Occasional Price Tags contributor Michael Mortensen provided a detailed response to the post: What is the simple answer to this question? – on whether more supply is sufficient to address housing affordability.
Here’s a revised and expanded version that’s worth posting on its own:
 
Any discussion about unit prices needs to address the absolutely skyrocketing price of RESIDENTIAL LAND and various taxes, commissions and exactions on the same. Follow the money.
Developers are still operating on a Return on Cost margin of about 15% (to 20% if they are lucky). Internal Rates of Return – factoring in the interest costs and cash outflows needed over 4 to 5 years needed to realize that profit – are c.12% (not MASSIVE by any stretch given some of the risk involved. These benchmark ratios have not changed so it is not so much “developer greed” driving prices upwards as many might suggest. Development management fees are calculated as 2% to 4% of total costs EXCLUDING land, so there are no huge windfalls there.
Construction costs have escalated somewhat. Extended timelines for rezoning, development and building permits are also a factor in many municipalities. However, land supply and cost are the real issues.
When I left Vancouver in 2013 to work in London, land was $250/ buildable square foot in the downtown core; when I moved back to Vancouver in 2016, it was over $500 / buildable square foot – a 100% increase in 3 years! Land is now more expensive than construction on a square foot buildable basis – and remember that land costs have to be paid at the beginning of the development period … that’s an expensive financial “carry” on a project that will take 3 to 5 years to complete.
I think that most people in the development industry would agree we are seeing the influx of more global capital which takes a  more speculative view of our market – witness some irrational purchases as various syndicates buy and flip land on to other syndicates Peter Wall’s flip of a Nelson Street site near Burrard – purchased for $16.8M sold less than a year later for $60M –  and resold again months later for $68M is illustrative). The only thing changing in their sequential pro formas – other than escalating land costs – is an escalation in their anticipated selling prices … what will the market bear? Apparently a LOT! Down the housing production chain, a similar game exists with condo flippers who secure and assign pre-sale contracts.
 
Nelson Street Property Flip

 
The land flippers are not advancing new development rights,  producing anything or, or creating any new value – they are simply inflating the price of land and housing.
The “heat map” of racing land prices has radiated outwards as developers struggle and compete to secure developable sites. Most EVERYTHING out there has some complexity and risk to it – be it environmental contamination, or political/planning risk, or assembly risk. Transit Oriented sites along the Skytrain routes are trending up to and over $200/sf buildable as these assemblies will be substitutes for the convenience of inner city living.
 
On the supply side, in the face of strong demand there are virtually no completed units available for sale in our region of 2.4 million people. Don’t believe me? Check CMHC’s reliable statistics.
There are really very few “greenfield” sites – most development prospects entail destroying existing value in return for the opportunity to create more intense land uses on a given parcel of land. We are so land constrained – Montreal has 80,000 square kilometres of land in a circle with a 50km radius from the city centre; Toronto has 40,000 because of Lake Ontario; Greater Vancouver has only 18,000 square kilometres once you take away mountain slopes, the Fraser river, the US border, the ALR (a regional planning success story) and the Pacific ocean.
Now, more and more, we have to RECYCLE and REPLAN developed land – witness the new Strata Dissolution legislation that allows the demise and sale of older buildings nearing the end of their service lives. More and more older stratas (remember the leaky condo crisis!) are being targeted.
 
Strata Dissolution

 
Who are the winners in all of this? …. anyone selling property is selling into a very constrained land market. For example, Homeowners along the Cambie corridor are organizing and selling their single family lots for $3 to $5 to $6 million (one seeking $11M below). That’s all capital gains free provided they were primary residences. Any business selling larger sites will trigger capital gains taxes, so they really need to see big bumps in value in order to justify redevelopment. Governments selling land also win (witness any recent large land plays and you’ll see big numbers on sales revenue for any provincial, crown, or municipal sale of land). For example, watch the City of North Vancouver’s sale of the 5 acre Harry Jerome site – it will be c.$300+/sf buildable.
Cambie Corridor Homes/

 
Harry Jerome RFP

Also add the brokers who guide these deals – they are making their cut on hefty commissions.
 
Governments are winners in other ways: Provincial Property Transfer tax fills BC’s coffers. The province collects tax on the purchase of development sites AND on the sale of the new units created on the same site – a double dip! And as land and property prices double, so too does the Province’s cut – to the point where the value of real estate property transfer taxes now eclipse natural resource royalties on an annual basis. Municipalities across BC also take their cut as they try to capture 75% of the “Land Lift” as properties are up-zoned.
 
Property Transfer Tax Double Dip

 
By virtue of their land use powers, Cities can create “land” (buildable area) for free – so this is one tool we have at our disposal to create some degree of affordability. Take Vancouver’s suburbs for example, which account for 85% of the City’s land base but houses only 75% of the population.
Time to think about a new Vancouver Special (below), about how we re-use land, and how we plan growth in our other close-in neighbourhoods to accommodate more people at greater intensity with commensurate (and reasonable) levels of new amenity. The subject of the relative fairness of compulsory city Community Amenity Contributions is rife with debate, but the truism these are exacted at the rate the market can bear – coming out of the land price, or added to the purchase price of units.
 
A New “Vancouver Special”

 
The question of who benefits from the uplift as land is rezoned is really one of equity: a classic planning problem. I think we’ll be hearing more and more about inclusionary zoning as a planning tool to share the uplift, but this still raises the question of access and fairness in the distribution of the benefits of rezoned development potential. Who wins the lottery for the next affordable home?
Ultimately supply and demand and government policies all shape the market for land and housing. We need to look at land, tax and housing policies at federal, provincial, regional and municipal levels in a holistic manner to create the conditions needed for more balanced markets.
I’m interested in other people’s perspectives on this.
Cheers
Michael Mortensen

Comments

  1. Undoubtedly, what would be necessary to make the new vancouver special work would be that they not be rare … if everyone can split their lot in half, its not such a special thing, and so one would hope that land costs would not increase per/sf … if these require rezoning or special permission from the city, they will be unicorns with added value, and so will not aid affordability significantly (which is likely why current townhomes cost much more than the sum of their SFH lot parts).

  2. What would happen if we simply stopped accepting RZ applications which rely on expensive (thanks for your observation Michael) land assembly needed towards larger, more dimensionally efficient economy of scale driven, below grade parking infrastructure ($100,000 per stall?) which will be useless for anything else (thank you parking by-law) in the not too distant future?
    What if, instead, we could achieve the same desired capacies by intensifying our city through missing middle strategies in all zones that enjoy the assets of current land owners, without further land assembly, in a way that they can contribute this equity directly while protected from capital gains?
    Could more dense smaller frontage initiatives, with slab on grade proformas that reflect reduced construction time to occupancy/revenue, coupled with “pre-paid” land assets as project equity, creatively introduce new and livable typologies? (we already have a few good examples and our talented design profession will figure this out).
    Would smaller frontage developments require the same design approval scrutiny, and related processing times, that we now see for larger projects from assembled land?
    Would this make for a more interesting city, a human scaled city that sells itself, perhaps not needing marketing soft costs to “sell product”?
    Could the city, under this future, figure out how to manage the dispensation of density that is transparent, equitable and strategically focussed towards local, meaningful amenity while protecting the value of such density over time as a “taxpayer owned asset”?
    Would the market react to the above in a proactive manner?

    1. That’s a pretty roundabout way to advocate for the tried and true two-up, two-down fee simple rowhouse. Nineteenth Century English masonry construction would be substituted for BC-grown CLT, glulams and plywood joists prefabricated with precision in climate-controlled plants, then trucked to a site then bolted together on a slab at grade a lot faster than stick framing. This could become the new starter home Special. I predict they will become very popular if sound attenuation and privacy are well-addressed, and there isn’t a hint of strata title.
      There are, of course, infinite variations.

    2. Scale matters. Assembly is generally necessary to bring densities up above 25 units/acre. People get divorced over home renos! Imagine a redevelopment! Few individual landowners have the skills, knowledge, capital or risk tolerance to launch their own mini development projects. I don’t think a “missing middle” strategy that attempts to cut out the creativity and skills of the development industry is going to succeed. The city (“of Vancouver” I impute from your comments) has reasonable public process for comprehensive planning, rezoning, density bonusing and development permits.

      1. What about Montreal’s many city homes of 3-4 stories with multiple units? Setting aside the very attractive but not code approved exterior stairs…

  3. When you say cities can “create” new land to increase supply (and presumably at least make a dent in its cost) do you mean through upzoning or greenfield development, or both?

  4. The high price of the land is a function of the supply-demand imbalance. If this is fixed, the price of the land will come down.
    Demand can be reduced my making people poorer, restricting credit (including increasing interest rates) or restricting entry from non-residents or other undesirables (empty homes tax, airbnb restrictions, etc).
    Supply can be increased with direct provision by government, relaxed zoning (and, at the margins other rules such as development fees, planning lead times, parking requirements, etc.) and construction of additional transit lines or highways (in particular, commuter rail lines).
    Over the long term, supply measures are likely to more effective because they don’t create incentives for people to work around them the way demand measures tend to.
    The number of units under construction is at very high levels relative to the last few decades, so the problem (for condos/apartments at least) should self-correct somewhat over the next couple of years.

  5. This perfectly illustrates why “adding supply” is like throwing fat on the fire and won’t help with affordability. The more SFH lots you rezone (or hint you may rezone) the more product there is for speculators. And the more presales units you make available offshore the more the price gets bid up before it even hits the local market.

      1. I’m not sure how development firms not working at capacity equates to a need for more supply? And I’m surprised at that comment, as I had heard they were having a difficult time getting good subtrades due to the high amount of construction going on.

    1. The CRA and provincial governments are looking seriously at presales, foreign family trusts, etc. You will probably see prices go down once new rules are enacted, but I predict many will be disappointed that the influence of foreign money accounts for only a part of the unaffordable price levels.
      Interest rates, land use and regional demographics will still be central factors affecting value.

    2. Further, how does preserving the vast number of large lots in amber correct our affordability and land supply issue?

  6. Monad, located at 3351 West 4th Avenue by Lang Wilson Architects, is an excellent example of my post above as this project redeveloped a 33′ lot at almost 50 units/acre and 2.5 FSR under prevailing zoning. Relies on a car elevator instead of underground parking. Very livable typology. Need more of this.

  7. In any discussion about housing supply we should remember that we are talking about human beings. Here are a few interesting stats from the 2016 census for Vancouver. We need to ask the question: Who are we trying to accommodate when we try to build our way to affordability and what is the best form of housing for those people? The secondary issue is what is the preferred form of tenure because that is also a component of the affordability question; ownership or rentership? They are quite different pathways leading to vastly different personal financial outcomes with social and political consequences in the long term.
    603,502 Vancouver total population, 2011 census
    631,500 Vancouver total population, 2016 census
    283,195 households (family of one or two adults and children)
    100,010 one person households
    25,000 lone parent families averaging 2.5 members
    100,000 plus seniors over the age of 65
    41,300 single detached homes
    So just looking at these figures how should we critique our public policy housing objectives?
    Do policies align with actual needs of the population or are we just fooling ourselves when all we talk about is densification, densification, densification?

    1. The numbers do tell a story, don’t they? The 41,300 SDH figure is absurdly low when you understand they occupy about 80% of the residential land in Vancouver (see the Mountain Math site).
      Given our demographic trends, seniors will need a lot more of everything … housing, accessible mobility options, healthcare. That will cost money — a lot more money than is devoted to seniors as a proportion of public budgets today. Raising taxes will not cover all of it. Taking money from other programs will certainly have its political and economic limits.
      Therefore, increasing economic output and productivity (with corresponding tax revenues) while decreasing inefficiency and waste will likely become the central policy plank of several levels of government in another decade or so. Making cities far more efficient must be a big part of these initiatives, and addressing land use while vastly improving transit to displace oil dependency and wasteful road expenditures can be a powerful instrument to bring that about.
      Small lots, rowhouses and townhouses can play a big roll in the square mile platting between arterials. Low rises can play a roll up to three blocks off arterials, and mid rises on and adjacent to arterials will become crucial. I’d say Vancouver could comfortably triple its population to 2 million living and thriving souls with these measures, but that will require better walkable streets lined with mixed-uses and injections of Big Transit. Political courage needs to start somewhere.
      That is, of course, densification. So is adding a dog house to the back yard. It’s only a dirty word when it’s grossly out of scale or comes with 1.3 parking stalls per unit.

      1. I’m not sure if Jens on the Mountain Math site says 41,300 Single Family Dwellings occupy 80% of the residential land. If he does, he’s mistaken.
        The Statistics Canada definitions of dwelling type can be confusing, and is important to understand in this discussion.
        Single Family Dwellings are just that – there’s one family (or household if it’s a single person household, as they are not considered to be a family) living in a dwelling. That definition says there’s no suite, or suites.
        If there’s a suite, then Statistics Canada call it a duplex. There are 52,975 dwellings in a duplex, so there at least 26,500 more structures in that category.
        If there are two dwellings side by side, or front to back (which in Vancouver is usually called a duplex) then Statistics Canada call it a semi detached house. There are 4,480 more of those in the City of Vancouver.
        And finally, if there are two suites, and Statistics Canada find them (irrespective of their legality) then the property will be defined as ‘Apartment in a building that has fewer than five storeys’ – even though it isn’t an apartment at all.
        On that basis there are over 100,000 of the 283,900 dwellings – over 35% of the city’s dwellings – occupying the stated 80% of the residential land. (I’m assuming that number is correct). That’s not nearly as dire a proportion as is sometimes portrayed.
        This isn’t an argument about trying to add new forms of higher density housing into ‘single family’ neighbourhoods, but rather acknowledging that many of the dwellings are two family, and with the addition of non-authorized suites or legal laneway homes, three family lots.
        In another post, there’s a discussion about the economics of replacing homes like these with rowhouses. The savings that could be achieved from pre-fabrication are relatively unimportant, compared to the land costs. Fee simple projects would be more, not less expensive, as each dwelling has to have separate service hookups. It’s difficult to see how family dwellings could cost less than $1m each, given prevailing lot values – and that would be on the east side. On the west side the land values are higher. While they would be relatively more affordable than the detached homes today, they wouldn’t be within the reach of many families looking to move on from an apartment, (although rising apartment values might help some of them). If there is a housing bubble that’s about to deflate (or burst) and land values come down, then the economics of development would be very different. Until then there are probably no easy solutions.

Leave a Reply

Your email address will not be published. Required fields are marked *