“When you have investors competing with first-time buyers who walk in with a couple of [baby] strollers, typically the investor is going to win,” Mr. Pasalis says. “They are well capitalized. They can pay a higher price. And this is why our home ownership rate is declining, because more and more homes are actually going into the hands of investors who rent them out, and amplifying home and amplifying condo prices. We are seeing that.”
But let's break this down a little.
Where are these first-time buyers walking into? Is it a resale home showing or is it a pre-construction showroom? If it's the latter, then we know it's going to be difficult / atypical for them to make a buy decision so far in advance. They already have multiple strollers in hand, do they want to wait 4-7 years for their pre-construction home to be ready?
I would also add that in our current environment -- where investor demand for pre-construction homes has waned significantly -- the development industry has not seen a marked uptick in end-user demand. Why are they not stepping up now that they're not being outbid by investors? In my opinion, it's an ideal time to buy!
“When you have investors competing with first-time buyers who walk in with a couple of [baby] strollers, typically the investor is going to win,” Mr. Pasalis says. “They are well capitalized. They can pay a higher price. And this is why our home ownership rate is declining, because more and more homes are actually going into the hands of investors who rent them out, and amplifying home and amplifying condo prices. We are seeing that.”
But let's break this down a little.
Where are these first-time buyers walking into? Is it a resale home showing or is it a pre-construction showroom? If it's the latter, then we know it's going to be difficult / atypical for them to make a buy decision so far in advance. They already have multiple strollers in hand, do they want to wait 4-7 years for their pre-construction home to be ready?
I would also add that in our current environment -- where investor demand for pre-construction homes has waned significantly -- the development industry has not seen a marked uptick in end-user demand. Why are they not stepping up now that they're not being outbid by investors? In my opinion, it's an ideal time to buy!
One reason could be that people who own strollers still largely prefer low-rise housing. Maybe it's for reasons of affordability, maybe it's a cultural bias, or maybe it's a genuine preference. Either way, let's turn our attention to resale homes. In this scenario, who is likely to pay the most?
If you're an investor, then you are looking for a specific yield. And so in theory, it should be a mostly dispassionate decision: "Here's the most that I can pay in order to meet my minimum returns. Do not exceed." But the question is whether is this is going to be more or less than what a stroller-owning group of people would pay.
The answer is probably that it depends. However, if the answer is that the investor wins and they then turn around and rent it to people who own strollers, is this actually a problem? And if this same investor happens to own 25 other rental homes and they're all rented to people who own strollers, is this an even greater problem?
I suppose it is a problem if you're worried about Canada's homeownership rate, which has in fact declined from about 69% (in 2011) to 66.5% (in 2021). But what does this even mean? Is a higher homeownership rate always better? Does Canada have a target number? As of February of this year, the homeownership rate in Switzerland was only about 36.3%. And the last time I checked, it was still a rich country.
There is nothing wrong with renting. I know wealthy people who have opted to rent their entire life because they enjoyed the flexibility and/or had better places to put their money.
All of this said, the argument in the above scenario is that, but for investors outbidding people with strollers, these homes would be more affordable and that would in turn increase the homeownership rate. It's a similar argument to, but for foreign buyers or but for Airbnbs, these homes would be more affordable.
But in a city like Toronto, we are building very little in the way of new low-rise houses. New supply is virtually non-existent. Similarly in Seattle, they are now building more accessory dwelling units than they are single-family houses. So it is any wonder that demand is constantly outstripping supply and that prices are being bid up?
In my opinion, a better solution is to rethink how we build our low-rise neighborhoods. And here and here are two good places to start.
One natural response to yesterday's post about (housing) affordability vs. beauty is to think that I put forward a false dichotomy. Why can't we have both? Why does it need to be a zero-sum game? Surely there's a middle ground. Our cities should be both inclusive and beautiful. And of course, I don't disagree.
What I was trying to do with the post was force a thought exercise. There are lots of things that we do as city builders which serve to increase the cost/price of housing. Going to a design review panel adds time/cost. Deciding to use that really nice material from Europe adds cost (and maybe time). And even adding a simple building stepback adds time/cost.
So in doing these things, we are in effect deciding that these are more important that just building cheaper and lowering the resulting rents/sales prices. We can certainly debate the right balance and how much should be spent on things like design and/or sustainability, but it doesn't change the fact that, for better or for worse, we are saying, "it is important that we spend the money on this particular item."
Now, there is also a common counter argument that none of this really matters, because developers will always price new housing at whatever the market will bear (i.e. the maximum possible price). But as I have tried to argue many times before on this blog, this is not always true. Pushing prices too far increases risk and slows absorption.
It also ignores the fact that in any given city there are going to be sites that are infeasible to develop with new housing. That is, when you look at all the costs and, yes, what the market will bear, the numbers just don't work. And so what can happen when you reduce development costs is that you now unlock more sites for new housing, increasing overall supply.
None of this is to say that our cities shouldn't be beautiful or that we shouldn't strive for creative design solutions. This is exactly what we should be doing! Instead, this post (and yesterday's) is simply a reminder that time and things do cost money, and that the decisions we make are rarely benign. In fact, they usually speak to what we value the most.
If you had to pick one, would you say that it's more important for new housing to be affordable or to be beautiful? Many of you are probably thinking that it should be both. And while it is true that good and thoughtful design doesn't always need to be more expensive, nice things do often cost money. And sometimes, doing as little as humanly possible costs even more money.
Let's consider two development scenarios. In scenario A, the developer has well-oiled machine that delivers relatively affordable, but identical rental housing all across the country. The buildings are functional and there's virtually no vacancy, but the architecture is undoubtedly bland and it certainly doesn't respond to its local context. Standardization and efficiency trumps all, including aesthetics.
In scenario B, the developer is similarly building new rental housing, but she instead invests heavily in custom designs. Each building is unique. And each building goes through a "design review panel", after which extensive changes are made in order to ensure that the design is truly beautiful and that it responds to its local context. As a result, there is a real price premium to these homes.
These are perhaps extreme examples. Usually, the goal is some sort of balance between affordability and beauty. But I do think it speaks to some of the tensions that our industry faces. So if you had to choose one, which one would it be? What kind of new homes do our cities really need more of? And if your answer is scenario B, does it change after a certain premium?
One reason could be that people who own strollers still largely prefer low-rise housing. Maybe it's for reasons of affordability, maybe it's a cultural bias, or maybe it's a genuine preference. Either way, let's turn our attention to resale homes. In this scenario, who is likely to pay the most?
If you're an investor, then you are looking for a specific yield. And so in theory, it should be a mostly dispassionate decision: "Here's the most that I can pay in order to meet my minimum returns. Do not exceed." But the question is whether is this is going to be more or less than what a stroller-owning group of people would pay.
The answer is probably that it depends. However, if the answer is that the investor wins and they then turn around and rent it to people who own strollers, is this actually a problem? And if this same investor happens to own 25 other rental homes and they're all rented to people who own strollers, is this an even greater problem?
I suppose it is a problem if you're worried about Canada's homeownership rate, which has in fact declined from about 69% (in 2011) to 66.5% (in 2021). But what does this even mean? Is a higher homeownership rate always better? Does Canada have a target number? As of February of this year, the homeownership rate in Switzerland was only about 36.3%. And the last time I checked, it was still a rich country.
There is nothing wrong with renting. I know wealthy people who have opted to rent their entire life because they enjoyed the flexibility and/or had better places to put their money.
All of this said, the argument in the above scenario is that, but for investors outbidding people with strollers, these homes would be more affordable and that would in turn increase the homeownership rate. It's a similar argument to, but for foreign buyers or but for Airbnbs, these homes would be more affordable.
But in a city like Toronto, we are building very little in the way of new low-rise houses. New supply is virtually non-existent. Similarly in Seattle, they are now building more accessory dwelling units than they are single-family houses. So it is any wonder that demand is constantly outstripping supply and that prices are being bid up?
In my opinion, a better solution is to rethink how we build our low-rise neighborhoods. And here and here are two good places to start.
One natural response to yesterday's post about (housing) affordability vs. beauty is to think that I put forward a false dichotomy. Why can't we have both? Why does it need to be a zero-sum game? Surely there's a middle ground. Our cities should be both inclusive and beautiful. And of course, I don't disagree.
What I was trying to do with the post was force a thought exercise. There are lots of things that we do as city builders which serve to increase the cost/price of housing. Going to a design review panel adds time/cost. Deciding to use that really nice material from Europe adds cost (and maybe time). And even adding a simple building stepback adds time/cost.
So in doing these things, we are in effect deciding that these are more important that just building cheaper and lowering the resulting rents/sales prices. We can certainly debate the right balance and how much should be spent on things like design and/or sustainability, but it doesn't change the fact that, for better or for worse, we are saying, "it is important that we spend the money on this particular item."
Now, there is also a common counter argument that none of this really matters, because developers will always price new housing at whatever the market will bear (i.e. the maximum possible price). But as I have tried to argue many times before on this blog, this is not always true. Pushing prices too far increases risk and slows absorption.
It also ignores the fact that in any given city there are going to be sites that are infeasible to develop with new housing. That is, when you look at all the costs and, yes, what the market will bear, the numbers just don't work. And so what can happen when you reduce development costs is that you now unlock more sites for new housing, increasing overall supply.
None of this is to say that our cities shouldn't be beautiful or that we shouldn't strive for creative design solutions. This is exactly what we should be doing! Instead, this post (and yesterday's) is simply a reminder that time and things do cost money, and that the decisions we make are rarely benign. In fact, they usually speak to what we value the most.
If you had to pick one, would you say that it's more important for new housing to be affordable or to be beautiful? Many of you are probably thinking that it should be both. And while it is true that good and thoughtful design doesn't always need to be more expensive, nice things do often cost money. And sometimes, doing as little as humanly possible costs even more money.
Let's consider two development scenarios. In scenario A, the developer has well-oiled machine that delivers relatively affordable, but identical rental housing all across the country. The buildings are functional and there's virtually no vacancy, but the architecture is undoubtedly bland and it certainly doesn't respond to its local context. Standardization and efficiency trumps all, including aesthetics.
In scenario B, the developer is similarly building new rental housing, but she instead invests heavily in custom designs. Each building is unique. And each building goes through a "design review panel", after which extensive changes are made in order to ensure that the design is truly beautiful and that it responds to its local context. As a result, there is a real price premium to these homes.
These are perhaps extreme examples. Usually, the goal is some sort of balance between affordability and beauty. But I do think it speaks to some of the tensions that our industry faces. So if you had to choose one, which one would it be? What kind of new homes do our cities really need more of? And if your answer is scenario B, does it change after a certain premium?
