Why is PT ridership falling in the US, but growing here?

Jarrett Walker recently posed an interesting question, that he was after some more in depth research on than the usual ‘reckons’, “why is public transport ridership in the US falling so much?”

This builds on a tweet from Kirk Hovenkotter, showing that ridership had fallen in most large US cities over the past year, which was reported on CityLab:

A number of “culprits” are suggested. The obvious one being that oil prices have fallen significantly over the past few years, alongside an ongoing process where immigrants – or poorer Americans in general – are being priced out of transit rich inner cities and into more car dependent suburban areas:

Some of the factors behind these declines are national, as the transportation scholar David Levinson points out via email. The economy is expanding, and oil prices are plunging. People are buying more cars and driving them more often, both to work and to weekend activities that are better served by vehicles. American cities continue to suburbanize, and as they do, taking transit often becomes a less attractive option. Immigrants, long a strong base of ridership for agencies, are increasingly moving out of urban centers… and buying and driving their own vehicles.

Other suggestions are that people are shifting to using ride-hailing services like Uber and Lyft – but the evidence is pretty thin on the ground when it comes to that:

This argument probably holds truest for weekend boardings. But the best research out there (and there isn’t much yet) suggests most workers don’t rely on Uber and Lyft for regular daily commutes. Ride-hailing may even be more supportive of transit than competitive, at least in the biggest cities (smaller cities might be another question). At the very least, it doesn’t seem to be siphoning a significant number of riders away. When Uber and Lyft left Austin, mass transit saw a very modest one percent bump in ridership, according to the transportation consultant Jarrett Walker.

Of course, meanwhile in Auckland public transport ridership continues to grow strongly, as I noted yesterday February ridership was up 8.6% on February 2016, with both the rail network and the Northern Busway again registering double-digit increases.

Even across Canadian cities that we usually enviously compare ourselves, ridership growth is much slower than Auckland – although they start from a higher base. This leads to an interesting question of why Auckland is bucking the trends seen elsewhere so strongly. I think there are a few possible suggestions:

  • Auckland’s recent rapid growth and the growing congestion it has created, means that PT offers a pretty competitive travel choice for many people – especially when using the rail network or the Northern Busway.
  • We’re still seeing the benefits of recent investment in rail electification and integrated ticketing, as well as the improved “value for money” offering that came with zone-based fares last year.
  • Service network improvements, mainly in the south so far, have also helped increase ridership – some of that is a result of us shifting to a system that encourages greater transfers although indications are that overall journeys have increased too.
  • The NZ/US dollar exchange rate usually offsets fluctuations in oil prices so we don’t see as rapid increases/decreases in fuel prices at the pump as is the case in the US. Also a higher proportion of what we pay is tax when compared to the US.

All up we are doing well to buck the international trends and it should give us ongoing confidence in investing in public transport – that people will continue to flock to where improvements are made even when fuel prices are relatively low. We’ve still got a long way to go but perhaps one day soon we can be envied as a city used in case studies of what to do to make public transport better rather than our history of the opposite.

Another flawed congestion report

Every year TomTom produce a report about how much worse congestion is getting in Auckland, and every year the media lap it up – usually without looking at the flawed methodology of the report. So it was the NZ Herald yesterday:

Auckland’s roads are so congested commuters are spending an extra 45 minutes a day – or four working weeks a year – stuck in traffic.

A new report has revealed the country’s congestion is now worse than Hong Kong with the time spent on Auckland’s roads doubling in the space of three years.

TomTom has released the results of its Traffic Index 2017, an annual report about traffic congestion in cities around the world.

Auckland is ranked as the 47th most congested city on the planet, worse than Hong Kong, which has a population of 7.2 million.

Auckland’s level of congestion has risen from 33 per cent of extra travel time in 2015 to 38 per cent in 2016.

Drivers in New Zealand’s biggest city now spend an extra 45 minutes each day stuck in rush hour traffic, the equivalent to 172 hours, or four working weeks in a year.

As we’ve noted quite a few times before, the way in which TomTom derive their congestion “scores” is pretty meaningless because it focuses so much on comparing travel times between peak and off-peak, rather than actually looking at the overall average travel times for different cities.

We’ve unpicked this methodology before, but perhaps the best explanation of how stupid it is comes from Jarrett Walker, looking at “Urban Mobility Report” produced by the Texas Transport Institute using a very similar methodology to the TomTom report:

The technical core of the argument is simple. TTI’s Travel Time Index, one of their more quoted products, is a ratio of peak congested travel times by car against uncongested travel times by car. In other words, travel times are said to be “worse” only if they get much longer in peak commute hours than they are midday.

This ratio inevitably gives “better” scores to cities where normal uncongested travel times are pretty long — in other words, spread-out cities. Here’s the CEOs’ critique of how the TTI compares Charlotte and Chicago:

Now it seems complete nonsense to say that Chicago, with an average travel time of 32.6 minutes has worse congestion than Charlotte, with an average time of 48 minutes – but that’s exactly what’s happening here. Furthermore, the methodology completely ignores how an increasing proportion of trips taken by rapid transit, walking and cycling aren’t affected by congestion. Jarrett Walker again:

The journalistic spin that TTI itself recommends is that non-car modes matter only if they reduce congestion, and that congestion remains the primary measure of urban mobility.

What’s more, TTI’s suggestion that public transit directly reduces congestion is actually quite fraught, and many transit experts, including myself, steer away from it. Transit certainly creates alternatives to congestion for individuals, and the resulting benefit to individuals can be aggregated to describe society-wide improvements in both productive time and personal/family time. But those calculations are much more clear and direct than any “transit benefit to congestion” overall. That’s because newly freed, high demand road space tends to induce new car trips.

Most transit projects are not trying to reduce congestion, or not all by themselves. If congestion reduction is your goal, you need a combination of transit and market-rate “decongestion” pricing for motorists. For most advocates of transit in the context of compact sustainable cities, the goal is not to reduce congestion but to give citizens options to liberate themselves from it.

This is why it’s so important we invest in a greater range of transport options and particularly ones that are able to move a lot of people reliably and not affected by traffic congestion. Sure not everyone can or will want to use them but we’ve seen first hand in Auckland than when offered good options, many will flock to use them.

Perhaps the most useful way of using the TomTom report is not so much comparing across different cities – for the reasons best illustrated above – but more to track the same place over time. In that respect Auckland is seeing a pretty big increase in congestion over the past few years, up from around 100 hours a year to 170 hours a year. This is a pretty sad indictment, given how much focus the government has on reducing congestion and how much money they continue to sink into building more roads.

It will be interesting to see next year’s results and whether completing the Western Ring Route has made things better, or worse.

Quit whining, Millennials, and save for a home!

The other week, BNZ chief economist Tony Alexander put out a statement chastising young people for not saving harder to buy a home. As I pointed out, his argument was based on a pile of untrue assertions and misleading data. Others also expressed similar views.

In a further statement reported by Jenée Tibshraeny, he clarified that crazy house price increases have actually made it harder for young people to afford a home. It’s nice that he’s aware of that, but the rest of his article suggests that he thinks the hole he’s in will turn into a tunnel if he keeps digging.

Alexander’s core advice remains:

Young buyers these days need to make deep sacrifices in spending on other things if they want to purchase a house and if such sacrifices cannot be made home ownership could well remain out of reach…

If purchasing a house is your goal then there is no shortage of things which those who already have purchased sacrificed as they built up their savings, worked at reducing the principal to improve their position, and adjusted when their interest rates and/or expenses went up. Things people have cut out have included…

· Cafe visits
· Going to restaurants and bars
· Smoking
· The latest telephones, games consoles, cars
· International travel
· Weekend and evening leisure time because they took an extra part-time job.
· Hired help like dog washers, landscape designers, etc.
· Subscription tv, gaming, music
· Privacy – by taking in flatmates, student boarders, or renting out space on Airbnb.

And he continues to make blatantly false statements about the saving behaviour of Boomers (who spent their 20s taking on debt) and Millennials (who are saving lots in their 20s):

Baby boomers will understand this need to build savings over many years before seeking a mortgage. But the younger generation used to businesses chasing them continually for their dollar will take some time to cotton on to the implications and figure out how to get to the head of the queue.

As I said last week, house prices have risen significantly relative to the price of just about everything else. In that context, Alexander’s advice to save money by cutting back discretionary expenses, most of which are relatively cheap, is bad advice for the average young person. That might have worked in the past, when housing was cheap compared with overseas travel or consumer electronics, but it doesn’t work now.

Since Alexander hasn’t done the maths on this, I will. How long would it take you to save for a deposit on an average or lower-quartile Auckland home by skimping on luxuries?

I’m going to start by making a few simplifying assumptions. First, I assume that people are saving money in bank accounts that offer returns that are roughly equal to inflation, and then I ignore inflation – all numbers are in real terms.

Second, I’m going to make some generous assumptions about future increases in the price of housing. Today, the price of a median Auckland home is just over $800,000, and the price of a lower-quartile home – ie a typical starter home – is around $680,000.

Those prices have risen at double-digit rates for the last five years. But I’m going to make a very optimistic assumption that we get real house price inflation down to a much lower level – say, a mere 3% per annum.

Third, I’m going to assume that first home buyers will still be required to come up with a 20% deposit due to loan-to-value restrictions. Lowering that ratio would probably cause house prices to rise faster anyway, offsetting the benefits for first home buyers.

Finally, I’m going to consider a hypothetical case of a very feckless Millennial who spends money on a whole bunch of unnecessary luxuries rather than prudently saving for a mortgage. Our made-up spendthrift is assumed to:

  • Go on one overseas holiday a year at a cost of $4000
  • Buy a coffee a day at $4 per coffee, or $1460 per year
  • Go out for a $40 brunch every Sunday, which costs $1040 per annum
  • Get acupuncture ($80) on a weekly basis, costing $4160 per year
  • Subscribe to Sky TV at $600 per year

In addition to all of this self-indulgence, they also hire a cat whisperer to visit their pet while they’re at work and prevent it from developing emotional problems. Cat whispering costs $23 per visit, adding up to an astonishing $5750 per year (based on 250 working days a year).

These savings add up to $17,010 per annum, or around 30% of the average pre-tax income for an 25-29 year old Aucklander with a full-time job (a bit over $50,000). Surely someone saving that hard would be able to afford the deposit on a home in no time?

Well, no. Here’s a chart comparing their accumulated savings with the required deposit. While their savings would eventually exceed the required deposit, it would take:

  • 11 years for them to afford a lower-quartile home
  • 14 years for them to afford a median home.

In other words, someone who started saving in earnest at 23 wouldn’t be able to afford the deposit on a home until they were 34. Furthermore, if real house price inflation was even slightly higher – say 5% rather than 3% – it would take 23 years to afford the deposit on even a lower-quartile home.

This analysis demonstrates two important things.

First, following Alexander’s advice and saving until it hurts won’t help young people. The only way things will get significantly better is for house prices to fall to a more realistic level.

In Alexander’s world-view, the only two paths forward are for young people to give up everything fun and work three jobs to save for a deposit and pay the mortgage, or for them to give up on home ownership. But that’s a false choice that only applies if house prices stay at current levels. If prices were lower, bank economists wouldn’t be making silly comments about how to save for a deposit by firing your cat whisperer.

Second, this shows that any further increases in house prices are unsustainable for first home buyers. Even if real house prices only increase by 3% per annum, that means that the value of a median home will increase by $24,000 a year, or almost half of the average wage for employed people in their late 20s. The required deposit will in turn increase by $4800, meaning that the average employed Millennial would have to save almost 10% of their pre-tax income just to keep up with inflation in the average deposit.

This in turn means that we have to take a hard look at our baseline assumptions about capital gains on residential property. Although rising prices have been beneficial to some, it’s becoming increasingly apparent that they have a range of negative social and economic consequences. Put it another way: I wouldn’t necessarily buy on the promise of everlasting capital gains.

The death of coal?

At TransportBlog, we focus on transport and urban issues. However, other topics pop up occasionally. Energy and electricity have always had a link to transport – oil, one of the world’s most versatile energy sources, is mainly turned into petrol or diesel, but it can also be used to create electricity (NZ did this in a small way until the late ’70s). Electricity powers our trains, and could also be important for light rail and electric vehicles in the future.

At an energy conference a few years back, I heard a climate change expert talk about coal’s importance to the world power supply, and that China was opening a new coal power plant every week. If things kept going as they were, the world would have ‘locked in’ the rest of its carbon budget within five years.

What’s a “carbon budget”? This is the amount of carbon dioxide and other greenhouse gases which can be burnt before the world is set down a path of 2°C global warming. We’re not at that point yet, and it will be quite a few years before we reach it – but the problem is that we keep burning every year, and we really need to cut down on those emissions before we reach the end point.

The other problem is that many of the things that generate emissions are long lasting. A new coal plant is going to be around for decades, say 30-50 years. This is the thing about ‘locking in’ the carbon budget – investment decisions today will affect the level of emissions for a long time to come. Sure, you can build the coal plant and then shut it down after ten years, but that’s terribly expensive: the owner would never get a return in that time. Or, as an everyday example of these investment decisions with long-term implications, cars that roll off the assembly line today will be on the roads for 20+ years before they’re thrown on the scrapheap.

So I’m pretty happy to see that coal power is looking much shakier. I’ll start with a global view, then look at China, Australia and New Zealand.

The World

It seems odd to us here in New Zealand, but coal still supplies almost half the world’s electricity. It’s also the highest-emissions way of generating power – natural gas is an improvement, although still quite emissions intensive.

Globally, coal consumption has been growing over the last 50 years, as shown in the graph below:

Source: BP Statistical Review of World Energy 2016

As the graph shows, coal demand has been growing much more slowly in the last few years, and even fell in 2015. The graph also shows the importance of China to what happens globally: this one country now accounts for half the world’s coal consumption, and pretty much all the consumption growth in the last decade.

Besides China, you’ve got the US (which grew until 2007 and then started dropping – part of this will be economic factors), the other OECD countries (demand falling slowly in the last few years), and the rest of the world. The ‘rest of world’ is growing quickly, mainly due to developing countries building new power plants. Essentially, coal consumption is shifting from the developed countries to the developing countries, which is likely to continue.

There’s an economic development question which has to be balanced with climate goals: is it fair to deny developing countries access to a very cheap energy source, when they don’t have the money to pay for more expensive energy and it’s the developed world which has made up the lion’s share of emissions to this point, and has much higher emissions per capita? It’s generally agreed that this isn’t fair, so it does get taken into account in world climate talks.

So where does coal head from here? Was that 2015 dip the start of a long-term decline, or does coal consumption stay flat, or will it start growing again? From a CNBC article:

[The International Energy Agency] expects worldwide growth in coal consumption to average just 0.6 percent between 2015 and 2021 as developed countries continue to abandon the energy source and China’s consumption plateaus. That will offset growing demand among emerging nations, particularly in India and Southeast Asia.

Whether coal demand returns to 2014 levels or falls short of the mark will largely depend on consumption in China, which accounts for about half of the world’s appetite… coal demand is falling in China, and the IEA believes it will continue to dip through 2018 before entering an upward trend through 2021.

The Energy Information Administration, part of the US government (not to be confused with the IEA!), projects world coal demand to grow by 0.6% per year through to 2040. However, this projection is almost a year old, so it may not reflect the latest changes in the coal market. Again, China is the big factor, and it seems to have changed tack in the last year.

China

In the last year or so, China has made some big announcements on coal. It cancelled 103 plants which were planned or under construction, and won’t approve any new plants entirely until the start of 2018. However, another article gives some useful context on the issue: China’s aim is to have 1,100 gigawatts of coal capacity by 2020, compared with 920 at present – but there were so many power plants being built or planned that it would have overshot the 1,100 mark substantially. Already, China’s power plants are running at a very low utilisation level, only generating about 40% of their maximum capacity. There’s already an oversupply in many parts of the country, which would have been made even worse if the new plants came online.

Still, cancelling power plants once they’re under construction is a big deal. As noted above, it’s an expensive way to do things. China is looking for cleaner energy alternatives – it now has more wind and solar capacity than any other country – and also pledged, under the Paris Agreement, that its overall emissions would peak by 2030. China’s commitment on this, as a developing country, makes New Zealand’s ‘commitment’ look pretty weak by comparison.

Although it’s early days, China has certainly shifted its stance on coal, and committed to being a climate leader. Coal is in the black books not just for its greenhouse gas emissions, but also because it’s so polluting – with terrible effects on the air quality in many Chinese cities.

Australia

The Herald ran a great piece recently looking at the Australian situation:

A couple weeks ago Prime Minister Malcolm Turnbull announced that his government is planning to subsidise the construction of clean coal power stations to make electricity more secure and affordable… However, the power generation companies who Turnbull would be relying on to build these new coal powered generators appear to want nothing to do with it.

Clean coal power stations are hugely expensive to build and they need to operate for 30 years to produce a return. That comes with a political and technological risk that power companies aren’t prepared to carry… energy companies don’t want to build new power stations when there is a risk of them becoming stranded assets that don’t produce a return and no one wants to buy.

I’m appalled that the Australian government is wanting to subsidise new coal plants – and ‘clean coal’ is a very misleading term at that. Still, it seems like the Australian power companies don’t want to touch this deal. The ‘political’ risk is that at some point, maybe not too far away, some stronger climate change agreements will get signed, and those coal plants will face heavy emissions costs. The ‘technological’ risk is that renewables, solar and wind, keep getting cheaper. This could leave coal unable to compete.

Here’s an interview with a power company CEO:

Well, I think CS Energy certainly has no intention of building any coal-fired power plants, ultra-centre super-critical or not. And it would surprise me greatly if there was any more coal-fired technology was built in Australia.

I think when you look at the risk of the investment, you’re talking about $2 billion-plus investment up-front. These assets have a plant life of roughly 40 years, and so it’s a very, very big long-term bet. So given the current uncertainty, I think it would be a very courageous board that would invest in coal-fired technology in Australia.

New Zealand

Coal has never made up more than 10% of our power supply, and it’s become less important in recent years:

Coal, oil and gas plants all fall under the category of ‘thermal’ generation, and with a bit of effort you can convert from one to the other. As shown in the graph, NZ was no longer burning oil for electricity after the late ’70s, and most of our thermal electricity comes from gas.

More than 80% of NZ’s total electricity now comes from renewable sources, and that’s been trending upwards slowly. The government has a goal in place of getting to 90% by 2025 – hardly ambitious – and we have a good chance of getting there. Over the last few years, coal and gas plants have been closing, or running less frequently.

Huntly is the only major power plant which still uses coal. It has steam turbines, which can run on either coal or gas, but generally Huntly runs them on coal. Two of the four coal/ gas units closed, in 2012 and 2015. This dropped Huntly’s capacity from 1,450 megawatts to 950. There was talk in 2015 about closing the last two coal/ gas units – leaving Huntly as a gas-only plant, and essentially ending large-scale coal power generation in NZ – but a deal was signed in 2016 to keep them open until 2022.

The Otahuhu power station, actually in Otara, has closed and been sold as a long-term development site. The 400 megawatts of gas generation there had been built in stages from 1968, with the last stage in 2000 – it only operated (intermittently) for 15 years. The smaller Southdown power station also closed in 2015 – 114 megawatts, with part of that capacity only added in 2007.

I expect that’s as far as we get for a while. The current big question mark in NZ electricity is what happens with Tiwai Point, the aluminium smelter near Invercargill. There’s been years of talk about it potentially closing, or reducing its operations. And this single place uses a whopping 13% of NZ’s electricity, around the same as every household in Auckland combined. Even without Tiwai Point, power demand has been quite flat, rather than growing as it was up until 2007. There’s plenty of renewable generation consented and ready to build, but the power companies won’t build it until the demand and prices are there to support it. So for now, we’re stuck with what we’ve got.

The death of coal?

This is what the death of coal looks like. It’s not a sudden fall to zero worldwide coal consumption. It’s consumption turning flat after decades of growth. There are still coal power plants in almost every country, but older plants are being shut down early and not replaced. New plants aren’t being built, at least not in the developed countries – because in a future where climate change is one of the only certainties, coal is a terrible long-term investment.

And yet we don’t have globally binding climate agreements, or a clear way to determine who will pay what for their emissions. We’ve got developing countries, keen to improve their living standards and bring reliable electricity to their citizens. Coal is cheap, and getting cheaper now that developed countries are turning their backs on it. Poorer countries are likely to still find coal attractive – but for how long, and how fast will they be able to transition to other power sources?

Car-dependency is a bad deal

Is it a good idea to have a transport system oriented primarily around the car? Cars are useful for a lot of things, but is it a good idea for most people to use them for most trips?

This is a practical question rather than a philosophical one. Over the last 70 years, different countries have taken very different paths. Some countries, particularly the US but also New Zealand to a lesser degree, have invested heavily to make driving the go-to transport option. Others, such as Germany and the Netherlands, have taken a different course, with a greater focus on public transport, walking, and cycling.

In a 2015 CityLab article, Eric Jaffe tallies up the results for the US and Germany. Here’s the scorecard:

To summarise, Americans have a transport system that:

  • Requires them to spend more on transport, because they own more cars, travel longer distances, and hardly use zero-cost transport modes like walking and cycling
  • Requires their government to spend more to build roads and provide public transport subsidies to compensate for all the underpriced roads
  • Kills all types of road users at much higher rates
  • Contributes to a serious obesity epidemic, which in turn jacks up healthcare costs
  • Adds greenhouse gases to the atmosphere at a much faster rate.

Basically, a car-dependent transport system is a bad deal on pretty much every level. Germans do plenty of driving, but cars are part of a much more balanced transport system. As a result, their advantages are maximised and their disadvantages mitigated.

As Jaffe observes, differences in transport choices can be observed at pretty much every spatial scale in the two countries. Although Germany has its share of suburbs, people living in them have a much greater range of choices and much less need to hop in the car to do everything.

The data come from a recent comparison of German and U.S. planning approaches led by transport scholar Ralph Buehler of Virginia Tech. Drilling down to the city level, Buehler and collaborators find more of the same driving trends in an analysis of two large metros from each country: Washington, D.C., and Stuttgart.

Both areas have similar economies, labor markets, core populations (roughly 600,000 people), regional planning organizations that outline local transport policies. Yet Stuttgart comes off as less car-reliant than D.C. on all sorts of measures…

What’s especially notable here is that driving behavior in the remote periphery of Stuttgart is about the same as it is in the suburbs of D.C. To wit: the two most car-dependent suburbs of Stuttgart (Nürtingen and Geislingen) have shares of all trips by car roughly equivalent to the two least car-dependent suburbs of D.C. (Arlington and Alexandria): roughly 70 to 75 percent in each place. Meanwhile, walking and cycling account for 6 percent of trips in most D.C. suburbs, while in Stuttgart’s most car-oriented areas these modes still account for more than a fifth of all travel.

So the suburbs of D.C. are basically as car-oriented as the cow pastures of Stuttgart. The map below lays it out pretty clearly:

Shares of trips by car in jurisdictions of D.C. and Stuttgart. (Buehler et al, 2014, International Planning Studies)

But, you ask, isn’t one advantage of American car-dependency that it’s allowed cities to open up vast tracts of land to build new suburban homes? Surely America has benefitted from greater housing affordability as a result?

Yeah, not really. As the Economist‘s House Price Index shows, between 1975 and 2016 real house prices in Germany only rose 9%. In the US, they rose 56%, even accounting for the collapse of a massive house price bubble in the 2000s. So it’s hardly the case that cities need more cars to get affordable housing.

What do you make of the data on transport outcomes in the US and Germany?

No, Boomers, it’s not like it was back in the day

Last week BNZ chief economist Tony Alexander was in the paper with some stern words for young people trying to find somewhere to live in a city that doesn’t have enough housing to go around. As reported by Susan Edmunds:

Think your parents got an unfairly great deal when they bought their house for $40,000 – or thereabouts – 30 or 40 years ago? Not so fast.

BNZ chief economist Tony Alexander says young people priced out of the market are wrong to point the finger at retirees. […]

“The cost of borrowing to purchase a property has plummeted and because of this structural jump in demand for property prices have lifted. Those Baby Boomers people are dumping on paid mortgage rates in the late-1980s around 20 per cent,” he said.

Older people were turning to property investments because they did not have the stomach for sharemarket volatility, he said. That also drove up prices. Accelerated population growth and the spending power of double-income households played a part, too.

He said young people wanting a house should buy a “dunger or even a meth house to strip, and do it up”. “Basically be prepared to do what the Boomers did in many instances,” he said.

“Start out in a desolate new suburb of clay soil far from work, do up a piece of shite, or build and live in what will become your garage whilst building the rest of the house around you in the following few years.

“And how to finance it? Go to cafes and spend as much on lattes, muffins, frappes, wraps, etc. as often as the Baby Boomers did,” he said.

“Hire as many gardeners, landscape designers, decoration consultants, plumbers, feng shui consultants, window washers, dog walkers, dog washers, cat whisperers and general handymen as they did.

“And hope to hell that when you come to retire you don’t sit looking at your bank statement shaking your head because when you had a mortgage the bank charged you 20 per cent but now that you have term deposits you’re only getting 3.5 per cent all whilst listening to people saying you and your profligate ways are the problem.”

Whoah. There’s a lot in here, and most of it is flat wrong.

For a start, Alexander’s contention that young people are spending too much on personal services compared to their prudent, virtuous elders is contradicted by the evidence. Set aside the fact that young people who are renting and unable to find secure, long-term homes generally don’t bother to hire a landscape designer or decoration consultant. Let’s look at the data on savings rates.

Last year, Mark Vink, a Treasury economist, analysed the savings rates of different birth cohorts of New Zealanders. People who are currently in their late 20s or early 30s are saving at higher rates than their parents did at the same age:

10-year-birth cohort average saving rates by age of household head (Treasury)

Eyeballing the chart, it looks like Boomers – ie people born between 1950 and 1959 – had net negative savings rates throughout their 20s and 30s. They were borrowing more than they were spending. By comparison, people born between 1980 and 1989 – the unfairly-derided Millennials – appear to have saved upwards of 10% of their income in their mid-20s, in spite of the fact that many of them had to borrow to pay university fees.

Vink observes that Boomers’ profligacy and Millennials’ prudence is likely to be due to the fact that Boomers did, in fact, have it easier when they were young:

A surprising feature of the data is that the saving rates of younger generations appear to be generally higher than those of the generations preceding them. To check this result I used a variety of econometric techniques, and all suggested that this pattern is robust. Contrary to popular opinion, successive generations of households appear to be saving at significantly higher rates than earlier generations did at the same age. One plausible explanation for this rise in saving rates, supported by other related research, is that it reflects the precautionary response of younger generations to an economic environment with higher unemployment and less generous public welfare than faced by their parents.

It probably is true that young people are buying a different mix of goods and services than their parents did at the same age. But that’s not because we’re spendthrifts: it’s because the relative price of things has changed over time. Some things that were expensive for young Boomers, like consumer electronics, air travel, and clothing, have gotten cheaper due to globalisation and technological change.

Here’s a chart based on Statistics NZ’s Consumer Price Index. Since 1985, the price of international air transport has declined by 29%. Bicycles have gotten 38% cheaper. (Adjusted for quality, new cars are almost the same price as they were in 1985.) The price of women’s footwear – and apparel in general – did rise in the late 1980s, but it basically hasn’t budged in over 20 years. Adjusted for quality, the price of telecommunications equipment – ie cellphones – has fallen by a staggering 95% since 1999.

Housing is a very different story. According to the CPI, the cost to buy housing has risen by an astonishing 350% since 1985. This outweighs price movements in just about any other CPI category.

Basically, what this data shows is that saving money on discretionary expenditures like dining out or going on holiday is no longer a viable strategy to afford a home. It may have worked 30 or 40 years ago, when the ‘nice to haves’ were comparatively pricier. But today, housing has gotten really, really expensive relative to all the other things that we buy, and a lot of things that used to be luxury goods, like consumer electronics, are now cheap enough to be enjoyed by most people.

In this context, Alexander’s advice to cut back on small luxuries just doesn’t make sense. For instance, the required deposit on an average Auckland house is around $160,000, or 20% of the current median price of around $800,000. In theory, I could save a deposit by never going out for brunch. But in reality, brunch only costs around $20, so it would take 22 years to save up the money, assuming that I would otherwise go out for brunch on a daily basis. (Which I don’t.)

Lastly, it is true that mortgage interest rates were considerably higher in the 1980s than they are today. According to Reserve Bank statistics, the floating mortgage rate for first home buyers peaked at just over 20% in 1987, compared to its current level of 5.7%.

However, buyers in the 1980s didn’t have a harder time paying the mortgage, as high inflation quickly eroded away their debt. Although interest rates were high, this mostly reflected high inflation rather than increased difficulty obtaining or paying off a loan. After accounting for inflation, real interest rates were considerably lower.

That’s illustrated in the following chart, which shows annual consumer price inflation and mortgage interest rates since 1970. The green line on the chart, calculated as the difference between the two series, provides a rough estimate of the real interest rates that people were paying on mortgages. Real interest rates may have been a bit higher in the late 1980s, but they were negative in the 1970s, when many older Boomers bought homes.

Basically, Alexander’s assertions about the savings behaviour of young people are false, his suggestions about ways to save even more money to buy a home are largely useless, and his references to the high mortgage interest rates faced by Boomer homebuyers are misleading. These kinds of articles are inaccurate, patronising nonsense, and it’s high time news outlets stopped printing them.

Edit: Since I wrote this, BNZ CEO Anthony Healy has apologised for Alexander’s comments. Kudos for that.

Looking closer at the GPS

There has been an impression over the past while about how the government has adopted a more conciliatory approach to transport in Auckland. In some respects this is true, as they’re no longer getting in the way of quickly progressing the City Rail Link, they stumped up the Urban Cycleway Fund which is delivering some fantastic projects, and through ATAP there’s now alignment between the council and government on Auckland’s future transport needs including expanding the rapid transit network and a more open mind to road pricing. These are all very good things that are a big step forwards from where we were 4-5 years ago.

However, in other respects it seems that relatively little has changed. We still see crazy boondoggle motorway projects being announced before a proper business case has been done. We still see the highly sensible proposal for a regional fuel tax being knocked back for no good reason. And, when it comes to the Government’s most important transport document – the Government Policy Statement (GPS) – we still see a very State Highways focused strategy for transport.

This is the fifth GPS created since legislation was changed in 2008 requiring the document to be prepared. Only four of those have ever actually taken effect though, as the GPS released by the Labour government in mid-2008 was quickly replaced in early 2009 by the new National government. Each GPS provides a variety of strategic directions, objectives and measures, but where the GPS really has “teeth” is in defining upper and lower bounds for how much NZTA can spend on different funding areas – known as “activity classes”. By way of example here are the “funding bands” in the 2015 GPS (we don’t yet have the full 10 year bands for the current Draft GPS):

The real impact of these “funding bands” is that they prevent NZTA from continuing to spend in an area once that “allocation” has been used up, regardless of the merit of that potential investment. So, for example, even if a public transport project had a fantastic cost-benefit ratio and aligned really strongly with the strategic direction outlined in the GPS (and how NZTA gives effect to the GPS through more a more detailed framework), if there are too many PT projects in any given year then NZTA will be unable to fund them.

Given that this is the 5th GPS to be released, we can track how the proportion of investment in activity classes has changed over time. This task is made a bit more difficult as some of the activity class names have changed (for example PT services and PT infrastructure used to be separate but were then merged). To get around this issue and to also simplify it a bit, I’ve narrowed things down to State Highways (both improvements and maintenance), Local Roads (also both improvements and maintenance), Public Transport, Walking & Cycling, Road Policing and Other. While GPS’ are 10 year documents, we only need to consider the first three years as that’s how often the GPS is refreshed. I’ve summed the upper and lower bands for each three year period which is shown as the lighter shade. The (L) and (N) signify a Labour or National Minister of Transport who released the document:

What immediately stands out is how massively State Highway investment has grown over the course of time, nearly doubling from under $4 billion in Labour’s 2009 GPS to over $7 billion in the most recent draft. This has primarily been to fund the government’s expensive Roads of National Significance. Other areas have either remained fairly similar (road policing), grown slowly (local roads) or declined (public transport). Public transport funding is only just getting back to the level originally proposed in 2009 by Labour in the new Draft for 2018-21.

What’s also important to remember is that the overall size of the NLTF grows each year, so it’s worth looking at how the proportions have changed over time. For this I have used the “upper limit” of the funding bands as they are the most crucial in determining what NZTA can and cannot fund.

The most stark change is for State Highways, which have gone up from 42% of total investment in the 2009 GPS to around 55% in the most recent. Public transport, on the other hand, has declined from 14% in the 2009 GPS to 10% in both the 2015 and 2018 documents. Even Local Roads investment has declined, from 25% in 2009 to 22% in the 2018 plan.

Regardless of arguments about modes, it seems like we have a strategic approach to transport funding that is continuously putting more and more eggs in the basket of State Highway improvements. Many of these large State Highway projects have struggled to generate good cost-benefit ratios (another way of saying they’re pretty crap value for money) so it seems odd that we keep shovelling more and more money into them.

Over the next few weeks we will gather some key submission points and put together something to help you make a submission on the draft GPS. Feedback closes at 5pm on March 31.

AT to be more open about contracts

In an interesting and positive move yesterday, Auckland Transport announced they would start releasing the details of every single contract they award, not just those over $50,000 as they currently do.

Auckland Transport (AT) will be releasing details of all its contracts publicly.

Since it was established in 2010, AT routinely published the details of all contracts valued over $50,000 on its website. That threshold has now been dropped to zero.

AT Chairman, Dr Lester Levy, says that as a publicly-funded body, the organisation wants to be as transparent and accountable as possible.

“There is a small extra administrative burden in releasing this sort of information, but we feel that it’s worth it to allow more open scrutiny of our activities,” he says. “This demonstrates a clear commitment to being open and accountable to the public at large.”

Dr Levy says the nature of some of AT’s activities, such as property negotiations, means that sometimes information is commercially-sensitive and involves third-party businesses or individuals.

“In those cases, and to protect the interests of ratepayers and taxpayers, they are dealt with confidentially. However, when the reason for that confidentiality no longer exists, the material is routinely released (and published on AT’s website).”

I wonder how much of this comes as a result of the fallout from the recent fraud case in which on former AT manager was sentenced to 5 years jail. We also know that this is something Penny Bright has been pushing for, I wonder if it means she will pay her rates now?

The information they currently release is here. One request for AT is it would be useful if AT could also provide a CSV version of the data in the PDF. Also it seems silly that AT only show the last 6 months. Why not just leave old versions of the file online.

The results on the website at the time of writing this are still only contracts for over $50k but the one thing that particularly surprises me is just how many are direct appointments. By my count, of the 260 contracts on the list, 229 of them (88%) were directly appointed. Here is a same of the current report.

I’m sure some people will be going through these results, with a fine tooth comb.

Govt silly to reject Regional Fuel Tax

Last Thursday Finance Minister Steven Joyce announced that the government was “ruling out” using a regional fuel tax as one way to fill the $4 billion transport funding gap that was identified by ATAP. He noted a few reasons for this decision:

And second, I stress that we are not interested in introducing a regional fuel tax. I have reiterated to Mayor Goff this morning that we do not see regional fuel taxes as part of the Government’s mix for transport in Auckland because they are administratively difficult, prone to leakage and cost-spreading, and blur the accountabilities between central and local government.

In some respects it wasn’t particularly surprising that the government made this decision. They have long had a somewhat bizarre hatred of regional fuel taxes, not only cancelling Auckland’s proposed fuel tax in 2009 that was going to pay for the electric trains (a decision that probably delayed electrification for a year or two) but then also changing the Land Transport Management Act in 2013 to remove the possibility of Councils even applying to the government for such a tax.

Many of these “concerns” were addressed in a report (page 15 onwards) that the Council commissioned in 2012 to inform their submission on the LTMA changes. Looking first at the issue of cost-spreading (which basically means the risk that petrol companies will raise prices around NZ rather than just in Auckland to pay for the regional fuel tax):

With the level of scrutiny in this sector it seems pretty unlikely that we would see this happening. Furthermore it seems like there are good checks and balances that could be put in place to ensure it doesn’t happen. So, not really a valid excuse.

Now for “leakage”, which is the likelihood of people travelling outside Auckland to “fuel up” and therefore avoiding the regional tax:

Once again it seems like these issues are marginal and can be easily addressed. This led the commissioned report to conclude that concerns that were raised in relation to a regional fuel tax at the time (which seem very similar to those mentioned by Joyce last week) can be easily addressed.

Of course Joyce’s final point – about accountabilities between central and local government, is probably the real reason for the opposition. Essentially government doesn’t want to give up the power it has through collecting fuel taxes. But this seems a bit petty and I’m sure in relation to such a high profile issue in Auckland (the funding of transport) and the broad agreement between Council and Government on what the priority investments are, there would be clear accountability with the public.

This rejection of the regional fuel tax now puts the ball back in the government’s court to come up with some other ideas for addressing the funding gap. They’d better hurry up as the clock is ticking to get this sorted in time for the 2018 transport funding plans.

Draft Government Policy Statement 2018-28: Roads Roads Roads

Yesterday the Ministry of Transport released for consultation the Draft Government Policy Statement (GPS) for 2018-2025. The GPS is refreshed every three years and as the name implies, it sets out the government’s policies and spending for transport over a 10-year horizon.

The single most important aspect of the GPS are the funding ranges for each of the 10 activity areas. The funding ranges set an upper and lower limit of how much money will be spent on each activity every year. These ranges are then used by the NZTA in conjunction with regional councils in setting the more detailed National Land Transport Programme (NLTP) and Regional Land Transport Plans (RLTPs) which will list specific funding levels. This is how the various transport documents are tied together and as you can see, other regional and national plans have to be consistent with or give effect to the GPS, meaning there aren’t a lot of options to stray from what the government wants.

In total, over $11 billion is expected to be spent over the six years from 2018 to 2024 but depending on circumstances that could be as high as over $12 billion.

And importantly, here are the individual funding ranges as a graph. This looks at the total range over three years and I’ve included the 2012-15 and 2015-18 figures as a comparison to show how they’re changing. Some notable things you can see:

  • There is another significant increase for state highway improvements. Many of the big Roads of National Significance projects will be winding up over that 3-year period but other expensive projects, such as the East West Link and Northern Corridor are expected to getting underway.
  • They’re lowering the bracket for local road projects saying it was consistently under spent but that the opposite is true of local road maintenance.
  • On top of the State Highways fund, there is a separate activity for regional projects which they admit are mostly state highway projects too.
  • Public Transport gets some improvements in range but it’s worth noting that this covers both services and infrastructure. Also with NZ’s weird funding rules, it isn’t allowed to be spent on rail infrastructure.
  • Walking and cycling does get a little boost but not a significant one.

To give an idea of where investment has been in the past, this shows the funding ranges for the 2015-18 NLTP and where within those ranges funding was allocated.

Much of the text within the document feels like it has just been copied and pasted from previous versions of the GPS but I went through (most) of it anyway and a couple of things stood out.

The document states that the GPS takes into consideration a range of government policies relevant to transport, this includes the Kaikoura earthquake and tsunami recovery. But oddly it makes multiple references to the fact it doesn’t fully take into account the ATAP work agreed between the government and the council as it’s waiting on funding decisions. This makes me nervous that the government are planning on picking and choosing from ATAP.

30. The Auckland Transport Alignment Project is a collaborative exercise between Auckland local government and central government officials. It has provided analysis to inform the development of the GPS. The Auckland Transport Alignment Project identified four key strategic challenges and a strategic approach to investment for Auckland. The strategic approach looks to make better use of existing networks, target investment to the most significant challenges, and maximise new opportunities to influence travel demand.

31. The draft GPS 2018 recognises the Auckland Transport Alignment Project and Kaikoura earthquake but does not fully take the funding implications of Auckland Transport Alignment Project into account. There is expected to be changes to the final GPS 2018 once funding decisions have been made.

Previous GPS’ have talked a lot about getting value for money from transport investment while at the same time promoting programmes like the RoNS and other government initiatives that assessment has shown to perform poor economically. Now they’re starting to drop the charade government projects will be good value and saying they’ll be done anyway, simply because the government like them. This is a massive double standard from the government who have for years berated Auckland for projects they claim have a low economic value.

36. It is expected that maximising value for money will automatically advance economic growth and productivity and road safety. However, there will be investments with a low benefit cost return that are necessary to advance Government policies. In these cases there will need to be a strong policy alignment (as expressed in the GPS) with Government policies and transparency about the reason for the decision.

……

61. For many investments it will be possible to obtain good benefit cost returns while providing the right infrastructure and services at the best cost. However to sufficiently advance some government policies, investments may require a lower than normal benefit cost return (i.e. less than the average Benefit Cost Ratio (BCR) for the National Land Transport Programme (NLTP). Even in these cases, in general it is expected that the benefit cost ratio will at least exceed one.

One thing to remember about the GPS is that it only covers some areas of transport which seems short-sighted, even if they claim there will be integration with other modes.

39. Investment in movement of freight by road is covered by the GPS, but investment in movement of freight by rail, sea and air is not. However, coordination between the GPS and those responsible for different modes of transport can help to maximise the benefits of transport to the economy.

There are a few positive things to say about public transport and the role it has to play, such as:

115. Significant increases in public transport capacity have seen more people using and relying on public transport in the main metropolitan areas. These increases have occurred alongside increasing fare box recovery, indicating that the investment is resulting in more efficient outcomes.

116. The GPS will support this result by:

  • continuing to invest in public transport, including modal integration where appropriate
  • continuing the momentum set by GPS 2015 to increase the efficiency of public transport investment

Yet at the same time, they make some odd statements such as that forecasts are overly optimistic.

Passenger numbers have increased recently and are forecast to increase in Auckland and Wellington over the short term (and in Christchurch in the medium term). Although forecasts of increased passenger numbers have typically been overly optimistic. Auckland and Wellington public transport plans are based on an increased public transport task.

Fare box recovery rates have improved in Auckland and Wellington. Currently expenditure is in the middle of the funding range.

The proposal is for a gradual increase in the funding range to cover forecast passenger growth and for some public transport infrastructure work (such as park and ride facilities).

There is a need to keep focus on value for money, and ensure fare box recovery rates are at the expected levels.

Over optimistic forecasts, that’s a bit rich coming from the MoT, for example remember this graph showing actual vs forecast vehicle travel.

Of the big investments in PT in the last decade, the rail network and the busway, in both cases they are performing ahead of expectations. In the case of the rail network, we are ahead of those expectations despite the trains taking about 2 years longer to fully enter service like the earlier assessments had identified. We’re also performing ahead of the MoT’s expectations when it comes to ridership for the CRL. At one point, they claimed we wouldn’t meet the 20 million trips by 2020 yet at current rates, we’ll hit it this calendar year.

Consultation on the GPS is open till the end of March.