Month: October 2015

• Technology is eating the world

  

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  Earlier today the comment section of an old post I wrote about UberX was revived with a discussion around technology and what it means for human capital.

  The concern expressed was that technology and machines are going to put us all out of a job. And it stemmed from a discussion around driverless cars. Clearly we are headed in that direction and so eventually we will no longer need to drive or have people drive us around. This means that something that was once a job will no longer exist.

  But I am not yet convinced that it will be as dire as some believe it will be – though it could very well necessitate some significant structural changes in the economy.

  Here are two things to consider:

  Marc Andreessen has written and tweeted a lot about the topic of “robots eat all jobs” and his argument is that this line of thinking often revolves around something called a lump-of-labor fallacy. This is the idea that there is a fixed amount of work to be done. And so when technology replaces humans, we are just making the labor pie smaller.

  But the reality appears much different. Human wants and desires increase and we find new ways to put people to work. One of the examples I’ve heard Marc give, that I really like, has to do with buildings. In the past, there used to be a guy whose only job was to shovel coal into a furnace. He physically heated the building. But eventually technology did away with that requirement and that job. Is that not progress? Or should we go back to that in order to put people to work?

  All this said, unemployment and job displacement are still serious issues for cities and countries. Which is why some people – including many capitalists – believe that minimum wages will not be enough going forward. We will also need to look at things like a “basic income guarantee” to redistribute wealth and ensure that, no matter what, everyone has a certain amount of money to live.

  At first blush, this doesn’t feel right. But I think it’s important to remain open minded and engage in discussion. Hopefully we can do a bit of that today in the comments below.

  2015.10.21

• City building every way you can

  

  Tonight I attended and gave a short talk at a city building themed PechaKucha night here in Toronto. If you aren’t familiar with the PechaKucha 20×20 presentation format, click here.

  The first PechaKucha night was held in Tokyo, but it has since expanded to over 800 cities around the world. Each city has a local organizer who acts as a steward and here in Toronto it is Amy Bath. She did a fantastic job this evening.

  Tonight’s event was all about non-traditional forms of city building. It was not so much about how architects and developers are shaping the built environment – thought there was some of that. It was more about how interdisciplinary artists, graphic designers, bloggers, and others, are having an impact on cities. So in my case, I was speaking as a blogger, rather than as a real estate developer, which was a bit unique for me.

  What excited me about tonight is the amount of talent and passion that we have in this city, and how so much of it is being harnessed to make cities better.

  Jay Wall of Studio Jaywall is doing incredible work at the intersection of graphic design and city building. My friend Mackenzie Keast of Distl and NXT City Prize is organizing public space competitions and then working with the city to get them built. And my friend Justin Broadbent, who is an interdisciplinary artist, is just killing it and putting Toronto on the map. I don’t know how else to say it.

  And this is just naming a few of the people in attendance.

  I have so much respect for people who love the city they call home and actively try to make it a better place. That’s a lot harder to do than just complain about why your city isn’t (insert other allegedly better city here). But it’s also a lot more productive.

  2015.10.21

• The contradiction in American housing policy

  I really like this post by Daniel Hertz talking about the inherent tension in American housing policy.

  Here’s his conclusion:

  We are, in conclusion, profoundly conflicted as a nation when it comes to housing: we want it to be affordable, but we also want its prices to rise fast enough to be valuable as a financial investment. That’s a contradiction we need to acknowledge if our housing policy debate—and, ultimately, our housing policy—is going to be coherent and constructive.

  Of course, this situation isn’t unique to the US. Though the US does have homeownership subsidies – such as the mortgage interest tax deduction – that other similar countries, like Canada, do not have.

  Still, I feel a similar kind of contradiction here. We worry about excess supply and housing bubbles when the reality is that both of these things are desirable outcomes if, and only if, the primary objective is to maintain housing affordability.

  But I don’t think that is the primary objective in practice. At least in this part of the world, I think we worry first and foremost about making sure that home prices continue to go up and that wealth is being built. Then, we worry about providing affordable housing for those that are unable to participate.

  I’m not making a judgement call on whether or not that’s a good or bad thing. It just strikes me that this tension, and there certainly is a tension, is not an equal one.

  2015.10.19

• What tax policy could be doing to home sizes in Ontario

  

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  In yesterday’s post I made a remark that we have antiquated tax policies here in Ontario that encourage the building of smaller new construction condominiums. There seemed to be a lot of interest in that comment, and so I’d like to talk about that today.

  Some people thought I was referring to development charges, but I was actually thinking of the GST/HST New Housing Rebate in Ontario. 

  The way it typically works in Ontario is that when buy a new construction home, the price you pay is inclusive of HST (harmonized sales tax) and net of any applicable rebates, such as the rebate program mentioned above. 

  This means that the price you see on your agreement is usually the price you pay. I say usually only because there are ways that you could disqualify yourself from the New Housing Rebate program. But that’s a different post.

  So what does this mean in practice?

  Let’s say you went out and bought a new construction condo for $368,200 (there is a reason I’m picking what seems like an arbitrary number). If there was no such thing as the New Housing Rebate program, then the sales tax owing on this home would be the full 13%. And that would mean that the price paid before any taxes is actually $325,841 (x 13% = $368,200). This is an important number because it represents revenue to the developer.

  But since there is a New Housing Rebate program, the effective tax rate actually works out to be 5.20% for this particular sale price, which means that the price paid before any taxes is now $350,000 (a nice whole number). And so because of rebates and because they are now paying less HST, the developer’s revenue number has increased. It has gone from $325,841 to $350,000.

  The way this logistically works is that purchasers usually assign the New Housing Rebate benefits to the developer who then processes all the paperwork. This is what I mean when I say that the “sticker price” is inclusive of HST and net of any rebates – it already factors in the possible deductions.

  So far things are looking good. And I want to be clear that I don’t have concerns with the New Housing Rebate program in its entirety. In fact, it’s a hugely important part of the new home industry. Without it, many projects would simply not be feasible to build.

  However, as the price of the new home increases (which typically happens as the home gets bigger), the rebates start to fall off. The federal portion of the rebate maxes out at a base purchase price of $350,000 (which is why I chose that number) and the Ontario portion maxes out at a base purchase price of $400,000.

  What all this means is that as the unit sizes get bigger and more expensive, the effective tax rate is no longer at 5.20%, as was the case in the example I gave above. It increases. And if you hold prices constant for the purchaser, it means that the developer’s revenues now start to drop.

  To illustrate why this matters, consider the following chart:

  

  In the first scenario, the developer builds and sells 2 units for a price of $368,2000. This translates into revenue of $700,000. However, if the developer instead decides to combine those 2 units and sell the larger single unit for $733,100 (roughly double the price) then the effective rate of HST goes up and revenue drops by $30,000.

  The second scenario is similar to the first one except that instead of 2 units, it’s 3 units which then get combined into one. Here revenue drops even further – by $50,000.

  Now, you could argue that there are some cost savings associated with building fewer suites, but I don’t think it would offset the differentials shown above, especially if you multiply those revenue numbers across an entire project. So what this all means is that it can be more profitable for developers to build smaller units priced below the thresholds mentioned above, as opposed to a smaller number of larger units. 

  Again, I’m not saying that HST rebates are bad. They’re critical to the industry. I love them. But I do believe we should be thinking about the possible implications that the current set up could be having on what we’re building and in particular on unit sizes.

  If you’d like to learn more about how the rebates work, check out this PDF from the Canada Revenue Agency. I tried to keep things simple in this post.

  2015.10.18

• Pre-sales, shear walls, and condos, oh my

  

  Pre-sales are a big part of many condominium markets. The way it typically works is that developers sell suites in their building before construction has even started and then uses those purchaser deposits (which are held in trust) to obtain a construction loan to actually build the building. Part of the reason this is done is that it, in theory, reduces speculative overbuilding.

  Nobody really knows the exact number, but here in Toronto many suites within a new building often end up getting sold to investors. And in some locations and some buildings, it could be most suites.

  On the one hand this is a good thing. Because in a way they provide the short-term money that gets new projects off the ground. And if they end up holding onto their suites, they also become landlords for new rental housing. Here in Toronto condos have been almost the only new rental stock built in this city for decades. (Purpose-built rental is now starting to come back though.)

  But one of the potential negatives is that buildings could be getting designed more around investor needs as opposed to end user needs. And that is happening because many end users – particularly when it comes to larger suites – find it difficult to make such a big life decision 3-5 years out. Doing that means saying to yourself: Okay, I’m going to buy this 3 bedroom condo today because 4.5 years from now when it’s complete I expect to be married and have 1.5 kids. Life doesn’t always work that way.

  We also have antiquated tax policies in Ontario that encourage the building of smaller suites. And I believe they should be modernized. (This topic deserves a dedicated post.)

  So if we are to think of these condo suites as products, then you could say that there are two broad customer segments: the investor and the end user. There are obviously sub-segments within each, but let’s assume that those are the top of the funnel.

  The challenge now facing developers creating new product is that the system we have put in place arguably privileges one customer segment over the other. And it’s a problem that is somewhat unique to the real estate industry because it takes so damn long to bring new supply to the market. (If you sell jets or yachts, maybe you have a similar problem.)

  Now one way to solve this might be to create lots of flexibility in the product. That is, you could allow people to adjust and combine suites to fit their current needs. And that’s what great products do: they meet specific needs and solve problems. In this scenario, perhaps the single person could “add-on” to their suite as they enter a new life phase. And indeed, this is something people are experimenting with by way of things like “knockout panels.”

  But the problems with this are twofold. 

  Firstly, this requires an adjacent and suitable suite to come on the market so that you can buy it. And that may not happen 6 months before the baby comes. 

  Secondly, most Toronto condominiums are built using something called shear walls. These are structural reinforced concrete walls that cannot be removed without compromising the integrity of the entire building. And most purchasers like these walls between them and their neighbors because they’re worried about noise. So combing suites isn’t always as straightforward as we might think. There are many constraints.

  One way to mitigate these problems is through smaller projects. That reduces the lead time between purchase and occupancy. But I am sure there are probably other creative solutions that we could come up with to better align product and customer needs.

  2015.10.17

• Urban population densities, compared

  

  Earlier this month The Washington Post published an article called, There’s no such thing as a city that has run out of room.

  And what it was really about was that when we say there’s no more room (I guess people are saying this), we are really saying that we just don’t want to allow anyone else to become our neighbor. Because the reality is that urban population densities vary widely around the world. So how can you really call a place full?

  I’m not sure I feel this pain point as much as the author, but I always find population densities to be a fascinating topic. And accompanying the article was a tool – using data from Demographia – that allowed you to compare the population densities of various cities.

  Here are are two scenarios I ran:

  

  It’s important to keep in mind that these numbers are averages for the entire economically contiguous region. So it tells you nothing about the potential spikiness of certain areas. That’s why the population density of New York (which includes portions of New Jersey and Connecticut) probably seems low to you.

  Still, it’s fascinating to see how extreme some cities – including some first world cities like Hong Kong – can be. Clearly many cities have a lot of room to become a lot more dense. And I think that would be a good thing.

  2015.10.16

• How cities get branded

  

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  I have been thinking a lot about city branding lately. It’s a topic I’m interested in to begin with, and all of the Blue Jays mania going on in Toronto right now has got thinking about our own brand.

  Because at the end of the day, yes, it’s baseball. But it’s also something much larger. It’s about civic and national pride, and it’s about who we are as a city. That’s why city branding has become a global industry and why it’s so closely connected to tourism, media, sports, and entertainment.

  Still, great city branding is incredibly difficult to do. Lots of cities have tried and lots of cities – from Adelaide to Toronto – have failed. Anyone remember the “Toronto Unlimited” brand of the mid-2000′s? It had absolutely zero stickiness.

  But in reality, cities are brand building all the time whether they realize it or not. Here in Toronto, our biggest brand builder right now is probably Drake. That might sound silly to some, but I believe it to be true. And next to that, you have people like Jose Bautista with his bat flips and his support of local brands like Peace Collective. In addition to their day jobs, these people are helping to shape the identity of the city.

  What, then, is professional city branding supposed to do?

  Well, in my opinion, it is their job to mine a city for the things that already exist. A city brand, no matter how great it may be, cannot be expected to create something from nothing. There has to be something there to begin with.

  But once you identify that something, a great city brand can tie it all together; create a cohesive and collective identity; and serve as a guide for future decision making. And when that’s done effectively, you actually begin to enhance the things that you initially started out with. The associations become even more powerful.

  So today I thought we could have a discussion in the comments about city brands. How would you describe the brand of your city in one sentence?

  For me, I would describe Toronto along the lines of being the most livable and multicultural 24/7 global city. And when you think of it this way, you can probably see why I think a 2AM last call at the bar is laughable.

  2015.10.15

• One flip of the bat

  

  2015.10.15

• Thoughts on land-value taxation

  Yesterday I wrote about a new book that was just released called The Next Urban Renaissance. 

  The first essay in the book, written by Ingrid Gould Ellen of New York University, is centered around three ideas to help cities deal with the affordable housing problem. This is something that successful cities all around the world are grappling with.

  The first idea is land-value taxation, which is also known as a “split-rate” tax. I’ve touched on land-value taxation before on ATC, but I never really dug into it. So this was a good reminder to do that.

  The idea behind land-value taxation is to split property taxes into a land tax and an improvements tax (i.e. the building), and then shift more of the burden over to the land side. Economists tend to really like this model because taxing buildings/improvements can discourage property investment and development, whereas taxing land doesn’t impact supply. The supply of land is fixed.

  So in the context of affordable housing, land-value taxation is thought to be a way to encourage more development and to increase the supply of new housing – which is usually a good way to keep home prices in check.

  Here’s how Ingrid Gould Ellen described it:

  …a land tax would discourage speculators from hoarding
  undeveloped land and incentivize them to develop their parcels to the
  full extent allowable. Regardless of whether a parcel sits vacant, houses a
  partially occupied, one-story retail strip, or holds a 30-story apartment
  tower, the annual tax bill would be the same. By switching to a land tax,
  a city could therefore increase the supply of housing and, by doing so,
  reduce prices across the board.

  But I can’t help but wonder if this isn’t more applicable to cities or areas that are currently struggling to encourage development. For instance, would boom town Toronto really benefit (in terms of affordable housing) from a tax change that ends up encouraging more high-rise development?

  It also strikes me as being exceptionally difficult to implement, particularly in city like Toronto that is growing and changing so quickly. Is it reasonable to ask the owner of a small downtown parking lot to being paying property taxes as if a 90 storey supertall had been built on top of it? Because that is the reality in some parts of this city.

  And if we opted to phase in this new land tax, would it then become a game of arbitrage where developers look for properties with the lowest land taxes but the highest achievable densities?

  Finally, I wonder if it wouldn’t exacerbate some of the problems that already exist in rapidly growing cities, one of which is the preservation of smaller heritage buildings in centrally located neighborhoods:

  In the case of a split-rate tax,
  the losers will be owners of parcels with high land-to-building value
  ratios, or owners of small buildings on valuable, centrally located parcels,
  who will likely see an increase in their tax bills after the switch to
  a split-rate tax.

  Land-value taxation is something that I’ve been thinking about for a number of months now. But I am struggling to come up with a decisive position. If you have any thoughts on this, it would be great to hear from you in the comments.

  2015.10.13

• The Next Urban Renaissance

  

  The Manhattan Institute for Policy Research has just published a free book called, The Next Urban Renaissance: How Public-Policy Innovation and Evaluation Can Improve Life in America’s Cities.

  Here’s an excerpt from the foreword:

  This collection of essays brings together the best ideas from scholars with expertise across a broad spectrum of urban issues. The common theme of the papers is to innovate, evaluate, and leverage the remarkable private talent that is so abundant in America’s great cities. Public capacity is sharply limited; the ingenuity of urban entrepreneurs seems practically boundless. Local governments should be more entrepreneurial and do more to use the talents of the entrepreneurs around them.

  As a further preview, two of the ideas suggested in the book include: 1) reducing or eliminating parking requirements for new developments (which is something I’ve written about before on ATC) and 2) implementing a split-rate property tax for land and its improvements.

  If you’d like to download the free PDF, click here.

  2015.10.12