Slides and speaking notes from a 15-minute talk I gave last Thursday. The audience was mostly investors and small developers.
I should say up front that I’m a layperson, not a professional. My day job is in software. I don’t have any real estate investments myself - I prefer low-cost index funds. But like a lot of people, I’m extremely concerned about housing being so scarce and expensive across the whole region. We’ve got two children who are now young adults. Where are they going to live?
I’m part of an informal but very active pro-housing community. We’re calling ourselves the Vancouver Area Neighbours Association. I’m also involved in politics, especially with the federal Liberals, and I ran for Vancouver city council with Kennedy Stewart’s slate in 2022.
I track housing policy changes pretty closely, and I write them up on my daily blog, morehousing.ca. Trent suggested that it might be helpful to summarize what’s happening, and what this means for investors.
This is a picture of the severe housing shortage in Metro Vancouver. I’d describe it as high demand colliding with a slow, difficult, and revenue-maximizing approval process at the municipal level.
There’s a lot of people who are afraid of new housing and suspicious of developers. At the municipal level, there’s two major bottlenecks, the approval bottleneck and the cost bottleneck. We regulate new housing like it’s a nuclear power plant, and we tax it like it’s a gold mine. But as things get worse and worse, there’s more and more political pressure to open up these two bottlenecks.
Canada’s not running out of space, but people don’t move around randomly, they move where the jobs are. Metro Vancouver has lots of jobs, we don’t build enough housing to keep up. So then prices and rents have to rise to unbearable levels to force other people to give up and move away.
Covid really lit a fire under the housing market. When Covid hit, suddenly we had a lot more people working from home and needing more space. We have an even more severe shortage of residential space, and a surplus of office space. Plus we had post-Covid population growth on top of that.
If you’re a real estate investor, one pitfall you want to watch out for is the belief that housing always goes up. You can see from the graph that this isn’t true: back in the 1990s there was a peak, but then prices fell back significantly.
The housing market is like other markets, driven by supply and demand, which is reflected in prices. When demand is high and prices go up, the incentives to increase supply get stronger and stronger.
On the political side, all the lights are flashing red and all the alarms are going off. It’s a terrible situation for younger homebuyers and renters. Even for older homeowners who moved here 20 years ago and bought a place, it’s pretty bad. When younger people can’t afford to live here, the healthcare system is going to be under increasing strain.
Even landlords and investors are uneasy about the housing shortage. It’s not great to have to turn away hundreds of desperate people who are looking for a place.
A lot of US state governments have been overriding municipal opposition to housing, from Democratic states like California to Republican states like Montana. And that’s exactly what’s happening right now in BC.
One of the most important questions is, what are these reforms actually going to do? It’s hard to make predictions, especially about the future. But we have several years of recent data from Auckland.
Auckland’s the largest city in New Zealand. A few years ago, they were facing a major housing shortage. In 2016, they made it easier to build townhouses and small apartment buildings in a lot of the city. Because prices and rents were high, they were successful in building a lot more housing.
This table summarizes the changes that Auckland made. As we’ll see, they’re very similar to the changes that BC is making. They rezoned a lot of land in the city to allow for three units on a single lot, as well as small apartment buildings in certain zones.
The basic idea behind allowing more density is that people want to live where they have easy access to lots of jobs. So at a geographically central location, land prices will be higher. It makes sense to allow more height and density, so that each household doesn’t have to consume as much expensive land. When you artificially restrict height and density, it’s like pushing down on a balloon. People who would have lived closer to the centre get pushed further out.
This slide shows the impact of Auckland’s reforms on the cost of land per square metre of floor space. By increasing the number of buildable square metres on a given parcel of land, Auckland reduced the land cost per square metre.
With more supply, rents in Auckland slowed down compared to other cities in New Zealand, and after a few years, they’ve actually declined in real terms.
More supply of new housing doesn’t just affect prices and rents for new housing.
Housing is a ladder: it’s all connected. Whenever we block new housing, the people who would have lived there don’t vanish into thin air. They move down the ladder, competing with other people for existing housing. You get trickle-down evictions and tremendous pressure on people near the bottom of the ladder.
Conversely, new housing frees up older housing. Whenever a new building opens up with 100 apartments, that’s 100 fewer people who are competing with everyone else for the limited supply of existing housing.
This slide shows what happened to home prices in Auckland. In areas that were upzoned, apartments or high-density housing became cheaper, because there were more of them. Houses or low-density housing went up in price, because most of the value was in the land, which could be redeveloped for higher density.
So if you’re a real estate investor thinking about what’s going to happen over the next several years, you should keep in mind that rents don’t always go up, they can go down. Apartment prices don’t always go up - we can always build more apartments. It does seem reasonable to predict that land prices are likely to continue going up, especially the closer you are to the centre.
So that’s Auckland. Before getting into the specifics of what the provincial government is doing, I’d like to talk a little more about the obstacles that they’re trying to tackle, by speeding up approvals and reducing costs.
The reason that we regulate new housing like a nuclear power plant is that a lot of people are afraid of new housing. They like their neighbourhood the way it is - that’s why they live there. If you propose even a four- or six-storey building, it’s extremely difficult to get approval, especially in the city of Vancouver. There’s a long list of regulatory requirements which are higher-priority than housing. As Ginger Gosnell-Myers says, “It’s easier to elect a pope.”
Even if something’s legal to build, nothing will happen if costs are too high.
This graph shows an analysis from May 2022, of a six-storey rental project in Vancouver. With rents at that time, the value of the new building would be about $860 per square foot, the total height on the right. The “hard costs” for labour and materials are about half of that, shown in red. All other costs, including development charges and GST, are shown in turquoise. Subtracting those costs, you get $230 per buildable square foot that the project can pay for land. The value of the land with its existing buildings is $180 per square foot, shown in blue. So that leaves $50 per buildable square foot in “land lift” that motivates the landowners to sell, shown in green.
As costs rise, the green part shrinks. When it’s too small, the landowners aren’t interested in selling, and nothing happens until prices and rents rise enough for the project to make sense. In other words, cost increases are first absorbed by land lift, but once that’s gone, they end up being paid by homebuyers and renters. It doesn’t just affect prices for new buildings, it also affects prices for existing buildings, since they compete with each other.
Now a big reason that municipal governments don’t just make new housing legal by right is that their incentives are backwards. Because it’s illegal to build multifamily housing almost everywhere, you need to ask the city for approval, and this is a major source of revenue for the city. They’re acting as both vendor and regulator.
The city tries to extract as much money as they can get, and that gets added to the construction costs. For the city of Vancouver, that was worth $2.5 billion in supposedly voluntary Community Amenity Contributions, cash or in-kind, from 2011 to 2020. In comparison, $250 million per year is about one-sixth of the city’s annual operating budget. Without that, the city would need to raise property taxes.
There’s no such thing as a free lunch. Someone has to pay. These additional costs are being paid by younger homebuyers and renters, so that property taxes on older homeowners can stay low.
The other problem here is that base land values are going up. When the allowable height and density doesn’t change, that’s bad news, because it’s eating into land lift, meaning that landowners don’t have much reason to sell. As Michael Mortensen puts it, what projects need to be more economically viable is Vitamin D: more density. Allowing more floor space to be built means that the cost of land is spread over more buildable square feet.
Now let’s take a look at the response from the provincial government.
David Eby became premier a little over a year ago, after John Horgan stepped down. Eby’s an impatient guy, someone who’s perfectly willing to get into fights with housing skeptics and with municipalities.
In the fall last year, the province introduced and passed a series of legislative changes. There’s a lot of them, but the common theme is, speeding up approvals and reducing costs, in particular by making more housing legal.
This includes transit-oriented development, allowing more density within a 10-minute walk of rapid transit stations and major bus exchanges. But in a lot of cases, municipal governments were already planning for more density in those areas.
The change that’s actually expected to produce a lot more housing is allowing four-plexes and six-plexes on a single lot. It’s like a townhouse complex, without requiring land assembly.
On a typical lot, you would be allowed to build a four-plex with three storeys and 50% site coverage, for a floor space ratio of 1.5. Close to frequent transit, you would be allowed a six-plex with 60% site coverage or 1.8 FSR. That's about 2-3X as much floor space as is currently allowed for a detached house.
I should mention that the city of Vancouver and Victoria already have their own multiplex programs, so the province’s rules won’t automatically apply. But the province is strongly encouraging them to adopt the provincial guidelines.
Low-rise projects like this are particularly important because they’re much faster to plan and build than a high-rise. BC estimates that this will result in something like 200 to 300,000 additional homes over 10 years.
The province is looking at a number of other reforms. I won’t try to talk through all of them.
And it’s not just the province that’s moving forward on housing. There’s a number of things happening at the federal level as well. I’ll just highlight that the federal government is reducing the cost of construction for rental projects, helping with the cost bottleneck, by removing the GST on rental projects.
I’ll just conclude by describing the basic choice. This slide shows housing starts in Atlanta and in San Francisco. In Atlanta, you can see that when the economy is booming, housing starts go up, and when the economy cools off, housing starts go down. Meanwhile prices stay stable. In San Francisco it’s the other way around: housing starts are stuck at a low level, and prices go through the roof.
In other words, we can either build a lot more housing and put downward pressure on prices and rents, so that younger people can afford to stay in Metro Vancouver. Or we can build housing slowly and watch prices and rents go crazy, making Vancouver more and more like an exclusive country club, where younger people can’t afford to live.
Thank you.