"Why is Vancouver so insanely expensive?"

Patrick Condon in Maclean's

Posted to Reddit.

There’s a long tradition of people responding to the headline rather than reading the article. Someone wrote:

Because people from around the world and other parts of Canada want to live here for the mild weather and quality of life - it’s not complicated.

I'd suggest that it's more about where the jobs are. Courtenay and Campbell River also have mild weather, but they're not deep labour markets in the same way that Metro Vancouver is.

This explains one side of scarcity: demand is high. But it doesn't explain the other side: why is supply low? Why can't we just build a lot more homes to meet demand? Land is limited by ocean and mountains, but elevators exist. Why is there so much land which is under-used?

The short answer is, we regulate new housing like it's a nuclear power plant, and we tax it like it's a gold mine. (Paraphrasing the MacPhail Report.) It's a bit of a racket: municipalities are both a regulator and a vendor (selling permission to build). Over the 10 years from 2011 to 2020, the city of Vancouver alone extracted $2.5 billion in supposedly-voluntary "Community Amenity Contributions." Naturally there's no free lunch - this ratchets up the floor on prices and rents, and it keeps going up over time.

The result is that Vancouver is like a bonsai tree: lovely, but much too small. The resulting housing shortage is terrible for younger people and renters: real salaries are low, because after paying for rent or a mortgage, there's not much left over. It's worst for people near the bottom of the housing ladder, but it extends all the way up the income scale. $100,000/year in Vancouver vs. Edmonton. Edmonton's cold, but it's growing fast.

Condon’s thinking about a single site

Patrick Condon has a complicated explanation which doesn't make much sense, something like this:

• (1) Vancouver has limited land, so building more housing requires more density.

• (2) Allowing more density on a parcel of land makes the land more expensive.

• (3) ???

• (4) Allowing more density and building more housing doesn't make housing less expensive.

For a local example of building new housing making existing housing less expensive, see Gordon Price's observation that new housing in Downtown South in the 1990s kept a lid on rents in the West End.

I think what Condon is missing is the difference between thinking about what happens to a single parcel of land (“spot rezoning”), and thinking about a large area. (The fancy term is “fallacy of composition.”)

When you have very tight restrictions on what can be built across a high-demand city, and there’s only a few parcels of land where new housing can be added, those parcels will be extremely valuable. The result is that they’ll be built for very high density. It’s like pushing down on a balloon.

What’s driving up the price of lots where you can redevelop is that there’s so few of them, because you can’t add housing to most lots.

With broad upzoning, where you’d be able to build small apartment buildings by right on most lots across the city, the price of any individual lot would no longer be bid up by artificial scarcity. Shane Phillips, Building Up the "Zoning Buffer": Using Broad Upzones to Increase Housing Capacity Without Increasing Land Values, 2022.

Imagine, for the sake of argument, that every parcel in Los Angeles currently zoned for single-unit detached homes, duplexes, and triplexes was rezoned to allow up to 10 units in modest three- and four-story buildings. With more than 400,000 such parcels in Los Angeles, this would increase the city’s zoning capacity by at least 3.6 million units, 2 ½ times the city’s existing stock of 1.4 million homes and more than its estimated capacity in 1960. There are approximately 25,000 single-family homes sold on these parcels each year; if just 5,000 of these were sold and redeveloped to their maximum capacity, the city would add 45,000 units to its housing stock annually.

Recalling our hypothetical town and the scenario in which 50% of parcels are rezoned to allow for triplexes, homeowners in this 10-unit scenario cannot sell their parcels for a premium — there are too many just like them. The capacity for housing has increased, but the land price has not. Value capture is not necessary (nor is it feasible) because lower land prices will automatically be “captured” by renters and homebuyers in the form of lower rents and sale prices.

We have empirical data from Auckland’s 2016 upzoning, across a broad area but excluding some neighbourhoods: upzoned parcels of land increased in value by about 50% compared to the non-upzoned neighbourhoods, but because you could build 3X as much floor space on them, the cost of land per square foot of floor space fell by half.