May 19, 2016

Quote: “Some kind of hysteria”

Item from Ian:

Courier

Even one of the most seasoned veteran observers of the real estate industry has been shaken by this phenomenon. Economist Tsur Somerville, who holds UBC’s Real Estate Foundation professorship, admits he is in a quandary: “The world up to a year ago had a structure I understood,” he told me as he went on about a fixed supply and an excessive amount of demand. But not all prices should be escalating everywhere.  It is “reflective of some kind of hysteria,” people panicking and rushing to get into the market — anywhere.

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  1. “Hysteria” is the right word, both for the phenomenon and the reporting of it. But how an economist could not understand this is something that I can’t understand. Material things have value because most people think/agree that they do. Being in short supply just contributes to the common understanding that something will be desired and likely therefor have value, but supply/demand isn’t the only relationship that can bestow value. Sometimes people just get it in their dopey heads that something is valuable because everyone else seems to think the same thing at the same time. Apparently this befuddled economist has never heard of Beanie Babies.

    1. Thats not actually a bad metaphor … and inspired some good books: https://www.amazon.ca/Great-Beanie-Baby-Bubble-Toy/dp/1591848008

      The difference though is that you could always get your kid/spouse a knockoff (I imagine this was not a great thing to do for the whole giver/givee relationship … but still, you could), or another toy. There are no knockoff houses, or ‘other’ houses to speak of.

      Might be the same initial impulse, but certainly a different effect.

      1. To people caught up in the mania (or hysteria) of a value system, the effect is no different. The knock-off Beanie Babies were essentially the same little objects to the uninitiated and immune, but they were not the same commodities, and did not carry value within that closed system of crazy people who traded in such things and very much believed in their value (man, the 90’s was a strange time).

        Land and housing are as valuable as they are largely because everyone believes they are. Knock-off Beanie Babies made that weird little value system easier to undermine in the end, but when or if people suddenly stop thinking Vancouver land is valuable, it will stop being valuable. We can’t imagine how or in what scenario that would occur with land/housing because it’s foreign to us, but it is the case.

        1. I was agreeing with you … only pointing out that the specific metaphor has certain limits … limits which make the situation in Vancouver even worse (imoho) … as there are no alternatives.

          Its more similar to what happens in a famine – those with money can out-spend and stay fed, those who can’t, can’t … there isn’t any (or essentially no) elasticity in the demand, only the cost. What we see in Vancouver is an inelastic demand met with an elastic ability to pay, met with what has become a ‘famine’ of units in comparison to demand. The fact that much of the purchased ‘food’ is essentially immediately left to rot (remaining empty) only makes it seem more egregious.

        2. “Famine is the “triple failure” of (1) food production, (2) people’s ability to access food and, finally and most crucially (3) in the political response by governments and international donors.”

          [Housing] Famine is the “triple failure” of (1) housing production, (2) people’s ability to access housing and, finally and most crucially (3) in the political response by governments [in the face of international buyers].

          https://www.oxfam.org/en/somalia/famine-somalia-causes-and-solutions

  2. A demolition moratorium on single family homes would put a halt to rampant speculation, it would result in renovations rather than wasteful destruction, the unintended consequence of zoning changes allowing three units (house, suite, laneway) in RS-1 zoning.

    1. Why would it stop “speculation”? Speculation is based on the theory that something will be worth more tomorrow than it is today. Further constraining supply would seem to me to exacerbate the phenomenon rather than ameliorate it.

      Plus, it’s not “speculative” that land prices increase when the city ordains that 3 homes rather than 1 may be built on the same plot of land — that land is quite literally worth more today than it was yesterday and does not require us to prophesize about what the future holds to see the increased value.

      Instead, mandating unsustainably low density (i.e. SFH) invites investors to speculate that the restrictions will be relaxed in the future. Increase the density today and you reduce the incentive for such speculative regulatory arbitrage.

    2. Or a moratorium on tearing down single family houses to build another single family house. Tear down only allowed if the house is replaced with strata or row houses. But wait, municipalities don’t allow this. They prefer new luxury houses to creating more housing.

    3. A blanket demolition moratorium will ultimately lead to higher prices in today’s unaffordable market. It also leaves owners without a way to partly recoup the high costs of renos, especially when a good number of older houses present conditions that basically require a total gut n’ jack job with no gain in rentable or sellable floor area, or a net increase in housing alternatives to the unsustainable RS single.

      I don’t know what your experience is with renos, Jolson, but your comment leads me to believe you’ve never taken on the challenge of a major home reno, at least not where the pain of a near-bankruptcy decade is accompanied with litres of spilt blood, and perhaps a severed end of a finger and a spouse who walked away from the self-imposed poverty.

      1. The D’Arcy Jones Van Special reno is indeed exquisite. If a laneway house was added then the green effort would be even better in terms of increasing the housing stock, albeit rental.

        http://www.darcyjones.com/430-house/

        Some of my comments are oriented to those who cannot afford a full lot (practically every average Jane / Joe these days), to those who bought houses in terrible shape for a cheaper price, and to those whose houses date from 1910, not 1981, and are therefore not as structurally sound and certainly not up to Code.

    4. Better than a moratorium I think would be a more significant bonus for keeping/renovating, and more significant costs for new build. This would mean that yes you can build new, but the result will be smaller, and it will cost you a lot more.

      (instead of having a single tool (hammer) that makes every problem into a nail, have a carrot and sticks approach)

      The benefit of building green isn’t high enough. (If we do in fact want to be the greenest city)
      The benefit of keeping and renovating isn’t high enough. (If we do in fact want to be the greenest city)
      The cost of putting up something new and big and crap isn’t high enough.

      There is little incentive to produce good design, only big design to max out FSR and look good in numbers on a sales sheet. This only acts to incentivize building big and cheap and maximizing profits.

      Plenty of Vancouver Specials have been remodeled into fantastic spaces – see Scott & Scott, or the new urban award winner from D’Arcy Jones http://vancouver.ca/home-property-development/urban-design-award-winners.aspx … but unless there is a real incentive to produce something special, it is left up to the intrinsic motivation of whoever owns the property, and if the only interest is a quick sell and a quick buck, than there is no incentive for good design.

      There are some isolated examples where the rules were used to both keep existing and produce new and good design … but these seem to be isolated in RT, RM, and Strathcona … the bonus for renovation in RS land is too small.

      RT:
      http://architrixstudio.com/house-plans-design/1-multi-family/infill/
      Strathcona:
      http://www.straight.com/life/695696/heritage-meets-sustainability-unique-strathcona-project

  3. Imagine if we treated our food supply like this. Imagine if foreigners came in and bought up all our food, and anyone living on local incomes could only afford Kraft Dinner. Instead of food being actually used and priced to eat, speculators came in and horded it all and kept flipping it over and over for profit.

  4. Perhaps we need to identify the players; the flipper, the developer, the builder, the investor and the home owner all of whom have different goals. When a property is encumbered by a moratorium some of these players (flipper, developer) will find other ways to generate revenues which will in turn reduce demand while the builder will become the renovator.

    There is not a single house in Vancouver that cannot be renovated and or expanded at lower cost than a new build. Non-conforming buildings are generally renovated as there is no incentive to replace them.

    I agree with Artitectus, that the “Greenest City” needs to create innovative incentives that will see the retention, repair, and renovation of existing housing stock. It is just fundamental for a sustainable future.

    And yes we need single family homes because they offer social, cultural, recreational and economic opportunities, life and living opportunities that simply are not available in buildings with many units.

    1. I’m not sure I follow the logic that moratoriums on densification would “reduce demand”. How’s that demand reduction workin’ out for ya for the RS-1 that we have? The Vancouver Sun is running 3-4 articles a day demonstrating the contrary.

  5. By all means, keep and renovate an older house if possible.

    However, many, many Vancouver houses require major renos. Jacking them up and replacing the foundations while adding (or upgrading) a suite will run you at least $150K. Gutting the upstairs floors will bring you up to $350-800K, depending on the conditions and how much labour you are willing to assume yourself.

    Then there are those with rot from bottom to top with little value even to the greenest community. Fungi and carpenter ants have no green urbanist friends, and are often hidden within the wall, floor and roof cavities until some hapless new owner opens them up and sees the structural damage with their naked eyes, and age a decade overnight. That will lead to a 1:1 replacement at even greater cost.

    There are many ancient forms of single family housing in the world, but only one in the Metro until very recently: a detached house. The next logical step is single-family attached homes, as discussed widely on PT umpteen times before.

    Then you have one of the greenest of green policies yet to make a complete splash here: efficacious land use. Per capita emissions from both construction and lifespan operation, materials consumption, etc., are far lower in denser neighbourhoods. This is not ideology, projection or modeling. It’s based on factual evidence and measurements comparing up-zoned communities to sprawl.

    Sometimes one can’t see the forest for all the trees.

    1. And for umpteen times who says it is the next logical step? East Vancouver can hardly be considered sprawl!

    2. Jolson, this is a map of Vancouver zoning.

      http://vancouver.ca/files/cov/Zoning-Map-Vancouver.pdf

      You will note the vast white and light grey areas which are zoned RS (one family). The majority of the lots designated RS are the standard 10 m / 374 m2 (33 ft / 4,026 ft2) lot, and for the sake of argument can be taken as an average.

      Coverage by building footprints will probably average 140 m2, which leaves 234 m2 of open space per lot. As of 2011 Vancouver had 47,530 detached homes in RS zones. That number is decreasing, so let’s round down to an even 40,000 for illustrative purposes. This works out to 9.36 km2 (9,360,000 m2) of land consumed by the open space setbacks of all RS lots in the city. This is a very inefficient scenario in light of demographic demand and supply-related affordability.

      Now look at the blue area beyond the city boundaries. That’s the ocean and the Fraser River. Unless the feds allow floating cities beyond the harbour headline (or we invade Burnaby), it’s obvious that we have a gigantic spatial problem.

      In the context of absolutely no greenfield land left for housing, Vancouver’s RS zones, east, west and south, are indeed sprawling.

      It should be noted that the single family detached home stock in Vancouver decreased by 18,930 houses between 2001 and 2011. The attached ground-oriented townhouse numbers increased by 82,750 units in the same period.

      At least we’re on the right track, if a little slow.

  6. There’s a fascinating admission in the Courier article “Builders scramble for East Side lots as densification heats up”.

    Builder Jas Jawanda admits to a hand in glove relationship with agents who bring him a private deal: “clients who are thinking about selling a home.” There is a quid pro quo. He gets the lot – the agents get to list the redeveloped property when it’s built.

    How does all this work? Aren’t these agents also getting a “double end” commission on the first sale – from their original client – to the builder (since there would be no buyer’s agent), and then a second kick at the commission can when the house is built?

    The fiduciary duty of the agent to the seller of the property – is not mentioned.

    Jawanda states: “It’s such a dog-eat-dog world. I don’t want to get into that bidding process”.

    Isn’t the alpha dog in this transaction Jawanda himself – getting handed properties without competition from other buyers. Where is the benefit to the original owners – what’s their cut of the deal?

    How much more would the owners have achieved if other buyers had indeed been given the opportunity to bid? Aren’t the agents jumping through hoops for the builder in the hopes of getting that repeat listing. Who are these agents really working for?

    1. Good point. Does the law prescribe a fiduciary duty to agents in this scenario? Would this be a breach? If not, maybe we should look at that.

    2. If said property was subject to a demolition moratorium the scene would be very different and people looking for a home to live in would be competing to rent or purchase it rather than a business seeking to profit through demolition. If City Council were to so much as “consider” passing a motion to “study” the consequences of a demolition moratorium it could introduce the uncertainty needed to end the wasteful destruction and unaffordable prices of our homes. It is a matter of courageous action by City Council.

    3. By all means, let’s encourage council to study the issue. Let all interested parties and the public join in the debate. Do some professional independent cost-benefit analysis and planning. Develop phased approaches and alternate policies to a blanket one-note moratorium. Chose one and run with it.

      Let’s get cracking.

  7. A demolition moratorium doesn’t mean you can’t have a big new home, it just means you can’t use a bulldozer to get what you want!

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