Blessed by the Potato

With the 6th day of the power outage coming to an end there’s still no sign of power for our street. The neighbourhood association got its hackles up after the Toronto Hydro soundbites today about being down to individual houses/house-to-house action when nearly a square kilometre was still dark for us. (The current wording is “localized neighbourhoods”.)

The utility still won’t provide anything like an estimate.

I can understand that in the first day, when trees were falling faster than lines were going back up, it was impossible to provide any estimates. But at that time we were told to prepare for up to three days. Some of us are well past double that, and it would be really good to know what kind of arrangements to make at this point — our frozen houses aren’t really habitable, and our relatives (though too polite to admit it) are clearly getting a little sick of our couch-surfing, house-crowding ways. For those who booked hotel rooms to stay warm, a generator might be cheaper than continuing to pay by the night if this is going to take another week. I’m fine on the couch and have my laptop for updates, but if I have to stay away for many more days I’m going to want to move more stuff out (and maybe grab more than 2 changes of clothes so I’m not constantly doing laundry at the in-laws’).

Though we bugged out early (largely because of Blueberry, partly because I had a bad feeling about the whole thing based on how terrible our power reliability has been in the best of times this year), it was hard to leave at the time because you keep thinking “any hour now…” I’ve been back to check on the house once or twice a day, and the neighbourhood is deserted now. I cleaned out our fridge and freezers, must be over $500 in spoiled food (and lots of home-made and frozen toddler dishes). Less than a third of it was salvageable.

On the news there was a factoid that the fire department is dealing with 10 times as many carbon monoxide calls as normally. I find that a really oddly low multiple with so many people trying to keep warm in unique ways. Is the baseline rate that high, or is it that the few cases we’ve heard about in the news are about it for carbon monoxide calls?

We’re now heading into our sixth day without power here in Toronto, one of the hardest-hit sub-regions. From driving around the now-deserted neighbourhood, there are a lot of wires down that have just been marked with caution tape and left on the ground. If they all have to be strung back up to restore power, it could be another day even after the crews get to us.

The ice is so thick on everything: well over a cm thick on the ground, and now covered with ~6 cm of snow. The first day the ice was textured, kind of like curling ice, so it wasn’t actually all that slippery, but now it must have melted and refrozen a bit, and with the snow on top it is deadly slippery out.

We bugged out on the first day. Our power has been so wonky over the last year — with an eight-hour outage every month on average — that I actually asked for an inverter for xmas. Unfortunately (or fortunately*) I didn’t get one, so when I heard on the news that it could be up to 3 days to get everyone reconnected, and that colder weather with the potential for wind was coming for the city, I figured this ice nonsense was just going to get worse, and with the baseline level of problems in our neighbourhood grid we would likely be the last ones to be reconnected (closer to the 3-day mark, in other words).

While Wayfare and I could manage the cold by bundling up and staying under blankets, Blueberry just doesn’t have that kind of sense. So even though it was icy and the traffic lights were out, I decided late that first day to bail and crash with my dad north of the city (where they had heat, power, and got snow instead of ice). It was a difficult call to make at the time, as packing up all the stuff a toddler needs in the dark and cold takes time, and I was worried the drive was riskier than the cold (though it would be more pleasant, the icy roads and travelling beneath the branches we could see were falling to the ground was definitely more likely to kill us). But, my parents’ house in Toronto was out, Wayfare’s parents in Markham were out, and the tree branches were literally falling before our eyes, making the problem worse and worse for the hydro crews.

Well, in hindsight it looks like the right move. Just about the whole neighbourhood is abandoned now. Surprisingly, other municipal services have come: the roads and sidewalks have been plowed, and so did the garbage trucks. No sign yet of when the power will be back on. If my initial guess of “we’ll be last” is right, and the news is now saying Saturday for the last few households in Toronto, well, it could be a few more days to go. Of course, they’re also calling for gusty winds to move in over the next few days, which could start the problems all over again as all that ice is still on the trees.

When we left, the house was just ticking down through 14°C (from a set-point of 21-22°C, depending on what part of the programmed cycle it was in), a rate of heat loss of about half a degree per hour. Though they had already said on the radio that people should start running their taps to prevent freezing, I figured we had at least another day before we had to worry about that — and likely longer as the rate of heat loss would come down as the house got closer to the outside temperature. I was surprised though as we came back from the north country 3 days later to find the house was at about 4°C, and was still there the next day. I figured having part of the house (particularly the part with the hot water tank) below the frost line would help keep it “warm” (warm being a relative term when just above freezing is the goal so pipes and mystery bottles in cabinets you never thought about when evacuating don’t explode), as might a tiny bit of greenhouse effect when the sun’s out. So even if it takes another day or two for the power to come back on, it doesn’t look like we’ll have to worry about burst pipes and waiting months for a plumber to give us back indoor plumbing.

It’s eerily quiet in the house and the neighbourhood. So many people gone, no cars trolling around, no fans or furnaces, just silence.

As a last-minute xmas gift, my dad got me a small gas generator (he’s far enough north that they’re still in stock — I’m surprised so many people in Toronto would wait for hours in line to get one there, but wouldn’t take the same amount of time to drive to Barrie). It’s big-font rating is 2000 W, but the capacity is closer to 1600 W continuous. That’s enough to run the fridge, a small space heater, or the fans on the natural gas furnace. Unfortunately, the furnace isn’t wired up in a way that will let me plug it in, and I’m not about to go mucking about with it at this point. The house is too cold to bring it back up with space heaters (though for next time, space heaters might be enough to slow/stop the loss of heat if we start while it’s still warm).

The generator is nearly ten times as expensive as the inverter solution I was thinking of for the Prius (and surprisingly, not much more fuel efficient), though it is nice to just be able to pull the cord and plug in an extension cord, and not have to wire things to the 12 V battery or worry about someone stealing my car. On the downside, the Prius can run for nearly 2 days on a tank of gas in “backup generator mode”, while the generator I have requires refuelling every ~4 hours.

* – I say fortunately because if I did have an inverter to unwrap for this, we might have tried to stick it out. It might have saved the food in the freezer, but 1000 W (the capacity of the inverter I had asked for) doesn’t get you very far with space heaters. Instead of bailing before the wind and snow, and getting to spend a few days with the family up north, we likely would have had a miserable few days of shivering in the dark as the temperature continued to drop from the already-chilly 14°C — just slower than it would have without an inverter/PriUPS to provide power. That, or I would have had to hack the furnace to make it plug-in-able.

In today’s post at Michael James on Money, he mentions that we can’t extend generous government pensions to everyone.

Here’s something that I’ve never really understood: how is it that there are so many defined benefit pension plans? The news seems to be full of stories of underfunded pensions (another one today about Canada Post’s), and while I can see the logic that led to underfunding, due to the management of the plan and various incentives, I’m amazed that the plans exist at all. The issue is that people are terrible discounters of the future. I would think it should be easy to convince someone to take a minor increase in pay now over a future pension obligation. I would also think that the individual workers would be worse at that kind of math than the corporations and governments employing them.

Yet pensions exist, so what’s wrong with this thinking?

Perhaps an additional factor to future discounting is uncertainty: having a pension means people don’t need to wade into the dark waters of investing: their future will be taken care of, and that certainty (and service of freeing workers from saving and investing on their own) might trump their over-discounting of future payoffs.

Or maybe the organizations suffer from the discounting more than I had thought. Perhaps the present seems so make-or-break that they figure if they don’t keep current costs low (and thus make expensive future promises), they won’t be around to have to deal with the pension. It could be a dissociation between the organization and those negotiating in the present: the elected officials or car company negotiators figure they won’t be around when the bill comes due, so make some deals that are cheap in the short term.

If the certainty is a large factor in making workers value pensions, that might present an interesting opportunity and psychological approach for helping people think about their future selves and save/invest more on their own.

One of my shining triumphs here has been to create (with generous help from Matthew Gordon) the ultimate buy-vs-rent calculator tool (direct link to the spreadsheet).

The beautiful thing about a spreadsheet-based calculator like that is that you can follow the calculation, item-by-item, and check it for bugs if you get unexpected results. Earlier this week, B&E posted a list of calculators out on the net, and rather than linking to my supremely excellent calculator and associated post, Robb linked to a Get Smarter About Money calculator. Ok, it’s web-based and a little more user-friendly than a spreadsheet, and has graphs and sliders (though why you need house price to go up to $10M is a question left unanswered)… but was it accurate? I’ve seen many, many terrible buy-vs-rent calculators (even some seemingly excellent ones like the famous New York Times ones that just doesn’t work for Canadians due to tax differences). So I played around with it. And I quickly saw wonky results like this:

In the comparison I have there, the price-to-rent multiple is 260X ($2500 monthly rent on a $650,000 house); as we’ve learned from previous posts in realistic scenarios it should be better to rent with prices so detached from rents. Yet here the calculator is showing a rather large benefit to buying if you can only wait 7 years or more. Then, strangely and inexplicably, renting rapidly takes the lead in the final few years of the comparison, with some sort of apparent discontinuity at year 30. If you look at their “chart” you can see more errors immediately: I had entered $2500/mo in rent, which is $30,000 per year, yet the “total renting expenses” came to just $12,360 in their chart, a factor of three too low. The buying expenses were only about $31k in their chart, whereas the mortgage alone is that much, with a total cash outlay of nearly $45k each year.

Now if you instead do the same comparison in my calculator, you’ll find that renting beats buying right from the start (due to the high transaction costs), and is fairly flat in terms of net benefit for about 10 years, at which point the investment portfolio starts to get large enough that investment returns become comparable to rent and the exponential growth becomes truly noticeable. There is no big “buying is better” hump in the middle. Moreover, the magnitude of the difference is notable: in my calculator renting beats buying in such a scenario by over $600,000 in year 30, versus the nearly break-even result from this scenario in the flashy online tool, with the same assumptions regarding investment returns, inflation, mortgage interest, and other sundry costs.

It’s a bit distressing, as other online calculators have recently been found to have serious errors as well. For instance, Michael James uncovered one on the Globe & Mail’s site, and just today news broke on retirehappy about the government’s CPP calculator over-estimating your future CPP benefits and not at all handling early retirement scenarios correctly.

Footnote: let’s say you’re not convinced that my spreadsheet is the gold standard to which all other rent-vs-buy calculators should be held. To then check the accuracy of the online calculator, let’s run the first year’s numbers manually:
Buying: mortgage $31k, property tax $6k, insurance $1.7k, maintenance $6.5k; total cash cost: $45.2k. Principal paid down: $16.5k. Net cost of owning: $28.7k.
Renting: rent $30k, insurance $0.4k; total cash cost: $30.4k. Investment portfolio gains: $10.5k. Net cost of renting: $19.9k. Cost to sell house: $39k. Gain on house: $15k. After year 1, renting ahead by: $49.3k. Online tool says: $16k.
If you notice any errors let me know.

Fact: an “investor” buying a condo in Toronto today quite likely faces negative cashflow and poor projected investment returns based on current rents. The three reasons for buying in such a situation are that rents will increase — and increase fast enough to matter/before interest rates rise; that there will be price appreciation; or that the investor is making a mistake. Well there certainly was price appreciation in the past, and appreciation can beget appreciation until a bubble pops. Current and future buyers may not be counting on appreciation as much though, as expectations temper and we see flat or negative price growth (year-over-year price changes were negative for 416 condos in 5 of the last 12 months, and under 2% in all but 4).

That leaves rent increases. Urbanation puts out a quarterly report claiming staggering amounts of rent increases (figures that look even higher as they report price per square foot in a market with ever-smaller units). I mean, they don’t come close to keeping up with the kind of price appreciation seen over the past decade, but staggering compared to our expectation of rent increases from CPI inflation and the Ontario rent control increases. This news often gets picked up by the Star (with breathless headlines) and these high inflation figures get stuck in the minds of some. Personally, I’ve doubted these figures, as they don’t jive with my anecdotal experience or other data sources on rent inflation.

A new report from Veritas has ignited a bit of a spat, as they report a small amount of rent deflation. They also explicitly track and project the negative cash flow for an investor buying a condo in Toronto today. Urbanation took to their blog to try to debunk the new report and reinforce why we should listen to them instead.

What I found particularly shocking in Urbanation’s post is that they themselves don’t have a good handle on what proportion of the market their data is sampling. As far as I can tell, nobody does. They claim to capture 2/3 of the [condo] rental market. I back-of-the-envelope it and get more like a quarter of it (and a non-randomly selected quarter at that). And I think that says just how bad the data is: the biggest, splashiest report on the matter uses a non-random subset of data with several potential selection and reporting biases, and no one can even say what proportion of the population their sample represents or how representative it is. Smaller spot-check “mystery shopping” samples are potentially not as accurate, but nevertheless the fact that they disagree should call into question how much weight we give either figure. Nobody can even say whether the average rental tenancy lasts 3 years, 5, 7, or something in-between. Urbanation just takes an unsupported stab at 5 years below (20% turnover), and assumes that’s the same for owner-occupied and rental units:

Who’s [sic] research should be taken with a “grain of salt”?
We recognize that transactions through the MLS system don’t represent all activity in the condo rental market, but we do believe it represents the strong majority. […] The ‘true’ annual turnover rate of all condos is likely closer to 20%

[Emphasis mine]

Yes, whatever slice Urbanation gets from MLS will be bigger than the slice Veritas sampled on Craigslist and their mystery shopping adventure, but that’s not the point*. The take-home message is that they are both imperfect samples saying very different things about the market. We need to view the whole thing as a lot fuzzier than we have been: both reports likely have large margins error, and it looks like all we can say about rents on condos is that they’re basically flat, plus or minus 5%. Heck, the Ontario rent control rate may be the best estimate of rent inflation out there.

* – Even though bigger is usually better in sampling and stats, a bigger biased sample is still a biased sample.