Finances

April 26, 2024 Published by Eastern Ontario Chapter - By Gerry Bourdeau

A Plea for More Economics and Statistics

From the Volume 37 issue of the CCI Eastern Ontario Condo Contact Magazine

CCI-EO volunteers, condominium professionals of all stripes, and condominium directors do a fantastic job in general. I want nothing in this article to be construed as if I am saying anything other than the preceding. The following is a truism: despite everyone’s competence and best efforts, there’s always room for improvement. Humbly, if I may suggest two areas often overlooked by the condominium sector, they are economics and statistics. With one notable exception, which I will mention below, I have never seen a condominium education presentation that explicitly took into account economic ideas, or that was rooted in statistics.

If I had to guess why, it’s because generally, lawyers, condominium managers, and engineers are not required to complete economics courses. Accountants are vital to the condominium sector, and perhaps many of them choose economics electives, but they’re mostly engaged as auditors and not analysts. I have no doubt engineers receive training in statistics, and that all of these professionals are more than capable of engaging in economic and statistical reasoning, but, in practice, I don’t think economics or statistics are generally at the fore of the industry’s thinking, as I hope to demonstrate.

It’s my hope to ask or remind everyone in the condominium sector to engage in more economic and statistical-style thinking.

I have a presentation that takes audiences from econ fundamentals all the way to applying them to condominium problems. I don’t have the time or space to do that here, so I will, instead, offer examples of the utility of economic and statistical considerations.

1) Opportunity Cost

The true cost of doing A should consider the forgone value of doing B instead. In other words, if you invest $100 at a return of 10% per annum instead of buying a comic book that will appreciate by 12% per annum, then you’ve lost two dollars. In “accounting costs”, we consider the strict costs of doing something (expenses like materials and labour). In “economic costs”, we consider also theoretical things like opportunity costs (what else could’ve been done with the money). We should always operate based on economic costs to make sure what we’re doing is rational.

For example, generally, we want to avoid leaks and mold in condominiums. So, why don’t we undertake a plan to annually remove all drywall in all buildings to investigate for leaks and mold? After all, we managers regularly find leaks and mold in buildings. The answer is opportunity cost. It is irrational to spend more money looking for leaks and mold than the damage that is likely to be caused by leaks and mold. But, without giving specifics, I have seen more than a few recommendations in condominiums that make no “rational” sense. We should always be careful not to recommend policies and procedures that are more expensive than the issue they’re designed to prevent.

2) Chaos

If you’re a director, manager, or unit owner, you’ve probably received that typical reserve fund plan with future increases at the steady rate of inflation. After the pandemic, Reserve funds in Ontario were greatly affected by the construction inflation we saw. Indeed, operating budgets were also affected by construction inflation and the inflation of other costs like fuel and insurance. I know that Covid itself was not foreseeable. However, Canada’s historical inflation rates, new build inflation, and construction costs have varied a great deal. If we managers and reserve fund planners were using statistical means, like Monte Carlo simulation, to predict unlikely events (baking the outliers into suggested increases), the gap between existing reserve fund plans and new pricing would’ve been mitigated. Of course, having potentially higher appropriations to reserve of operating is something the condos would have to buy into before an outlier like Covid.

I am aware of one major exception, as mentioned above, to the lack of statistical analysis in the condominium sector, and that is the Canadian Institute of Actuaries report done by Jean-Sébastien Côté and Jon Juffs. The report is located here.

3) Elasticity

Put simply, the coefficient of elasticity in economics tells how demand changes in response to price. An inelastic demand is one where demand for the product doesn’t change much even if the price goes up. The classic example is life-saving medication. People will buy that no matter what else they must give up. Due to legislation, there are certain things that condominiums in Ontario must purchase and do purchase, whether they want to or not. A prime example is insurance. The Condominium Act, 1998, makes mandatory the purchase of certain insurance by condominiums.

That means when the insurance industry takes on losses, it can download almost all of those losses onto the consumer. It’s similar with snow contractors, construction companies, and other firms that condos can’t do without. Meanwhile, if the preceding firms raise prices, condos might do without “nice to haves,” like ornate gardens.

The trend towards markets having only a few vendors whose products are legislatively required means that, in the end, consumers will pay for almost all the price increases experienced by vendors. I am not saying that condominiums don’t really need insurance or something like that. I am saying that we collectively need to remember that when we mandate an increase in standards or a service, or when we reduce competition, we, simultaneously, decide that condo owners will pay the bill. This is yet another reason to keep number 1, opportunity costs, in mind!

Summary

Condominiums are complex, and the condominium industry is even more complex. We can always improve how we do things, but sometimes that comes at an unreasonable cost. Think of the plumbing example above. Sometimes, we can improve things efficiently and with few costs! One way to do that is to remember to put on our economist caps from time to time.

By Gerry Bourdeau, Condominium Management Group

Gerry Bourdeau is a condominium manager and management consultant with Condominium Management Group. He holds an MBA with a specialty track in data analytics, B.Sc. in psychology, and a certificate in business economics. Gerry is proud to volunteer for CCI-EO.