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?
"Is all of this basically the result of higher interest rates? General inflation? Labour shortage? All of the above basically increasing building costs?"
Higher interest rates. Higher cost of labour and materials. Increases in development charges. Building code changes.
Great, thank you for explaining this. Is there a way for cities to use/give with conditions, their land for housing? Wouldn’t that help cut down costs and subsidize development/rent costs for renters? Or are low interest loans the better policy alternative?
Also, I take you to be a proponent of the supply side being the cause of the housing crisis, what’s your take on the cheap credit demand side argument? Some of the people read think the role of the CMHC (still not clear exactly what the CHMC’s role is, but trying to learn more) and historically low interest rates from 08 until 22 as playing a significant role in landing is where we are?
Providing public land for rental housing (with greater height and density where land prices are higher) would definitely be helpful. Shane Phillips ("The Affordable City") strongly recommends leasing the land for a long term (like 99 years) rather than giving away the land entirely.
Regarding cheap credit: I read "Irrational Exuberance" (Robert Shiller) and "House of Debt" (Mian and Sufi) with great interest. After 2008, the Harper and Trudeau governments were very aware of the risk of a housing bubble fuelled by cheap credit, which is why Harper restored a maximum of 25-year amortizations and Trudeau brought in the 2% mortgage stress test. But that's not what's happening now. Usually when there's a bubble you'll see a high price-to-rent ratio. Now what we're seeing is low vacancy rates and high rents.
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
I think I'm more optimistic than you are about the market. What it boils down to is, people want to live and work here, and other people want to build housing for them. But besides the approval bottleneck, there's also a cost bottleneck: the value of the new building (based on the stream of future rents) minus the total cost to build it has to be significantly greater than the current value of the property with its existing building.
One thing I've learned from talking to people who work in non-profit development is that the business case for non-market housing looks very similar to the business case for market housing. Take out profit, and add some public contributions (maybe the land is free), but construction costs are going to be pretty much the same.
Looks like things are similar in the GTA: the average land price for multifamily development has dropped from $116 per buildable square foot in 2021 to $77 in 2023. Construction costs are way up (maybe easing now?). The sharp rise in interest rates means that financing costs are higher. The net result is that less land is available and fewer projects happen.
True enough! Recommendation 04 from the National Housing Accord proposal: "Provide low-cost, long-term fixed-rate financing for constructing purpose-built rental housing, as well as financing to upgrade existing purpose-built rentals." https://morehousing.ca/national-housing-accord
There's a program called RCFI that provides low-cost long-term loans to build market rental housing (it's helping to finance Senakw and lots of smaller projects). The National Housing Accord recommendation is for something similar.
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?
Yes, that's exactly correct.
"Is all of this basically the result of higher interest rates? General inflation? Labour shortage? All of the above basically increasing building costs?"
Higher interest rates. Higher cost of labour and materials. Increases in development charges. Building code changes.
Great, thank you for explaining this. Is there a way for cities to use/give with conditions, their land for housing? Wouldn’t that help cut down costs and subsidize development/rent costs for renters? Or are low interest loans the better policy alternative?
Also, I take you to be a proponent of the supply side being the cause of the housing crisis, what’s your take on the cheap credit demand side argument? Some of the people read think the role of the CMHC (still not clear exactly what the CHMC’s role is, but trying to learn more) and historically low interest rates from 08 until 22 as playing a significant role in landing is where we are?
Providing public land for rental housing (with greater height and density where land prices are higher) would definitely be helpful. Shane Phillips ("The Affordable City") strongly recommends leasing the land for a long term (like 99 years) rather than giving away the land entirely.
Regarding cheap credit: I read "Irrational Exuberance" (Robert Shiller) and "House of Debt" (Mian and Sufi) with great interest. After 2008, the Harper and Trudeau governments were very aware of the risk of a housing bubble fuelled by cheap credit, which is why Harper restored a maximum of 25-year amortizations and Trudeau brought in the 2% mortgage stress test. But that's not what's happening now. Usually when there's a bubble you'll see a high price-to-rent ratio. Now what we're seeing is low vacancy rates and high rents.
Cheers! I learn so much from you.
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
I think I'm more optimistic than you are about the market. What it boils down to is, people want to live and work here, and other people want to build housing for them. But besides the approval bottleneck, there's also a cost bottleneck: the value of the new building (based on the stream of future rents) minus the total cost to build it has to be significantly greater than the current value of the property with its existing building.
It's basically the future renters who are paying for the construction of the building, with the developer as a middleman. https://x.com/michael_wiebe/status/1711522535035281425?s=20
Or they can build it themselves, acting as their own developer. https://vancouversun.com/opinion/charles-montgomery-we-built-a-home-to-solve-some-of-the-greatest-challenges-of-our-times
One thing I've learned from talking to people who work in non-profit development is that the business case for non-market housing looks very similar to the business case for market housing. Take out profit, and add some public contributions (maybe the land is free), but construction costs are going to be pretty much the same.
Looks like things are similar in the GTA: the average land price for multifamily development has dropped from $116 per buildable square foot in 2021 to $77 in 2023. Construction costs are way up (maybe easing now?). The sharp rise in interest rates means that financing costs are higher. The net result is that less land is available and fewer projects happen.
Ah, but one of government's greatest superpowers is access to cheaper interest rates. All I'm asking is for them to pull every lever.
True enough! Recommendation 04 from the National Housing Accord proposal: "Provide low-cost, long-term fixed-rate financing for constructing purpose-built rental housing, as well as financing to upgrade existing purpose-built rentals." https://morehousing.ca/national-housing-accord
There's a program called RCFI that provides low-cost long-term loans to build market rental housing (it's helping to finance Senakw and lots of smaller projects). The National Housing Accord recommendation is for something similar.
Another move to help reduce interest rates: the recent expansion of the Canada Mortgage Bond program. https://www.cbc.ca/news/politics/annual-mortgage-bond-cap-raised-1.6978792