Urbanist Alain Bertaud -- who is author of Order without Design -- was recently in Vancouver for a talk about planning and housing matters.
One of the things that he argued, according to The Hub, was that Vancouver "cannot complain about high housing prices and, at the same time, drastically limit the amount of land available [for development]."
This should be an obvious thing. But then again, many people seem to believe that housing follows its own unique set of rules when it comes to supply and demand. So let's look at some basic math to illustrate what it means to, not even stop or limit development, but just slow it down a little.
Consider a development site that yields 300,000 sf of gross floor area. If I were to pick a number out of the air and apply a land price of $175 per buildable square foot, this is a site worth $52.5 million.
In today's environment, a land or acquisition loan for a site like this might come with a 50% LTV and an interest rate of 10%. What this means is that in a simple interest-only scenario, the annual debt service on this loan would be around $2.6 million ($52.5 million x 50% x 10%).
Urbanist Alain Bertaud -- who is author of Order without Design -- was recently in Vancouver for a talk about planning and housing matters.
One of the things that he argued, according to The Hub, was that Vancouver "cannot complain about high housing prices and, at the same time, drastically limit the amount of land available [for development]."
This should be an obvious thing. But then again, many people seem to believe that housing follows its own unique set of rules when it comes to supply and demand. So let's look at some basic math to illustrate what it means to, not even stop or limit development, but just slow it down a little.
Consider a development site that yields 300,000 sf of gross floor area. If I were to pick a number out of the air and apply a land price of $175 per buildable square foot, this is a site worth $52.5 million.
In today's environment, a land or acquisition loan for a site like this might come with a 50% LTV and an interest rate of 10%. What this means is that in a simple interest-only scenario, the annual debt service on this loan would be around $2.6 million ($52.5 million x 50% x 10%).
Now let's think of this on a per suite basis. Assuming an efficiency of 80%, 300,000 sf of GFA might equal 240,000 sf of saleable/livable area. Divide that by an average suite size of 625 sf, and you end up with 384 new homes on this piece of land.
If you now divide the debt service by this many homes, you get to an annual land loan debt service cost of approximately $6.7k per home. This means that if it takes two years to start construction (and take out the land loan), that's about $13.5k of land interest costs per home.
Of course, if the approvals process takes even longer, this cost goes up. Let's say that it gets decided that a "community working group" should be formed in order to further consult the community on the impacts of this proposed development.
If this adds another year to the timeline, you now have an over $20k bill per home just to cover the land loan interest. And this does not just get magically "absorbed", it needs to be added to the cost of the new home.
This also does not include the cost of the actual construction loan, or any of the other hundreds of costs associated with building new housing.
Obviously this is one of the costs of doing business. It is what developers sign up for when they look to build new housing. But I think it's important to remember that limiting development, or even just slowing it, has real financial implications: it makes housing more expensive than it needs to be.
Here is a study by three researchers out of California that asked Americans to predict the impact of a supply shock on various things, such as durable goods, commodities, labor, trade, and yes, housing.
For basically all of these items, people tended to answer correctly. Usually by a factor of at least two to one. In other words, when asked what reducing the supply of new cars would do to the prices of used cars, the majority of people responded saying that it would lead to an increase in prices.
However, when asked about the impact of a 10% increase in housing supply, about 40% said that it would cause prices and rents to rise. Only about a third believed they would fall (the correct answer). This is fascinating because it shows that housing seems to be an outlier. Most people don't have the same intuitive sense.
Montreal has a bylaw that came into effect on April 1, 2021 and that requires developers to contribute to the city's supply of social, affordable, and family housing. (All three of these have their own definition.)
Developers can meet this requirement in a number of different ways:
They can build the social, affordable, and/or family housing
They can contribute land or a building
Or they can pay cash-in-lieu
Usually, I think of inclusionary zoning as being the first of these three bullet points: a hard requirement to build a certain amount of non-market housing. That is not an absolute requirement here, and so I see this policy as being IZ lite.
Since the bylaw came into force, there have been approximately 150 new projects by private developers in Montreal, according to this CBC article. That has resulted in about 7,100 new market-rate homes. At the same time, it has resulted in exactly zero non-market homes.
From what I can tell from the article, every single developer has opted for option three: pay the cash-in-lieu instead of actually building the housing. Supposedly this has produced about $24.5 million in new fees, which sounds like a lot. But if you divide it by 7,100 homes, it isn't all that much: just under $3,500 for each new home.
So what is clear is that this is the least expensive option. That's why everybody is choosing it. If the fee was significantly higher and it was cheaper to just build the social/affordable/family housing, then every developer would just do that. This is how development pro formas work.
But at the end of the day, we are still taxing new housing and new home consumers for the purpose of trying to create a smidgen of more affordable housing. And this has never sat well with me, especially considering that there are plenty of other things that we could be doing to make new housing more affordable for everyone.
Now let's think of this on a per suite basis. Assuming an efficiency of 80%, 300,000 sf of GFA might equal 240,000 sf of saleable/livable area. Divide that by an average suite size of 625 sf, and you end up with 384 new homes on this piece of land.
If you now divide the debt service by this many homes, you get to an annual land loan debt service cost of approximately $6.7k per home. This means that if it takes two years to start construction (and take out the land loan), that's about $13.5k of land interest costs per home.
Of course, if the approvals process takes even longer, this cost goes up. Let's say that it gets decided that a "community working group" should be formed in order to further consult the community on the impacts of this proposed development.
If this adds another year to the timeline, you now have an over $20k bill per home just to cover the land loan interest. And this does not just get magically "absorbed", it needs to be added to the cost of the new home.
This also does not include the cost of the actual construction loan, or any of the other hundreds of costs associated with building new housing.
Obviously this is one of the costs of doing business. It is what developers sign up for when they look to build new housing. But I think it's important to remember that limiting development, or even just slowing it, has real financial implications: it makes housing more expensive than it needs to be.
Here is a study by three researchers out of California that asked Americans to predict the impact of a supply shock on various things, such as durable goods, commodities, labor, trade, and yes, housing.
For basically all of these items, people tended to answer correctly. Usually by a factor of at least two to one. In other words, when asked what reducing the supply of new cars would do to the prices of used cars, the majority of people responded saying that it would lead to an increase in prices.
However, when asked about the impact of a 10% increase in housing supply, about 40% said that it would cause prices and rents to rise. Only about a third believed they would fall (the correct answer). This is fascinating because it shows that housing seems to be an outlier. Most people don't have the same intuitive sense.
Montreal has a bylaw that came into effect on April 1, 2021 and that requires developers to contribute to the city's supply of social, affordable, and family housing. (All three of these have their own definition.)
Developers can meet this requirement in a number of different ways:
They can build the social, affordable, and/or family housing
They can contribute land or a building
Or they can pay cash-in-lieu
Usually, I think of inclusionary zoning as being the first of these three bullet points: a hard requirement to build a certain amount of non-market housing. That is not an absolute requirement here, and so I see this policy as being IZ lite.
Since the bylaw came into force, there have been approximately 150 new projects by private developers in Montreal, according to this CBC article. That has resulted in about 7,100 new market-rate homes. At the same time, it has resulted in exactly zero non-market homes.
From what I can tell from the article, every single developer has opted for option three: pay the cash-in-lieu instead of actually building the housing. Supposedly this has produced about $24.5 million in new fees, which sounds like a lot. But if you divide it by 7,100 homes, it isn't all that much: just under $3,500 for each new home.
So what is clear is that this is the least expensive option. That's why everybody is choosing it. If the fee was significantly higher and it was cheaper to just build the social/affordable/family housing, then every developer would just do that. This is how development pro formas work.
But at the end of the day, we are still taxing new housing and new home consumers for the purpose of trying to create a smidgen of more affordable housing. And this has never sat well with me, especially considering that there are plenty of other things that we could be doing to make new housing more affordable for everyone.
Why is this? Well, one commonly held belief is that building market-rate housing leads to gentrification, and that this ultimately leads to the displacement of existing residents. This might have been why some people responded saying that new housing will cause an increase in prices and rents. It'll lead to all housing going up.
However, there's research to support that this isn't the case. The problem isn't outward displacement following new market-rate housing. The greatest driver of gentrification is actually "exclusionary displacement", which is the inability of people to move into areas because of a lack of housing. (This study was based on 2010-2014 housing data from the UK.)
The thing about housing supply is that it relieves pressure across the entire market. Instead of a high-income person buying an old home to renovate (and causing outward displacement), they can instead choose to buy a new home (and not cause any outward displacement).
By doing this, they also leave behind a home that can then be absorbed by lower earners. One US study found that for every 100 new market-rate homes that are built, somewhere between 45 and 70 people move out of a below-median income neighborhood.
It is for reasons like these that, time and time again, increased housing supply has been shown to moderate home prices and rents (see above regarding Minneapolis and the Midwest as a whole). So if you're worried about the cost of housing, the answer is to build more. And if you're worried about gentrification, the answer is also to build more.
Our intuitions are telling us that this is true for most things. But for whatever reason, housing feels different. It's not, though.
Source: The charts and studies in this post are from this great FT article by John Burn-Murdoch.
Why is this? Well, one commonly held belief is that building market-rate housing leads to gentrification, and that this ultimately leads to the displacement of existing residents. This might have been why some people responded saying that new housing will cause an increase in prices and rents. It'll lead to all housing going up.
However, there's research to support that this isn't the case. The problem isn't outward displacement following new market-rate housing. The greatest driver of gentrification is actually "exclusionary displacement", which is the inability of people to move into areas because of a lack of housing. (This study was based on 2010-2014 housing data from the UK.)
The thing about housing supply is that it relieves pressure across the entire market. Instead of a high-income person buying an old home to renovate (and causing outward displacement), they can instead choose to buy a new home (and not cause any outward displacement).
By doing this, they also leave behind a home that can then be absorbed by lower earners. One US study found that for every 100 new market-rate homes that are built, somewhere between 45 and 70 people move out of a below-median income neighborhood.
It is for reasons like these that, time and time again, increased housing supply has been shown to moderate home prices and rents (see above regarding Minneapolis and the Midwest as a whole). So if you're worried about the cost of housing, the answer is to build more. And if you're worried about gentrification, the answer is also to build more.
Our intuitions are telling us that this is true for most things. But for whatever reason, housing feels different. It's not, though.
Source: The charts and studies in this post are from this great FT article by John Burn-Murdoch.
