Drop in residential land sales
Bad news for future homebuilding
'Precipitous' drop in residential land deals in Vancouver a bad omen for future housing supply. “The Vancouver area has had a sharp decline in the volume of deals involving residential development sites.” Dan Fumano, Vancouver Sun.
The new figures, from the national analytics firm Altus Group, show that the number of sales of undeveloped residential land in Greater Vancouver declined in each of the past five quarters, plummeting more than 85 per cent in the third quarter of this year from the second quarter of last year. The value of those land sales dropped to $202 million from $1.43 billion in that time.
The reason this decline might be of concern to political leaders and the public is because of what it could mean for the future housing supply.
These deals for development sites are often the first step toward the major residential projects that Vancouver-area municipalities are relying on to deliver big numbers of homes. If developers are hesitant to buy development sites, as the figures now suggest, it could mean there is less housing supply coming online in the future.
I couldn’t find this report on the Altus website, but there was a Q2 report which shows something similar, with a huge drop in residential land sales (green) from Q2 2022 to Q2 2023.
Land price is a residual: the amount a project can pay for land is the expected selling price of the new building minus the cost to build it.
When costs are up, land prices drop dramatically, which means that fewer landowners are willing to sell, and projects don't happen. They're not going to sell unless the land price is significantly higher than the current value of the property with the building that's already there.
Taxes and development charges are a cost, just like any other construction cost: they act like a brake pedal on new development. This is why there's currently a standoff between the federal government and the Metro Vancouver region over Metro Van's attempt to put 99% of the cost of new water/sewer infrastructure on development charges. The federal government just removed the 5% GST from new rental housing (helping to compensate for the headwinds resulting from higher interest rates). While the federal government is hitting the gas, Metro Van is hitting the brakes.
Am I understanding this correctly: higher costs (fees, construction, taxes) push down the amount developers can pay for land. Developers/project owners have a good idea of what people will be able to pay as rent, which will provide a return on the investment of buying, building and maintaining the building. With building costs and income known, the leftover is what can be paid for the land. Sellers of the land will only see when they feel/determine that selling will get them more money than continuing to use the land as it currently is?
Is all of this basically the result of higher interest rates? General inflation? Labour shortage? All of the above basically increasing building costs?
Blogged on this yesterday, in, not outrage, just resignation that this is the way the free market works. What can you do, but recognize "market failure"; it's not doing what's actually needed. I've already been arm-waving for direct government construction of housing on any land they've got or can reasonably buy. http://brander.ca/stackback#markethouse