Obamacare: the tyranny of choice 

My mom and I had a good catchup yesterday, and among the topics was health care.  As a newly-minted UK citizen, I’ve lived in the country long enough to have my concern/interest in health care take a back back back seat.  Alas, for my family continuing to live in the US, it’s just not an option.

Many questions, many choices, much confusion.  Source: enrollmissouri.org

Many questions, many choices, much confusion. Source: enrollmissouri.org

Speaking of options: I just perused the Missouri ‘health care marketplace‘, to see how far insurance has come since the very contentious legislation. Some thoughts:

  • For anyone interested in how much health care costs for Americans, consider this spreadsheet from the website.  Some explanation is required, so use the earlier link to hear the differences in tiers.
  • First impression: OH MY GOD THE AMOUNT OF CHOICE IS RIDICULOUS.
    • I’m reminded of buying peanut butter when I first came to the UK: at first I was near-horrified there were only about 5 choices of peanut butter at the grocery store; how do people live without so much choice?  Now?  I’m plenty happy to have that many choices…peanut butter just kinda works.
    • Following from the above: my naive impression is that the ultimate criterion for useful health insurance is just like peanut butter.  Does it work?  If it does, great.  I couldn’t care less which insurance provider it is, for example.
    • Given this is a health exchange, all the plans are meant to fit very specific criteria about what can be offered.  Somehow this still involves different pricing among many variables, including the country one resides within the state.  Really?
  • Second impression: how can any reasonable person be expected to make an optimal choice?  Mom found the site confusing, and she’s a smarty pants.  It’s like the site was designed to encourage normal folks to hire ‘navigators’.  Sound familiar?  I’ll give you a hint: the US tax system encourages exactly the same thing.  
  • Third impression: it’s a shame Obamacare was watered down so much.  
    • The huge amount of ‘choice’ looks to me like a ruse for price discrimination writ large.  +1 for the lobbyists.  Optically separating the risk pools for insurance will probably also keep premiums high, maintaining profits for private insurers.
    • My understanding of insurance is that the larger the risk pool, the cheaper the cost of insurance provision.  That’s the reason for the much-hated ‘mandate’ Obamacare places on supposedly healthy (but taxpayer-unfriendly) young folks choosing to only use the emergency room for health care.  By having all these different providers, risk pools stay small.  Costs can’t come down.
  • Final impression: it’s still a step in the right direction.

In sum: I had very high hopes for Obamacare as initially proposed.  Its move towards a single-payer model (which seems to work in every other developed country) is the right call to lower costs.  But no: as with many things, the final legislation seems to have kept all the unpalatable bits (e.g. the ‘mandate’) without the clearly beneficial bits (e.g. single-payer, very small number of options to ease choice and maximise risk pools).  My big hope for the future is to see Obamacare continue to succeed; consolidation among providers; and eventual phasing out of the private market for primary insurance.

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UK housing: Let’s choke our own people

Where can I live on my median income?  Source: londonrents.org.uk

Where can I live on my median income? Source: londonrents.org.uk

I’ve written before about my confusion/frustration/anger at the UK housing market. This view was reinforced by a recent Dispatches episode (for US readers, think 60 Minutes).  Now I could get very investigative about the issue myself – given I feel strongly about this issue, I may well in the future – but for now some thoughts from various readings/viewings/stats:

  1. There seems to be an obvious market failure going on in UK housing: lack of supply. The Dispatches episode quoted the need for about 240,000 new homes each year to meet basic housing formation, with only about 100,000 being built.  The figures are the same for London, in terms of housing built as proportion required.
  2. Call this a lack of understanding, but even Enzo Ferrari knew that you only needed to produce 1 unit less than demand to ensure pricing power.  This gap seems completely self-defeating for property developers.  In economics 101 terms, surely the marginal revenue isn’t maximised at this level of production; producers could still improve their (surplus) profits by producing more units.
  3. Why aren’t developers producing?  It’s probably a similar situation to cities like San Francisco/NYC, whereby geographic limits constrict supply.  In London’s case, however, these limits are self-imposed: green belts keep the property available within reasonable commute contained.  Planning permission is a big issue, as well –  London is a pretty low-rise city, and though that adds to the city’s charm, it lowers the city’s residential capacity.  Developers must play expensive games with planners to build more, which probably leads to more production of expensive, high-margin housing than higher-capacity housing.
  4. The influence of foreign investors.  Look, not every foreigner buying property in London is money laundering.  There are loads of folks seeing London for what it is: a supply-constricted market with lots of professionals making decent cash.  What I wonder about is buy-to-let hurdle rates: with mortgage rates at all-time lows, I suppose folks can be happy with a rental yield of 4-5% net of management fees.  That would set a cap on property prices, unless of course rents increase at a faster pace.  But if the latter occurs, who’s going to rent?  Most of London is already unaffordable.
  5. What about those on the ladder?  A frequent topic of London conversation is ‘getting on the property ladder’…maybe escalator would be appropriate here.  The idea is that one just needs to buy any property, get some gains, then flip into a bigger property.  Hmm… so one just keeps doubling down in the property sector.  For those trading up the ladder – be aware that both losses and gains are magnified.  In any case, I can see how this ladder situation puts politicians in a very tight spot: their constituents probably couldn’t handle a correction in property prices, as mortgages get called in.
  6. How about property tax?  The UK has a sort-of property tax, like the US: it’s called council tax.  The main difference, to me, is that the latter caps out at a pretty low level; US property tax is generally a set % of assessed value, with no cap.  Here’s an idea for the UK, which would probably be an easy redistribution from rich -> poor: take away the council tax cap.
  7. What about mortgage rates?  All time lows – check.  UK mortgages primarily variable rate – check.  Affordability based upon these low rates – check.  So look out when rates rise.  Again a politically difficult situation – why would the BoE ever raise rates, as so many people would probably find housing unaffordable.

In sum: UK housing is a classic asset bubble, in my opinion.  So much unproductive investment pouring into land values.  The fact the ‘housing ladder’ is ubiquitous should be a red flag that folks buy property because it always goes up…very dangerous.  And these inflated prices mean ordinary (middle class!) workers can no longer afford to live and work in London and elsewhere.  If the UK believes in equality of opportunity (and I think we do), why do we let this transfer of wealth from the lower-paid (stuck renting) to higher-paid (buy-to-let, with homeowners sharing positive externality) happen?  Seriously?

End soapbox.

Median incomes and housing affordability

Housing: get it while it's hot?  Source: Google Images.

Housing: get it while it’s hot? Source: Google Images.

Today’s Bloomberg has an article about housing affordability in various US cities, with some harrowing statistics.  Apparently an average Brooklyn residence would cost 98% of median income in mortgage payments (10% down payment; 30-year fixed mortgage).

So that got me wondering about London.  A quick calculation, using the same methodology as RealtyTrac in the Bloomberg article:

  • London median income: £23,800 p.a.  Source: London Datastore
  • London median house price: £322,000.  Source: same as above
  • Average mortgage payment: £1,770 per month.  That’s a 90% LTV, 25-year 5.5% mortgage.  Source: MoneySupermarket
  • Therefore, mortgage payment as % of median income: 95%

BUT WAIT

  1. A median income couldn’t borrow that much: The same mortgage calculator limits borrowing to around £100,000 for the median income.  Smart, seeing as 95% would be taken by the mortgage payments.  I assume this would be the same as the US.
  2. UK doesn’t do truly fixed mortgages: The nice things about US mortgages are:
    1. Tax-deductibility of interest (at highest marginal rate)
    2. 30-year interest rate fix.  Today’s rate is around 4% p.a. (Source: bankrate.com)
    3. Therefore: if UK mortgage rates went up (and let’s be honest: they’re unlikely to go down much from here), the median income would quickly be insufficient altogether.

In sum: I guess we already knew this.  Housing is VERY unaffordable.  I’m sticking with other options.