Costs matter
An illustration of how we ratchet up the floor on prices and rents
Costs matter because they set a floor on prices and rents. If costs increase, the price floor increases. If we want apartments to be less scarce, expensive and tiny, we need to bring down cost per square foot.
I’ve put together some crude visual illustrations. In the following diagrams, the top line is the price per square foot of floor space (say $1200 for a multiplex in East Van); the bottom line is the total cost per square foot (say $1050). The gap between the price and the cost per square foot provides the incentive to build, shown as pale green. The larger the gap, the stronger the incentive; the smaller the gap, the weaker the incentive.
Total cost per square foot acts as a floor on prices and rents. If the price per square foot gets too close to the cost per square foot, homebuilding slows or stops.
Costs include:
Land
Labour and materials (“hard costs”)
Architecture, design, and engineering fees
Financing costs
Municipal fees and development charges
When prices rise faster than costs, the incentive to build increases and we get more homebuilding, shown as the color changing to brighter green. Conversely, when prices fall faster than costs, the incentive to build decreases and we get a housing bust, shown as the color changing to red. Homebuilding slows down or stops until prices rise.
When costs (lower line) rise faster than prices, we also get a housing bust. Again, homebuilding slows down or stops until prices rise. In other words, the cost increases are passed through to homebuyers.
In BC, it’s typical for municipal governments to aim to take 70-80% of land lift. The result is that they’re continuously ratcheting up the price floor. When prices (upper line) go up, municipal governments raise their fees (yay!) and costs (lower line) rise. When prices go down, municipal governments can’t lower their fees (they need the money!) and we get a housing bust. Thus costs go up; they never go down.
The goal of provincial and federal governments is to make housing more affordable, by bringing down prices. This requires bringing down the cost per square foot:
Reducing the cost of land by allowing more density, as Auckland did in 2016
Reducing the cost of labour and materials by increasing productivity, e.g. by using more pre-fabricated assemblies
Reducing the cost of approvals by allowing more housing by right, or by speeding up rezoning and permitting
Bringing down barriers to entry so that smaller builders with lower cost structures can enter the market - see Mario Polese’s comments on Montreal vs. Toronto
Reducing taxes and fees, including municipal development charges
Thus we’re headed for a direct conflict between municipal governments and senior governments over municipal fees and development charges. The incentive of municipal governments is to maximize their revenue from new housing; the incentive of provincial and federal governments is to reduce costs.
It’s not just the BC government. At the federal level, Sean Fraser got into a fight with Metro Vancouver over its planned DCC increases. Conservative housing critic Scott Aitchison is clearly focused on this subject.
(For their part, the Liberal government is reducing financing costs for purpose-built rental housing by providing low-cost long-term loans through the Rental Construction Financing Initiative, waiving GST and allowing accelerated depreciation on new rental housing, and using the Housing Accelerator Fund to convince municipalities to allow more housing and speed up approvals. They’re also offering $6B in infrastructure funding, with the requirement that municipal development charges be frozen at April 2024 levels. Similarly, the Conservatives are promising to waive GST on new individually-owned homes under $1M.)
Isn’t it good when prices are falling?
It’s good as long as there’s still a gap between prices and costs, so that building can continue.
When costs are up and prices are falling, that benefits current buyers, but it’s not sustainable. Homebuilding has to stop until prices rise above the floor set by costs, so that projects are no longer underwater.
Isn’t it obvious that costs matter?
In a 2017 Sightline article, Dan Bertolet describes how there’s a widespread belief among municipal policymakers that costs don’t matter. Yes, Red Tape and Fees Do Raise the Price of Housing.
Few public policy issues can match urban housing politics for its incendiary combination of passion and misconception. To wit: the confounding idea that relaxing regulations and fees to decrease the cost of homebuilding won’t make homes more affordable.
Why? Because, goes the refrain, developers charge as much as the “market will bear” anyway. Any savings from streamlined regulations or reduced fees just yield more profit for the developer, not lower prices or rents.
That reasoning may sound legitimate, but it’s bogus. It misses the forest for the trees—or, the city for the building. Across an entire metropolis, when homebuilding is cheaper, homebuilding speeds up. And in booming, housing-short cities such as Seattle, the more new homes built, the less prices rise—that is, the lower the price the market will bear.
Why does this misconception about costs matter? Because it excuses counterproductive housing policy. Why bother fixing ill-conceived regulations that boost the expense of homebuilding if you believe doing so won’t help affordability? If you believe it just puts more money in developers’ pockets?
What’s more, the confused logic also infects debate over adding costs: if the market sets prices with no regard for cost, it follows that policies that increase the expense of homebuilding can’t raise home prices. This rationale frees policymakers to ignore that imposing impact fees on new homes, for example, is likely to exacerbate their city’s affordable housing crisis.
More
The MacPhail Report, July 2021 - housing is scarce and expensive because we regulate it like it’s a nuclear power plant, and we tax it like it’s a gold mine
The cost bottleneck - presentation to the Metro Van board, November 2023
Municipal finance ideas. If municipalities give up revenue from taxing new housing heavily, where are they supposed to get it from?
Unsold condos - what happens when market-clearing prices fall below costs
Urbanarium Debate #17 - why the province needs to intervene
Taxing land lift is not a reliable source of revenue - presentation to the Metro Van board, November 2024
Lowering costs lowers prices - when and where? I just can't recall. Small towns have suffered price drops because everybody leaves, but a growing place building housing so fast that prices dropped? Are there examples?
I concede the logic - IF you have a truly free market. Supposedly, housing has many, many vendors and developers and a free market.
But I'm frankly suspicious. When I read about that large condo in Burnaby staying empty on purpose to drive prices up, it seemed like economic insanity, but the story looked legit.
The article raises several critical points regarding the challenges inherent in Vancouver's housing market, particularly its reliance on discretionary zoning, and how municipal policies like the #BareTrustLoophole contribute to speculative investment and affordability issues. Here's a critical analysis contextualized with relevant data and policies:
Spot Discretionary Zoning and Affordability
Vancouver’s reliance on discretionary zoning leads to unpredictable and often lengthy approval processes. Without outright zoning, developers and homeowners face speculative risks, which increase the costs of land acquisition. This creates a "Wild West" market where only high-margin projects are financially viable, exacerbating the housing shortage and increasing unaffordability.
Cost-Driven Price Floors
The article correctly highlights how costs—land, labor, materials, municipal fees, and financing—set a price floor on rents and sales prices. Municipalities like Vancouver aim to extract 70-80% of land lift, further increasing these costs. The consistent ratcheting up of costs by government policies creates a cycle where homebuilding slows during downturns, maintaining high price floors.
Speculation and the #BareTrustLoophole
The #BareTrustLoophole enables property transactions to avoid property transfer taxes, creating a speculative environment that inflates land values. This loophole undermines municipal and provincial efforts to stabilize housing markets and is a significant factor in escalating prices.
Misaligned Municipal and Senior Government Incentives
There is a direct conflict between municipalities’ reliance on development charges as revenue streams and provincial/federal goals to reduce housing costs. As the article notes, incentives for municipalities to streamline approvals or reduce fees are minimal without external pressure, as demonstrated in clashes over development cost charge increases.
Potential Solutions and Gaps
The article suggests several measures for addressing these issues, including:
Increasing Density by Right: Examples like Auckland show that allowing more density outright reduces land costs per unit.
Pre-Fabricated Construction: Increasing productivity through prefabrication could lower material and labor costs.
Reforming Tax Policies: Closing tax loopholes like the #BareTrustLoophole could curb speculation.
Aligning School and Urban Planning: The lack of integrated planning exacerbates inefficiencies and undermines community-building efforts, particularly in transit-oriented developments.
Intersections with Education Infrastructure
As Vancouver densifies, schools become critical nodes of community infrastructure. However, discretionary zoning complicates the inclusion of schools in new developments, often leading to overcrowded or poorly located educational facilities. This is seen in the Vancouver School Board’s struggles with long-range facilities planning and its reliance on outdated BC Area Standards that do not accommodate modern educational needs.
Conclusion
The article provides a cogent critique of Vancouver's housing policies but does not fully explore how discretionary zoning's effects extend into other domains, like education and transit. A more holistic policy framework, aligning urban planning, educational infrastructure, and housing affordability, is essential to resolving these issues sustainably. The City of Vancouver's recent streamlining initiatives under the Vancouver Plan offer a starting point but require robust intergovernmental coordination and public accountability.