting debt as people spend money on overpriced houses.

One of my favorite quotes is from Upton Sinclair, “it’s difficult to get a man to understand something, when his salary depends on his not understanding it.” I’ve always assumed that the quote was cynical, but more intended to be amusing than an absolute judgement of how the world works.

But, the more time that passes, the more I’m starting to believe this quote actually reflects reality. Look at people’s reactions global warming. It’s a problem that is now likely to have a major negative impact on everyone, costing hundreds of millions of lives. But the paychecks of powerful people depend on not believing in global warming, so in the USA, denial is the official policy.

Something similar is happening in Canada with the housing bubble.

Some history

Look at the chart at the top of this post that compares Canada and USA’s debt to income ratios for consumers. It shows how, relative to their incomes, people took on massive amounts of debt to buy real estate. The USA’s line begins to fall in 2007 as the housing bubble in the USA pops. Essentially, Americans could no longer service the huge debts they took on. The bubble popping led to the Great Recession.

As a result of this speculative fervor over real estate, the financial system nearly collapsed. Banks usually lend money to each other overnight for about 0.1 percentage points more than they’ll lend it to the central bank. During the financial crisis, they demanded 3.65 percentage points more, because they were terrified that the other banks would collapse overnight. We were literally on the edge of the entire financial system locking up, with nobody lending to anyone else.

And what caused America’s housing bubble in the first place? After the tech bubble popped around the turn of the century, the central banks kept extremely low interest rates for too long. People took on too much debt to buy overvalued houses because the financing was so cheap. They gorged themselves on debt and were killed when houses stopped going up.

The Bank of Canada

This narrative is well-established. Stephen Poloz, the head of the Bank of Canada, must know it. But instead of heeding the warning, he’s pretending none of it happened.

After the Great Recession, the Bank of Canada lowered rates to “emergency levels” in an attempt to keep the system liquid. That worked, and the economy recovered.

So, learning from the experience with ultra-low rates in the USA—the growth of the American housing bubble, the huge amounts of debt taken on by consumers, and the subsequent crash—the Bank of Canada normalised rates after the threat had passed, right?

No. Not at all.

Instead, they kept interest rates at “emergency levels” for a decade, always deciding that the economy simply wasn’t strong enough for rates to increase.

And the result is almost identical to the USA in the early years of the 21st century. Housing prices have skyrocketed. Consumer debt is insanely high compared to incomes—even higher than it was in the USA at the height of their bubble.  British Columbia has had negative savings rates (i.e. people in aggregate spending more than they earn) for over fifteen years now.  People are borrowing huge amounts to buy massively expensive houses anticipating that they’ll increase in value forever.

And what’s Poloz’s reaction to this? A couple weeks ago, he said even a rate hike to over 5% wouldn’t cool the hot housing markets.

What’s going on here?

Really? Is he that stupid, believing interest rates don’t have any impact on housing prices and speculation?

No, I think we just have to look to Upton Sinclair for the answer. Poloz is scared of looking like an idiot if he increases interest rates and crashes the housing market. So, he’s closing his eyes to the consequences of his actions.  It doesn’t matter to him if Canadians take on debt they can’t afford or can’t retire because they lost all their money speculating on overpriced houses.

What matters to Poloz is getting through his term without upsetting the boat, the same thing that matters to every politician.

Heck, you see the same thing in the recent changes the Ontario provincial government has enacted in Toronto. They’ve added a foreign buyers tax on houses, but have excluded pretty well everyone from it. Even foreign students can buy without paying the tax (because every student needs to own their own their own multimillion-dollar home). The government’s goal wasn’t to cool off the market, but rather appear to be taking actions to cool off the market.

The bottom line

This housing bubble experience has changed my views on politicians. I used to believe that most politicians are in the job because they want to make a positive difference, and that, despite their poor reputation, politicians care about more than just making money and holding onto power.

But, seeing politicians’ reactions to this housing crisis—seeing them ignore Canadians who risk ruining their financial lives by taking on massive amounts of debt to buy overvalued assets— I’m no longer convinced that’s true.  Because now, politicians’ salaries depend on them not understanding the causes and consequences of this housing bubble, and so that’s the way they’re acting.

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A Second Solution to Corporate Tax Avoidance

Water drops reflecting the image of an airplane passing overhead

It’s common for corporations to avoid taxes by locating operations in jurisdictions with low tax rates. In essence, this results in countries adopting a “beggar thy neighbor” strategy, lowering their corporate tax rates to attract foreign operations

Last week I talked about one strategy for reducing the value of this avoidance strategy, taxing companies based on their full global income. One of the main problems with that approach is getting reliable data from companies—a country can get information about what happens within its own borders, but getting information from outside its borders requires the co-operation of other countries. Thus, with that approach, it would be relatively easy for corporations to cheat on their taxes and not be caught.

To deal with this problem, I’ll propose a second strategy to deal corporations relocating to avoid taxes, one I like to call, “concede defeat”.

Just give up

In a global economy with local taxation, there’s essentially no way to avoid bad neighbors who will offer sweet deals to persuade companies to relocate. So, countries should become the “bad neighbor” first by replacing corporate income tax with a sales tax. Instead of taxing companies based on their income, which opens the door to countries offering better income tax deals, tax corporations based on their sales in your country. In essence, become the “bad neighbor” who steals corporations from all over the world.

If companies want to sell in your country, they can’t avoid a sales tax. There is no way for companies to hide the sales that they make in your country, so there is no way for them to avoid such a tax. Relocating won’t do them any good—they’ll still have to pay taxes in your country.

Some downsides

There are, of course, downsides to this approach. First, this sort of adjustment shifts the tax burden from companies with the highest income to companies with the highest revenue. This change would have real consequences. Today, if you’re running a company that is just barely above break even, your company won’t be paying income taxes. But, if you’re required to pay a tax based on your sales, it would greatly increase your taxes, potentially driving you into bankruptcy (and throwing your employees out of work).

A profitable company with high margins, on the other hand, would become even more profitable, since the tax on its revenue would be lower than the previous tax on its income. Optically, this would look bad, as it would effectively lower taxes on the most profitable companies.

That said, perhaps the tax rate could be graduated based on the revenue of companies, so companies with higher revenue essentially paid a higher marginal tax rate on their sales. It would be hard to police such a tax since companies would try to avoid higher tax rates by creating subsidiaries, but in a computerized age, I imagine it is possible (such as, for example, making all subsidiaries use the same tax identification number as the their parent company).

Even so, a tax based on revenue rather than profits would be borne disproportionately by low margin businesses.

Exports

The other issue with this sort of tax is that exports are essentially not taxed. Right now, if a company is profitable, they pay income tax on both their domestic profits and their profits from exporting. If you only have a domestic sales tax, you lose the tax on exports.

This could be addressed by taxing exports, but then you’re back into the situation where it’s in a company’s best interests to fly away to another country to avoid taxes, which is what we were trying to fix. But if you don’t tax exports, I don’t see a good way to avoid this problem.

Maybe the solution is protectionism—don’t tax the exports, but tax the imports to maintain your tax base. That makes life very good for global companies located in your country, and bad for companies not located there, but, in a “beggar thy neighbor” world, perhaps that is the best option.

Regressiveness

One of the other big concerns about this sort of tax is that for consumers, it would be regressive. Everyone, regardless of income, would pay the same sales tax as a percentage. But the poor are required to spend almost all their income to survive, whereas the rich aren’t. Thus, effectively the poor would be spending a higher percentage of their income on this sales tax than the rich.

In general, I find this sort of argument confusing, because it seems to attribute the full cost of the sales tax to the consumer rather than the corporation. But, if you extend that same argument to corporate income tax, then are corporate income taxes equally regressive now, since the consumer is paying their income to corporations which have higher prices to accommodate those corporate income taxes?

To me, both sales and corporate taxes look almost equally regressive, unless you assume that the staples the poor buy are low margin, and are therefore provided by corporations that don’t have high profits, so pay low taxes, while high-margin luxuries are provided by corporations with high profits and high taxes. But that seems to me to be a poorly-supported argument.

Rather to me, it looks to me like sales taxes are highly visible to the consumer, so people make generalizations about their regressiveness, while corporate taxes are less visible, so people assume they are only borne by the corporation, not the people buying the corporation’s products. Thus, I think the degree to which the cost of corporate taxes are borne by the poor is unclear.

In any case, if you do assume that sales taxes are regressive and wish to address that in some way, the government can issue tax credits to the poor, just as they do with the GST.

The bottom line

Such a change in tax policies would be widely derided as a transfer of taxes from corporations to individuals, so is probably politically infeasible. But, I think it’s not quite that extreme—taxes on corporations increase prices for everyone, so are not so different than taxes on individuals.

Thus, I’m not sure if eliminating corporate taxes in favor of a sales tax is a good idea or not, but it seems like, in a global world, it’s almost inevitable. Either you need co-operation between countries globally to ensure a fair, auditable corporate income tax system (i.e. my first solution), or you need to force corporations to pay taxes on the items they sell in your country (i.e. my second solution). I don’t see any third option.

One Strategy for Eliminating Corporate Tax Avoidance

51 places to hide money

One of the interesting arguments of the right wing is that corporate taxes should be reduced or eliminated because otherwise, corporations will build their business in jurisdictions with lower taxes. To a certain degree, this is true—a huge proportion of tech manufacturing happens in Ireland because of its attractive tax benefits.

However, this is also a bit of a red herring argument because it assumes that the only way that countries can deal with this issue is by lowering taxes instead of focusing on reducing tax avoidance. I see two potential ways to deal with this issue, one of which I’ll discuss today

Look around the world

One method of dealing with this issue is by taxing corporations based on their global income, rather than just domestic income. One common way corporations avoid taxes is by setting up subsidiary corporations in countries with low taxes. The subsidiary will pay the low taxes on sales outside the company’s home country, and the cash will sit in the subsidiary indefinitely since, if it is bought back to the home country, it will be taxed.

Over the last few years in the USA, there has been a debate about whether corporations should receive a tax holiday on foreign profits (i.e. whether corporation should be allowed a brief period of time to move those profits to the USA without paying full tax on them.) The theory is that those profits would stimulate economy rather than just sitting around in some offshore bank account. To me, that sort of strategy would just further encourage this sort of tax avoidance, so probably isn’t a good idea.

Instead, I’d suggest taxing companies on their full global income, including the income of all domestic and foreign subsidiaries and parent companies. In cases where a subsidiary isn’t fully owned, it could be taxed proportionately, or taxed as if it were fully owned if the ownership is more than, say, 25%. After all, often the reason for the creation of subsidiaries is to avoid taxation or liability, both of which aren’t actually things that benefit society as a whole. (e.g. Do we view it as acceptable if Canadian subsidiary pollutes in China because the pollution is done through a Chinese subsidiary?)

Some problems

There are, of course, some problems with this approach.

First, there is a double taxation problem since companies could have the both countries trying to claim the taxes. For instance, suppose Ireland has a 10% tax and Canada has a 25% tax. It would be unfair for a Canadian company’s Irish subsidiary to pay 35% tax. To avoid this, companies could get tax credits for foreign taxes paid, effectively paying 10% tax to Ireland and 15% tax to Canada.

Second, if the taxation of subsidiaries isn’t proportional to ownership, it would make joint ventures less attractive, but to me, that seems like a reasonable sacrifice (mostly because I suspect that if taxation was proportional to ownership, people would find some way to exploit that feature as a taxation loophole.)

Taking the ball and going home

Third, companies might not want to do business in your country if you taxed this way. As far as I know, taxing companies based on not just their subsidiaries but also their parent company would be unprecedented. But if you don’t do that, the business can just set up the parent company in a non-taxing jurisdiction and operate as before. Taxing the parent is one of the only ways to ensure the company won’t avoid taxes by setting up in Antigua.

But you can see why Apple might hate this. Perhaps only 4% of their profits come from Canada, but Canada is trying to tax 100% of Apple’s $45 billion in profits. That might be enough to make Apple not want to sell in Canada. But, if you actually believe in the invisible hand of economics, this likely won’t matter long term, since other companies will rise in Canada to create the products that Apple would refuse to sell here. The market won’t be as efficient as it would be otherwise, but that’s a natural consequence of taxes in every case.

What’s more, if USA imposed this sort of taxation, Apple would have no choice but to give in because that market is so big that they couldn’t avoid it. And, if all countries did this, you’d have solved the problem of companies relocating their operations to low-tax locales.

Documents, please

One of the biggest challenges in this form of taxation would be getting accurate global documentation. As the Canadian government, you can force Canadian subsidiaries to feed you documents, but you can’t force a Chinese subsidiary to provide you with accurate information.

This problem could be solved in two ways. The first would be with a global tax treaty, where documents were shared between governments to ensure fair taxation. In theory, this sounds good, but in practice, it might be tricky, since I imagine many of the rich people practicing tax-avoidance strategies are also influential in government. Thus, while the governments of all countries seem to have an incentive to reduce tax fraud, in practice, the individuals running the government may not.

Thus, another alternative is prosecution of corporate executives. In the last few decades, corporate malfeasance has been punished by corporate fines (i.e. not actually punishing the people who committed the crimes). If, however, you actually threw corporate tax cheats in prison (e.g. literally putting the whole board of directors and the ten highest level managers of the corporation in prison for a decade) for the discovery of tax fraud, then I think it would help to address this problem. Essentially, this standard for proving guilt shouldn’t be “did you know about the tax fraud?”, but rather, “In a well-run corporation, should a person in your role have been responsible for, or able to recognize, the tax fraud?”

The bottom line

This solution certainly isn’t perfect. Businesses relocating to low-tax jurisdictions is a challenging problems with no easy solutions. Nevertheless, as globalization makes this sort of tax-optimization easier, the issue becomes even more important to solve, even if all solutions are flawed.

Is Capitalism Monopoly?

Capitalism transforms monopoly

A reader recently send me a comment about whether there was some way to structure capitalism so that it doesn’t become the end game of Monopoly. By this, I think he meant capitalism eventually resulting in all the income generating assets belonging to a small subset of people with the rest of the population poor.

This question amused me, since Monopoly was originally intended to illustrate the evils of capitalism, but it’s also a good question, because I think even pure free-market capitalism isn’t as extreme as Monopoly.

Wealth accumulating to the few

Like Monopoly, capitalism does lead to gross wealth disparities. In essence, it’s easier for the rich to become richer than it is for the poor to become rich. This is true for several reasons. First, the poor are so focused on basics like food and shelter that it’s hard to find the resources to focus on wealth building. If you need two jobs to pay for food and shelter for your family, you don’t have the time or money to start your own business. In contrast, wealthier people only need focus a tiny portion of their time and money on subsistence, leaving the rest, potentially, for wealth generation.

Second, it’s easier to make money when you have money. For instance, the stock market might average 7% returns over the next year.  If are never likely to have more than $200 to invest in any year, it’s not really worth your time to learn how to invest in the market. But if you have $10,000 or $100,000 to invest, it’s worth your time to shoot for higher returns.  And this sort of reasoning is not limited to the stock market. In fact, many investments are literally unavailable to people of low net worth.

Third, companies that are successful are usually successful because they have a competitive advantage (e.g. a brand, a monopoly, dominance in a market that is too small to support more than one company).  Thus, companies that have become winners—and made their owners wealthy—are more likely to continue to succeed than some random new entrant without competitive advantages. The winners keep on winning. This is actually the core of Warren Buffett’s investment strategy.

Fourth, some business success is luck, but some is also skill. You’d expect the more skillful business people to have a greater chance of success in their business endeavors than less skillful people. So, you’d expect successful entrepreneurs to have a disproportionate number of skillful business people, and these entrepreneurs on average to have a better chance of continuing to accumulate wealth than a random selection of people. Again, winners are more likely to keep winning.

Why it’s not Monopoly

So, without any wealth redistribution, you’d expect wealth in a capitalistic society to naturally accumulate with a small minority. But, this model seems to assume that life gets worse and worse for the poor as a handful of rich dudes just get wealthier and wealthier. Nothing could be further from the truth because of a) the math associated with generational wealth transfers and b) capitalism’s creative destruction.

The most noteworthy thing about generational wealth transfers is that they don’t work. Almost everyone has a large number of descendants because population growth is geometric. If everyone averages 2.5 children, then, in a few generations, that billion dollar fortune will be spread across two children, sixteen grand children, 39 great-great-grandchildren. And not all those people will be prudent with the money, and certainly not all of them will have the business skills of the person who created the wealth. Thus, the wealth is diluted back into society. The wealthy will become unwealthy.

So, while the mechanics of capitalism ensure wealth is concentrated in the hands of the few, the few are constantly changing.

Creative destruction

An even more important factor is capitalism’s creative destruction. Competitive advantages are intended to ward off creative destruction, but destruction tends to happen anyway. Microsoft’s Windows monopoly was completely dominant in the 1990s. But, with the rise of the internet and smartphones, it’s much less important.  Bill Gates is still rich, but not nearly as rich as he’d been if Steve Jobs hadn’t started making iPhones.

Of course, this doesn’t result in the poor becoming wealthier relative to the rich, but it does result in the poor becoming wealthier in absolute terms. Competition drives down prices and leads to new innovations that benefit everyone, even the absolute poorest. Lower prices mean the poor get more bang for their buck. Innovations are often within the reach of everyone, even the poor. Very few people in first world countries don’t have telephones, TVs, and indoor plumbing.

And most people understand that. A few years back, NPR asked whether people would rather be rich in 1900, or middle-class now.  Over two-thirds would rather be middle-class now. To me, it’s a complete no-brainer. Would I rather have the Internet or servants? Would I rather have antibiotics or silk sheets?

The creative destruction of capitalism encourages those innovations, leading to better lives for both the rich and the poor. The fact that the decision is so easy shows how powerful capitalism is.  (Assuming you believe that making money is one of the driving forces behind innovation, which I do.)

While the poor are still relatively poor, they’re still much wealthier than the rich decades ago.

My bottom line

So, I think capitalism isn’t naturally a game of monopoly because the poor win even as they lose and because over generations, the winners change. That’s not to say that governments shouldn’t redistribute wealth to make the game more even, but rather that even with an unbalanced distribution of wealth, most people benefit from capitalism, even the poor. So, the real challenge is figuring out how to even out the game without destroying the benefits of capitalism. (Which, to be fair, is what the reader was asking in the first place.)

On Taxing Robots

Bill Gates posing with two robots

A few weeks ago, Bill Gates suggested robots that take human jobs should be taxed. His reasoning is the government taxes humans who do a particular job, so why shouldn’t you also tax the robot that replaces the human in that job? Enacting such a tax would not only ensure the government retains its tax base, but also slow the adoption of robotics, allowing people time to adapt to the changing world.

Of course, many people have disagreed with Gates’ idea, going so far as to call the founder of one of the most influential tech companies in the world a Luddite. But, I think it’s an interesting idea, worthy of discussion

The problem

Bill Gates is trying to solve one of the biggest problems of the twenty-first century, the displacement of human labor by automation. The problem is that automation results in gross inequality in society.  The manufacturers—the wealthy who own the businesses who replace human labor with robots—will benefit from the robotic revolution. They will be able to produce their goods at a much lower price, leading to increased profits.

The workers will benefit from lower prices on goods, but only if they actually have money to buy the goods. If they don’t have a job and are unable to find a job because their skills are obsolete in a robot economy, then this automation revolution is terrible for them. What’s more, there are likely to be a lot of displaced workers and relatively few robot-owners, so you end up with a society in which there are a bunch of poor people and a few really wealthy people.

This result isn’t good for anyone, since, once inequality becomes great enough and the poor realize the system is fixed against them, the poor are likely to rise up and destroy the system. I think we’re seeing some of that anger over inequality with the rise of Trump, and, if he doesn’t address the issues, then things could easily escalate in unpredictable ways.

Superficially, taxing robots would solve many of these problems. Replacing humans with robots would be less compelling, which would slow the drive to automation. People would still be displaced, but fewer people would be displaced each year, allowing people more time to adjust to these changes. What’s more, the government wouldn’t lose the tax revenue from the displaced workers, since they’d get it from robots instead.

The problems

Larry Summers has criticized the proposal, asking why Gates would tax in ways that reduce the size of the pie rather than distributing it differently. In a way, the “reduce the size of the pie” argument is silly, since all taxation does this. Too often, people who make this argument will only complain about the pie shrinking rather than actually proposing ways to redistribute it. From my perspective, if they aren’t willing to suggest reasonable ways to redistribute the pie, their “reduce the size of the pie” isn’t actually a serious argument, but rather an attempt to avoid arguments about pie redistribution entirely.

To me, the biggest problem with Gates’ proposal is that it’s impractical. Which labor-saving devices are robots? Is a stapler? What about a photocopier that staples? What about a photocopier that adjusts toner usage to increase contrast to improve the legibility of my document? What about a computer that allows me to copy a large chunk of text from one area to another? Or one that fixes typos when I do that cut and paste? What about one that paraphrases the text when I cut and paste? What about one that writes the text for me?

Thus, figuring out what qualifies as a robot is problematic. I imagine that if such a law were passed, an industry would arise that promised to de-roboticize your robots from a tax perspective (at least that would create jobs for humans). Depending on how tax law was worded, we could end up with people who look over the results of robots simply to rebrand robotic production into human production.

What’s more, if you add a robot tax, it could drive away business. As production has shifted internationally from countries with expensive workers to low cost workers, I imagine production by robots would shift from countries with high-cost, high-tax robots to low-cost robots. Thus, you’d lose the jobs of not just the factory-line workers, but also the people watch over and maintain the robots.

So, though Gates’ proposal has intellectual appeal, I don’t think it is feasible.

So what do you do?

Perhaps taxation of companies is one (relatively-unsatisfying) answer. When companies lower their costs—such as through automation—it increases their profits, and the tax system already has a way to ensure profits are taxed. Perhaps this tax could be increased on robot-producing and robot-maintaining companies. Of course, this would also result in such companies relocating to more tax-friendly locales, but that’s a general problem with taxation. To take care of such problems, the tax system is needs to be revamped.

Taxing the robot-providers and robot users still doesn’t solve the problem of displaced workers. This is where something like a guaranteed minimum income would potentially fit in. If a displaced worker doesn’t actually have to worry about starving to death or dying because they can’t afford hospital bills, then losing their job to automation isn’t nearly as big a problem as it would be otherwise. A guaranteed income would ensure workers have time and resources to retrain. There will still be some people left out in the cold by automation, but the consequences of being made obsolete would be far less severe.

Virtual Reality is Real

Shoot the gun and block with the shield

My first experience with virtual reality was in 1993. The computer science department at UBC did an open house, and one of the displays in the Graphics Lab was a simple virtual reality simulator.  The viewer wore glasses with lenses that alternately turned opaque and transparent in each eye. The computer flashed two different views, one for the left eye, and one for the right. A stick connected the viewer’s head to the top of the monitor, so that the computer could sense where the viewer’s head was, and adjust the image accordingly.

It wasn’t the most amazing thing ever, but it certainly worked. As a viewer, I could see a three-dimensional image on the screen that changed in a realistic way when I moved my head. Of course, that a stick needed to be attached to your head was a big weakness, severely limiting the practical applications of the technology. But what do you expect?  It was 1993.

Now it’s almost twenty-five years later, and I’m pleased to say that virtual reality is now real—and I experienced it for myself over the weekend.

The return of the video game arcade

In the last year, several virtual reality technologies have arisen—the Occulus Rift, Playstation VR, and the HTC Vive. With prices in the $1000 range, these technologies are actually targeted at (relatively wealthy) consumers. However, some entrepreneurs have decided to buy fifteen or twenty of these devices, and open virtual reality arcades where consumers pay $10-20 an hour to play virtual reality video games. I went to one of these arcades that is using the HTC Vive technology.

Vive virtual reality requires a PC, a virtual reality headset, earphones, and two handheld controllers. The controllers are like a gun with a touchpad on the grip and buttons on the side, allowing interactions like firing a gun, squeezing a cylinder, and selecting from a touchpad menu. Though there was a learning curve to the system, it wasn’t that difficult to understand the basics.

Most importantly, it works—the experience was almost completely immersive. While the image seemed slightly blurry for the first ten seconds, I didn’t even notice it after that.

I mostly played a game called Space Pirate Trainer. In it, you are standing on a platform with a gun and a shield, while spherical robots fly around you. Your goal is to shoot the robots before they shoot you. To avoid their gunfire, you can either block with your shield or dodge. As you’d expect for this sort of game, you also have a variety of weapons with different effects, from Gatling guns to lasers to guided missiles.

It really did feel like I was fighting off a robotic horde. I’m pretty sure others felt that way too. There was also a two-player zombie game, where you work together to defend your stronghold against a wave of zombies. When people were playing that game, it wasn’t that unusual to hear them screaming as a zombie snuck up behind then. What’s more players who warned each other about zombies approaching them from their blind side had a considerable advantage. It was literally like two people in a realistic-looking world, fighting off zombies.

So it’s done, right?

All that said, while it does work, the virtual reality problem isn’t solved yet because you still have the stick connected to your head (figuratively). You have to stay inside a relatively small area (say a 100 square foot square). This isn’t a problem for these games, because the system displays a grid so you know exactly how close you are to a wall, and that works well. If you see a virtual reality wall, you can reach out and touch the real wall, and it will be where you expect it to be.

However, the small playing area severely limits potential games. Sure, you can design interesting games where the player has to stay in a ten by ten square, but that limitation excludes a huge swath of world exploration games. You can’t create Skyrim in virtual reality today. There is some room for creativity—in one game, you can teleport from place to place instead of walking. But that game dynamic would almost certainly not been in that game without the real-world mobility restriction.

It also make me wonder whether there will be a bunch of wheelchair games coming out—if you make moving around world connected to hand movement rather than leg movement, then this problem goes away. And wheelchairs are the most common real-world example today where movement is tied to the hands rather than the legs.

The arcade business

Though the virtual reality is cool, I think virtual reality arcades will be a tough business. I’m not sure why someone would start one of these virtual reality arcades—within years, consumers will have their own VR systems which will make these arcades obsolete. The people creating these arcades should really study history to determine why traditional video game arcades became obsolete, and figure out what they should do to avoid what looks like a nearly inevitable decline in their business. To make this business viable, they need to be creating experiences that can’t be reproduced in the home, and they don’t seem to be doing that.

Multiplayer games may extend the runway of these arcades, since it might be too expensive for people to purchase multiple systems and network latency may limit remote communication between systems over the Internet. But I can’t imagine network latency will be a problem for long. Maybe the niche for VR arcades is solving the mobility issue by creating big enough rooms that player mobility is far less of a problem. But in cities with high real-estate prices, it seems hard to do that in an economic way if you’re only allowing one player to be in each huge room.  (And multiple players in each huge room is problematic as real-world interactions between players can be dangerous.)

So, I’m not sold on the arcade business, so I’d be interested in hearing if these entrepreneurs have some way of making their business model sustainable.

The bottom line

While virtual reality arcades might not be here to stay, virtual reality is. This technology works, and works well. I imagine within the next five years or so, I’ll probably own one of these systems for myself.

The Influence of Foreign Money in Vancouver

The Vancouver housing bubble shows extreme growth in housing prices.

For years, the Chinese have been blamed for inflating the Vancouver housing bubble, increasing the price of real estate beyond the reach of many locals. The theory is that the Chinese make money in China through licit or illicit means, and then illegally launder it by buying Vancouver real estate. (I use the words “illegally launder” because China has currency controls. Anyone transferring enough money out of China to buy a house in Vancouver has almost certainly violated these Chinese laws.)

Historically, I’ve always discounted the “the Chinese caused the housing bubble” theory. Though there are a fair number of ethnic Chinese in Vancouver—roughly 28% of the population according to recent Statistics Canada data—that doesn’t imply that ethnic-Chinese real estate purchasers are foreigners or using foreign money to buy.  Instead, it might mean that the people buying houses are Canadians who happen to have a ethnic Chinese ancestry, and are buying—just like many non-ethnic Chinese Canadians—because interest rates are super low, and they view Vancouver real estate as a “can’t lose” investment.

However, I’ve recently changed my tune. I now think Chinese money is a significant driver of the Vancouver housing bubble.

Why the change?

As a Canadian, I’m almost instinctively averse to blaming a particular group for bad things. I don’t believe I’m any more racist than the average Canadian, and I don’t want to espouse racist views. However, I also think that ignoring data and eschewing analysis for fear of being perceived as racist is short-sighted. Evidence should determine policy, and we shouldn’t allow the fear of being branded a racist constrain our analysis.

So, there’s a couple of data points that I find convincing. The first is that in the west-side of Vancouver (i.e. the really expensive side where the median detached home is typically in the $3-3.5M range), a huge percentage of buyers are of Chinese ancestry. One study indicated that 70% of the homebuyers’ names were Chinese, and 36% were homemakers and students.

Now that doesn’t mean that these were foreign purchasers. They could be ethnic Chinese Canadians. But it seems unlikely. For one, how can a homemaker or student with no income afford at $3M dollar home? The most likely explanation is that they’re getting money from elsewhere.

The problem with suggesting the money isn’t foreign

What’s more, if these buyers mostly are Canadians, that actually suggests a bigger problem than the housing bubble. To buy a $3M home, you need a massive income, like half a million dollars a year. The median family income in Vancouver is about $75K. So, if you’re saying that all these ethnic-Chinese purchasers are Canadian, you’re essentially saying that ethnic-Chinese Canadians are making five or six times more money than other Canadians.

If that’s the case, we really need to be asking how our systems are failing the non-ethnic Chinese Canadians who cannot afford these dwellings. Are we discriminating against the non-Chinese? Should we institute taxes on those of Chinese ancestry (or give money to everyone else) to level the playing field?

Of course not. It seems extremely unlikely that ethnic-Chinese Canadians have some huge economic advantage over others in Canada, or that Canada has massive systemic discrimination against the non-Chinese. A far simpler explanation is that foreigners and foreign money are behind most of the purchases in the west side, which is why so many purchasers are ethnic Chinese. To not believe that, one has to go through considerable contortions.

The second data point

The second data point suggesting foreign money is a major cause behind the housing bubble is the impact of the 15% foreign buyer’s tax. Christy Clark, in response to complaints from her top donors (condo developers), recently rolled back this tax only six months after it was implemented, making it so that people who have a work permit in Canada won’t have to pay. (This largely eliminates the tax, as people don’t actually have to work or pay taxes in order to get a work permit. Working or not, I imagine pretty well every foreign buyer will spend a couple of hours getting a work permit if they can save $500K on their $3.5M west side house purchase by doing so.)

Regardless, it was interesting seeing the impact of this tax. Essentially, it killed the market for single family homes in Vancouver. In contrast the condo market is still extremely strong (and was even before Christy Clark decided to further subsidize her developer friends by creating interest free loans to first time buyers who buy condos). Condos, of course, are the only thing most people who earn their money locally can afford to purchase.

Thus, to me, the single family home transactions plummeting at the same time as the foreign buyer’s tax was implemented while rest of the market remained hot suggests that foreign buyers with foreign money were likely behind a huge portion of single family dwelling purchases in Vancouver. If the single family dwelling market were driven by local money, I’d expect it to be as hot as the condo market as locals sell their condos in order to upgrade to houses. But it isn’t. It’s dead.

Thus, this data point further reinforces the first data point that a large percentage of the people buying single family homes in Vancouver are foreigners using foreign money.

My bottom line

Consequently, I believe foreign money and foreign buyers are a significant force behind the Vancouver housing bubble. While it is possible to contort yourself in order to avoid the conclusion that foreign money is a major factor, to do so would be intellectually dishonest, ignoring the simplest, most-likely-to-be-true explanations because they are politically unpalatable. (And, if evidence comes to light that indicates that these conclusions are wrong, I’ll change my beliefs.)

Of course, if Chinese money is a major factor behind the Vancouver real estate bubble, the natural question is, “what should be done, if anything?” To me, that’s a far more challenging question, one I may take up on a future blog if I can think of some good answers.