Once upon a time, a utility company based in Portland bought a utility company in Salt Lake City. Maybe it was the other way around. Either way, two utility companies merged and there was a lot of work to do to integrate their systems and prepare for the dreaded Y2K problem. There were technical resources in Portland and technical resources in Salt Lake City. Management worried about upsetting either group so they decided to do the system integration work on a rotating basis - one week in Portland and one week in Salt Lake City in order to ensure that neither group would be happy.
Although the employees of the newly merged utility company were not happy, I was happy. At the time, I was twenty-five years old. I had taken all of my meager material possessions and placed them in a storage locker. I stayed in hotels during the week and crashed at my girlfriend’s place in California on the weekend. I lived off of my per diums and banked my entire salary. Being homeless was not so bad.
The first week I arrived in Portland, I stayed at the Fifth Avenue Suites in downtown Portland. I didn’t know the area and was told a lot of people on the project stayed there. It was nice, but every day involved a forty-five minute commute via the Max (Portland’s light rail system) to the Lloyd Center. The Lloyd Center is a mall in suburban Portland and my coworkers and I never tired of telling people that we worked in a mall. However, the project consisted of 150 employees and consultants and we all needed some place to go daily. The powers that be rented space in the mall and we ate our lunches in the food court, watched people go ice skating, and proudly asked for our mall employee’s discounts.
In my consulting days, I always found the first week to be the hardest. I would come into a new city and not know my way around as this was in the dark ages before everyone had a GPS built into their phones. As I was getting the lay of the land, I noticed that there was a Doubletree Hotel across the street from the Lloyd Center. The Doubletree was also on the list of approved hotels, yet no one seemed to stay there. I immediately switched my reservations and started staying at the Doubletree and enjoyed getting an extra hour and a half back in my day by not commuting.
Within a few months, more junior consultants were added to the project and I was reunited with the gang I had established during a month long training course. There was a lot of work. There was a lot of drinking. Every morning in Portland, I was the last one to get out of bed and the first one in the office no matter what had happened the night before. Being directly across the street had its advantages. Being a rational person, I could never understand why my friends stayed at the Fifth Avenue Suites and added an hour and a half’s worth of commuting to their every day.
I was hung over and tired when Johnny came by my desk and suggested going to Starbucks. Being hungover was pretty much par for the course when your best friend goes by the name “Johnny” and you are over the age of ten. By the time Johnny suggested Starbucks, I probably would have been willing to drink the coffee at the nearby 7-11 that had been in the same pot without being cleaned since President Reagan was in office. Now, I know better and recognize that Starbucks is shit coffee, but I was desperate.
Johnny and I were walking back when I asked, “Why do you guys all stay at the Fifth Avenue Suites?”
Johnny beamed as if he were about to tell my the answer to life, the universe, and everything. “It’s the miles, fool!”
I nearly spit my coffee out - not because it was bad, it was Starbucks and by definition, it was bad. The sheer insanity of Johnny’s argument caught me off guard. “The miles?”
Johnny was still smiling, “Five hundred extra miles a week!”
“You do realize that miles have a cash value, right? I think I read that they are worth between a cent and a cent and a half. So you’re saying that you’re agreeing to a forty-five minute commute EACH way, every day so that you can get something worth between $5 and $7.50?”
Johnny was no longer smiling.
“We are here five days a week and I’ll throw the commute out for Monday morning and Friday afternoon because I’m going to the airport with you guys. However, that means you’re commuting six hours a week that I’m not. That commute is like working a side job for $1/ hour.”
It’s been fourteen years and I can still remember this argument. I am no longer in my twenties. Back then the extra sleep was good for sleeping off whatever was done the night before. Now, in my thirties, I wish I could throw a dollar at the alarm clock and let me recover the lost hour in the night before from when my daughter had a bad dream or my son was sleep walking around the house. I would gladly pay my alarm clock one stinking dollar for an extra forty-five minutes of sleep.
However, back in the nineties, I was on quite the roll. “It’s not like you have a shortage of miles either. You get miles for your flights. You get miles for the money you spend here through your Amex card. You’re probably racking up about four thousand miles a week altogether, you’ll have more miles than you’ll know what to do with and you actually give a shit about five hundred stinking miles?”
Johnny was annoyed. “You know what your problem is? You’re too logical!”
Guilty as charged. I am incapable of chasing things irrationally.
On a related note, in 2008, with the entire economy of the First World about to collapse, Australia increased its First time Home Owner’s Grant (FHOG) from $7,000 to $14,000 for first time buyers of existing housing. The government, in its wisdom, was trying to “stimulate demand” and prevent a hard landing in property prices as experienced in the United States, UK, Spain, Ireland, and elsewhere that had seen rapid property appreciation suddenly go bust.
It worked too, if you consider working to inflate air into an already inflated bubble. As buyers and “investors” flooded into the market with increased money to use for a leveraged purchase, they competed against each other bidding up house prices by roughly $50,000. That’s right, in an effort to cash in on $14,000 of “free money” buyers were paying $50,000 more than they would have without the FHOG. Even worse, property prices in Australia were already high by any traditional measure. Instead of letting property prices fall in a swift, much-needed way; the government decided to artificially inflate prices for several more years. After a single year of decline in 2008, property prices grew spectacularly until 2011.
The FHOG irrationally attracted Greater Fools to the housing party. The increase in property prices convinced even more Greater Fools that houses would always be expensive, that property prices would always increase, and that they would have to act now or “miss out”. The reality is, that purchasers overspent in an effort to get “free money”. Property prices in Australia were so far removed from the underlying fundamentals that it is going to take a long and painful correction similar to what has occurred in other countries to create real stability and sustainable growth.
Many Australians feel that they were not affected by the Global Financial Crisis. That is not true, through government manipulation, the affects of the crisis were merely delayed by a few years. Those who put their faith in the RBA and the government to avoid the crisis will find that the housing market has behaved irrationally and that continuing to prop it up will only prolong the pain.
Whether it is relatively low value airline miles or a government subsidy to buy inflated properties, “free stuff” can cloud otherwise smart people’s better judgement. Now that over a billion dollars has been spent on the FHOG and interest rates are at historical lows (for Australia), the only rational response to the current property market is to simply wait until prices are in line with their fundamentals.
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