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.
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.