Lock, stock and pork barrel: why it pays to be in a marginal seat

Lock, stock and pork barrel: why it pays to be in a marginal seat

If you’re a sporting enthusiast living in a marginal seat, the election period must have been an exciting time. Residents in the hotly contested electorates of Higgins, Chisholm and Herbert (to name just a small handful) have been showered with funding for volleyball courts, netball courts and football stadiums.

It is easy to be a little skeptical about the merits of government funding for projects that would otherwise seem to be under the purview of the market, or else local councils. It’s just as easy to wonder whether it’s a coincidence that all this promised funding is happening at the peak of election season and that it’s almost entirely being directed at seats that hang in the balance and are crucial for political parties to win. Let’s indulge this cynicism.

Dubbed ‘pork barreling’, the dark art of targeting government funding towards marginal seats (at the expense of those in safe seats) in attempt to secure key votes is rightfully decried as a perversion of the democratic system and one that unfortunately neither of the major parties seem too reserved about employing. The politicians are showering their favourite kid with toys, while leaving the others to sulk off with their old broken Gameboys. While this issue is hardly party-specific, an analysis of 95 ‘micro-announcements’ made by the Coalition estimated that around $1.7 billion of Coalition-funded pork was being slid under the noses of the taxpayer in an effort to win marginal seats.

While pretty much everyone can agree that it’s unfair, it does raise an interesting point: you would rather the place that you call home just so happen to be in a safe seat rather than a marginal seat. In a safe seat, your vote doesn’t matter (in the eyes of the political parties), while you might expect to see some extra cash being thrown your way to win you over if you live in a marginal seat.

But does that mean that it is better to go out and buy a new place in a marginal seat than in a safe one? The benefits are, of course, only one side of the equation. If property prices in marginal seats are commensurate with the extra benefit derived from governments throwing money in your direction, then you’re not strictly getting a better deal living in a marginal seat than a safe one (you have to pay more to get more). To work this out, we’ll need to get down into a bit of nitty-gritty.

An ‘informationally efficient’ market is one where all pertinent information is reflected in the price of an asset; the consequence of informational efficiency being that nothing is overpriced or underpriced and that one cannot get an abnormally ‘good deal’ and beat the market. A particular market can only be informationally efficient if all buyers and sellers know all relevant information that could affect the value of the asset and correctly incorporate this information into their willingness to demand and supply. The usual subject of discussion is the stock market, but we can analyse local real estate markets in the same way.

We should expect, if real estate markets are informationally efficient, that if the political landscape changes significantly, such developments should be reflected in house prices. For instance, as soon as word gets out that a previously safe seat is now in danger of being lost, it should follow that demand for real estate in the area increases in anticipation of the future expected benefits of pork barreling enjoyed by those living in the area, resulting in a price increase; a ‘pork barrel premium’. If this is the case, then there is no inherent advantage to buying in a marginal seat because the expected future benefits have already been factored into the price.

In reality, whether or not the porkbarrel premium exists depends then on whether prospective property buyers do in fact take into consideration the political positioning of the real estate they’re considering purchasing. Given how many more relevant factors there are when considering the purchase of a property (its intrinsic characteristics, proximity to relevant locations etc.), most people would not turn their mind to a factor as abstract as the potential of pork barreling benefits. While we don’t have any statistics on hand, it seems unlikely that enough prospective buyers consider pork barreling as a factor in order for it to be reflected in the price of real estate.

While there might be some particularly switched-on buyers who appreciate the benefits and are prepared to outbid their unaware rivals as a result (causing the price to increase to a small extent), there would not be enough such that the full benefits of potential pork barreling are captured by the small premium. This would result in a degree of informational inefficiency in the housing market which would lead to marginal seat properties being undervalued by the market.

So it seems highly unlikely that the hypothesised porkbarrel premium does actually exist. It should follow then that all other things being equal, buying a house in a marginal seat is a better deal than buying in a safe seat. Some business commentators have even touted the choice of living in a marginal seat as a great economic plan.

So it’s settled then. Buy a house in a marginal seat and for practically nothing you can live it up like the Gatsbys and host extravagant parties on an array of taxpayer-funded netball courts every single night.

Unfortunately, the reality is far less sexy than that.

Yes, technically, you are getting slightly more than you pay for by buying real estate in a marginal seat. But let’s try and put a price on these benefits. The headline of millions of dollars being spent on some new project in an electorate sounds substantial, but remember that these economic benefits are being spread over the thousands of people living in the area. Let’s revisit the example of the new football stadium in Townsville; maybe the average resident gets around $5,000 benefit from the new stadium. While that’s nothing to scoff at, in the context of house prices, this is a drop in the ocean. Keep in mind also that most of these proposals are conditional on the political party in question retaining their seat and even then they might not deliver. Consider also that a seat simply being marginal does not mean that it is guaranteed that at some point down the track it will receive even the promise of the old pork barrel; it is finite, after all. So buying property in a marginal seat on the basis that it may possibly result in a promise with the potential to deliver at best, a modest benefit, isn’t starting to look like the smartest plan after all.

This result makes sense when you think about it. If prices in a particular market don’t take into account a piece of information, there’s probably a pretty good reason for it; it’s just not that important in the overall scheme of things and the resulting mispricing is difficult, or near impossible, for outsiders to abuse and profit from. As alluded to earlier, the property market is very different from the stock market. For instance, if you knew that shares in NAB were underpriced (even if only slightly), it would be relatively easy to profit from this information, even if you didn’t already own any NAB shares; if enough people had the same idea, eventually NAB’s share price would rise to a ‘fair’ point and the mispricing would disappear. In contrast, simply knowing that property prices in a marginal seat should be slightly higher than they are is highly unlikely to present even the most cunning investor with a particularly profitable opportunity to exploit the situation. As a result, the mispricing is likely to persist and the ‘porkbarrel premium’ may not eventuate.

So if you’re a local resident, finding out that your seat has become marginal should be a nugget of good news, given the nice little bonuses you might receive in the future (at the taxpayer’s expense, of course). And if property prices do adjust (though they probably won’t), then you even can enjoy an extra windfall in capital gains if you decide to sell. But as for anyone else, pork is unlikely to present any significant economic opportunities.

Just some food for thought.