Daniel Hertz over at City Observatory just published a post talking about why land costs are so important when it comes to home prices. More specifically though, his post is intended to refute a claim that multifamily housing is always going to be more expensive than single family housing.
The key concept here – which is critical to understanding urban real estate economics – is that home values are essentially made up of two things: the land and the improvements (i.e. the building).
When home prices rapidly appreciate, as has been the case in cities like Vancouver (see below) and Toronto, it’s not the building, but the land that’s really driving the price up.
And as you can see from the chart below (which Daniel shared in his post), it is possible for multifamily housing to be less expensive than single family housing.
So why was someone arguing that multifamily housing is more expensive?
Well if you look at just construction costs, then this is generally true. Single family housing is typically wood frame construction, whereas multifamily housing is usually reinforced concrete or some other material that allows you to build up. In these latter cases, the price per square foot to build is going to be higher.
But Daniel’s argument is that when you build multifamily housing, you also begin to amortize the cost of the land over more housing units. So you begin to use land more efficiently and that offsets the higher construction costs.
However, two thoughts come to mind.
First, the value of a piece of land is entirely dependent on what you can build on it. And the more you can build on it, the more the land is worth. So as densities increase, so do land prices.
Second, a big part of why condominiums are so much more affordable is that they’re smaller. In 2014, the average condo size in Metro Vancouver was estimated to be 840 square feet. I couldn’t find the average size of a detached house in the city, but let’s assume for a second that it’s 2,500 sf.
If that were the case, then a detached house, despite being more expensive overall, would still be cheaper on a per square foot basis. You would be paying less for every square foot of livable space. True that doesn’t make the house more affordable, but I think it’s a bit unfair to compare apples (small condo) to oranges (large house).
So what I would really like to see is a graph of all-in low-rise and high-rise per square foot prices over time and for various cities. Because I would be curious to see at what point – if ever – they intersect.
After I wrote this week’s post about Chinese homebuyers in Vancouver, I was surprised to learn about the racism debate that flared up in the city / on Twitter. I guess this really is a touchy subject. (See: #donthave1million)
My reaction to the research was: Great to see someone (Andy Yan) putting in the time to try and better understand a market phenomenon. It’s painful how opaque real estate markets can be. Let’s get even more data so that we can make even better policy decisions. I didn’t read it as: let’s deliberately single out a race.
Because the reality is that we all knew this was happening.
Bloomberg recently published an interesting and related article that talks about China’s money exodus and how the Chinese logistically get their money out of the country. There are restrictions in place.
But first, here are two snippets from Bloomberg that describe the order of magnitude we’re talking about:
This flood of cash is being felt around the world, driving up real estate prices in Sydney, New York, Hong Kong and Vancouver. The Chinese spent almost $30 billion on U.S. homes in the year ending last March, making them the biggest foreign buyers of real estate. Their average purchase price: about $832,000.
In total, UBS Group estimated that $324 billion moved out last year. While this year’s numbers aren’t yet in, during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left.
Now here’s how it is being done:
It works like this: Chinese come to Hong Kong and open a bank account. Then they go to a money-change shop, which provides a mainland bank account number for the customer to make a domestic transfer from his or her account inside China. As soon as that transaction is confirmed, typically in just two hours, the Hong Kong money changer then transfers the equivalent in Hong Kong or U.S. dollars or any other foreign currency into the client’s Hong Kong account. Technically, no money crosses the border – both transactions are completed by domestic transfers.
And here’s a snippet that stood out for me because it shows how easy this has become:
While the first exchange has to be set up face-to-face, customers can place future orders via instant-messaging services such as WhatsApp or WeChat, and money changers set no limit on how much money they can move.
Given the scale and complexity of this issue – housing affordability – I have to believe that cities and policy makers would be far better off with more, rather than less, information. I hope we can work towards that.
It’s raining this morning in Toronto. The sun really hasn’t come up and out yet. And I’m spending the morning drinking coffee and reading a City Journal article from this past summer called “Hongcouver.”
The article talks about how the Chinese – first from Hong Kong and then from mainland China (PRC) – have dramatically reshaped the economic and cultural landscape of Vancouver.
I, unfortunately (it’s a great city), don’t spend a lot of time in Vancouver and so I don’t have an accurate sense of the local sentiment towards all of this change. But there’s no question the city has changed.
Here’s a snippet from the above City Journal article:
As for the notion that Chinese money tended to be ill-gotten, Yu pointed out that the property boom was propelled by the structural disparity between prosperous Hong Kong, a dynamic economy, and the comparative backwater of Vancouver, still “living on the fumes of empire.” For the price of a Hong Kong flat, a Chinese immigrant—even, say, an accountant—could buy a splendid home on Vancouver’s West Side. “The Hong Kong Chinese who came could buy their way into any neighborhood. [They] knew that money was a tool,” Yu told me. “They weren’t going to accept a second-class citizenship in Vancouver. They could say, ‘I don’t care about your British Imperial manners, I am going to buy your house.’ ” The irony was that the Hong Kong arrivals—“more sophisticated than the people they were displacing,” with “better schooling, better English accents,” Yu said—were themselves the products of a system of law and finance instituted by the British with the establishment of their Hong Kong colony in the 1840s, after Britain thrashed China in the First Opium War.
A lot of this was fuelled by the now defunct Immigrant Investor Program. The intent of the program was to allow “experienced business people” into the country in order to contribute to economic growth. If you had business experience, a net worth of at least C$1.6 million (that was gained legally, of course), and were able to invest C$800,000, then you could get permanent residency.
Between the mid-1980s and the end of the 1990s, approximately 30,000 Chinese came to Vancouver via this investor-class visa. And between 1987 and 1997, it is estimated that this group of Chinese possessed about $35 to 40 billion in disposable income. No wonder they bought real estate.
But the interesting question is whether or not Vancouver is better off now than it was in the 1970s before all of this migration really took hold.
There many who would argue that it is not. Vancouver now has the most expensive real estate in Canada and prices have completely detached themselves from local income levels – as they have in many international cities.
But there’s also a strong argument to be made that this influx of money has made the Vancouver economy more dynamic. Unemployment in the city was cut almost in half between the early 1980s and 1991 during the first wave of migration. It went from 13.6% to 7.7%.
In a way, it’s not all that different than what’s currently happening in San Francisco with tech and housing. I’m not saying there aren’t problems to be solved. But I think many of us can agree that the answer is not to eradicate the tech sector.
That’s throwing the baby out with the bathwater.
Daniel Hertz over at City Observatory just published a post talking about why land costs are so important when it comes to home prices. More specifically though, his post is intended to refute a claim that multifamily housing is always going to be more expensive than single family housing.
The key concept here – which is critical to understanding urban real estate economics – is that home values are essentially made up of two things: the land and the improvements (i.e. the building).
When home prices rapidly appreciate, as has been the case in cities like Vancouver (see below) and Toronto, it’s not the building, but the land that’s really driving the price up.
And as you can see from the chart below (which Daniel shared in his post), it is possible for multifamily housing to be less expensive than single family housing.
So why was someone arguing that multifamily housing is more expensive?
Well if you look at just construction costs, then this is generally true. Single family housing is typically wood frame construction, whereas multifamily housing is usually reinforced concrete or some other material that allows you to build up. In these latter cases, the price per square foot to build is going to be higher.
But Daniel’s argument is that when you build multifamily housing, you also begin to amortize the cost of the land over more housing units. So you begin to use land more efficiently and that offsets the higher construction costs.
However, two thoughts come to mind.
First, the value of a piece of land is entirely dependent on what you can build on it. And the more you can build on it, the more the land is worth. So as densities increase, so do land prices.
Second, a big part of why condominiums are so much more affordable is that they’re smaller. In 2014, the average condo size in Metro Vancouver was estimated to be 840 square feet. I couldn’t find the average size of a detached house in the city, but let’s assume for a second that it’s 2,500 sf.
If that were the case, then a detached house, despite being more expensive overall, would still be cheaper on a per square foot basis. You would be paying less for every square foot of livable space. True that doesn’t make the house more affordable, but I think it’s a bit unfair to compare apples (small condo) to oranges (large house).
So what I would really like to see is a graph of all-in low-rise and high-rise per square foot prices over time and for various cities. Because I would be curious to see at what point – if ever – they intersect.
After I wrote this week’s post about Chinese homebuyers in Vancouver, I was surprised to learn about the racism debate that flared up in the city / on Twitter. I guess this really is a touchy subject. (See: #donthave1million)
My reaction to the research was: Great to see someone (Andy Yan) putting in the time to try and better understand a market phenomenon. It’s painful how opaque real estate markets can be. Let’s get even more data so that we can make even better policy decisions. I didn’t read it as: let’s deliberately single out a race.
Because the reality is that we all knew this was happening.
Bloomberg recently published an interesting and related article that talks about China’s money exodus and how the Chinese logistically get their money out of the country. There are restrictions in place.
But first, here are two snippets from Bloomberg that describe the order of magnitude we’re talking about:
This flood of cash is being felt around the world, driving up real estate prices in Sydney, New York, Hong Kong and Vancouver. The Chinese spent almost $30 billion on U.S. homes in the year ending last March, making them the biggest foreign buyers of real estate. Their average purchase price: about $832,000.
In total, UBS Group estimated that $324 billion moved out last year. While this year’s numbers aren’t yet in, during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left.
Now here’s how it is being done:
It works like this: Chinese come to Hong Kong and open a bank account. Then they go to a money-change shop, which provides a mainland bank account number for the customer to make a domestic transfer from his or her account inside China. As soon as that transaction is confirmed, typically in just two hours, the Hong Kong money changer then transfers the equivalent in Hong Kong or U.S. dollars or any other foreign currency into the client’s Hong Kong account. Technically, no money crosses the border – both transactions are completed by domestic transfers.
And here’s a snippet that stood out for me because it shows how easy this has become:
While the first exchange has to be set up face-to-face, customers can place future orders via instant-messaging services such as WhatsApp or WeChat, and money changers set no limit on how much money they can move.
Given the scale and complexity of this issue – housing affordability – I have to believe that cities and policy makers would be far better off with more, rather than less, information. I hope we can work towards that.
It’s raining this morning in Toronto. The sun really hasn’t come up and out yet. And I’m spending the morning drinking coffee and reading a City Journal article from this past summer called “Hongcouver.”
The article talks about how the Chinese – first from Hong Kong and then from mainland China (PRC) – have dramatically reshaped the economic and cultural landscape of Vancouver.
I, unfortunately (it’s a great city), don’t spend a lot of time in Vancouver and so I don’t have an accurate sense of the local sentiment towards all of this change. But there’s no question the city has changed.
Here’s a snippet from the above City Journal article:
As for the notion that Chinese money tended to be ill-gotten, Yu pointed out that the property boom was propelled by the structural disparity between prosperous Hong Kong, a dynamic economy, and the comparative backwater of Vancouver, still “living on the fumes of empire.” For the price of a Hong Kong flat, a Chinese immigrant—even, say, an accountant—could buy a splendid home on Vancouver’s West Side. “The Hong Kong Chinese who came could buy their way into any neighborhood. [They] knew that money was a tool,” Yu told me. “They weren’t going to accept a second-class citizenship in Vancouver. They could say, ‘I don’t care about your British Imperial manners, I am going to buy your house.’ ” The irony was that the Hong Kong arrivals—“more sophisticated than the people they were displacing,” with “better schooling, better English accents,” Yu said—were themselves the products of a system of law and finance instituted by the British with the establishment of their Hong Kong colony in the 1840s, after Britain thrashed China in the First Opium War.
A lot of this was fuelled by the now defunct Immigrant Investor Program. The intent of the program was to allow “experienced business people” into the country in order to contribute to economic growth. If you had business experience, a net worth of at least C$1.6 million (that was gained legally, of course), and were able to invest C$800,000, then you could get permanent residency.
Between the mid-1980s and the end of the 1990s, approximately 30,000 Chinese came to Vancouver via this investor-class visa. And between 1987 and 1997, it is estimated that this group of Chinese possessed about $35 to 40 billion in disposable income. No wonder they bought real estate.
But the interesting question is whether or not Vancouver is better off now than it was in the 1970s before all of this migration really took hold.
There many who would argue that it is not. Vancouver now has the most expensive real estate in Canada and prices have completely detached themselves from local income levels – as they have in many international cities.
But there’s also a strong argument to be made that this influx of money has made the Vancouver economy more dynamic. Unemployment in the city was cut almost in half between the early 1980s and 1991 during the first wave of migration. It went from 13.6% to 7.7%.
In a way, it’s not all that different than what’s currently happening in San Francisco with tech and housing. I’m not saying there aren’t problems to be solved. But I think many of us can agree that the answer is not to eradicate the tech sector.
That’s throwing the baby out with the bathwater.
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