Category: Housing

• Shrinkflation in the housing market

  We all know that inflation is a thing right now. Prices are rising. One way businesses can choose to respond to this is through something called “shrinkflation”, which the Financial Times writes about here. The idea behind shrinkflation is that, instead of just raising end prices to absorb higher costs, you instead shrink or reduce your product or service offering. Of course, you could also do a combination of both things: increase your price and shrink your offering.

  This shrinking can take many forms. A few less chips in your bag. A slightly smaller chocolate bar. Smaller food portions at the restaurant. Or maybe opt-in room service for your hotel room. It can also take the form of less space. Average apartment sizes in most big cities have trended downward over the years for this exact same reason. Developers are working to maintain some kind affordability in the face of rising costs.

  I think a lot of people like to scoff at these sorts of practices. Why can’t we just build bigger family-sized suites? But the reality is that it is being driven by real market constraints. Without something giving, like suite sizes, urban housing would be multiples less affordable compared to current levels. The developers I know don’t have any sort of deep-rooted philosophical aversion to selling 5,000 square foot estates in the sky. The problem is simply that most buyers and renters won’t like the sticker price.

  2022.03.23

• 6-unit missing middle site for sale in Toronto

  Marty over at Laneway Housing Advisors published this listing in his newsletter today. It’s for an entitled lot at 78 Gladstone Avenue in Toronto that has been approved (by way of a minor variance) for 6 units. Five units in the front where a house currently sits and one unit at the back in a standalone laneway suite. Though it also happens to be a corner lot and so the laneway suite isn’t really “in the back”.

  It’s listed for $2.5M. And according to the description, you can build about 5,500 square feet (4,200 sf in the front with a 1,300 sf laneway suite). This ask translates into a land cost that is just over $450 per buildable square foot, which is far more than what high-density land typically trades for in the city right now. This is usually the case for smaller low-rise sites.

  To help put this figure into some kind of context, Bullpen Consulting published in their latest insights report that the average high-density land price in Q4-2021 was $135 per buildable square foot in Toronto (416 area code only). Of course, averages only tell you so much. To truly evaluate the feasibility of a site like this, you’d need to create your own pro forma and do your own residual land value calculation. The value of development land depends on what you can build on it.

  If you were to do that, I suspect that you would discover at least two things: 1) you would find it challenging to make the numbers work, particularly for rental housing, and 2) you would quickly realize that this sort of “missing middle” housing isn’t, in its current form, some undiscovered bastion of housing affordability.

  Part of the problem is that these 6 units are not being delivered on an as-of-right basis. Somebody had to go out and entitle the land in order to secure these permissions. That means that time and money were spent and that the current owner is now rightly seeking a margin for their efforts. But if we collectively believe that this is an appropriate and sensible form of housing, then this should not be a necessary step in the whole process. Especially for only 6 units.

  All of this being said, we know that Toronto and many other cities around the world are taking a hard look at this issue. And that there is a groundswell of interest in allowing more housing in our low-rise communities. It’s going to be a battle — just look at how Toronto’s new garden suite policies have now been appealed by various resident’s groups. But I’m certain that we’ll get there, just like we are getting there with laneway housing and other types of ADUs.

  2022.03.13

• Florida proposes stricter condo rules

  In response to the tragic collapse of the 12-storey Champlain Towers South building in Surfside last year, the state of Florida is set to pass new stricter condominium rules around inspections and reserve funds. And according to the WSJ, the requirements would be some of the strictest in the US.

  Under the House bill that has already passed, condominium buildings that are three or more stories would need to be fully inspected and recertified once they are 30 years old. For buildings within 3 miles of a coast (salt water is impactful), the requirement would be 25 years old. Following this recertification, the buildings would then need to be inspected every 10 years. Under the proposed Senate bill, the inspection process would start after 20 years and be required every 7 years. In both cases, the reports that come out of these inspections would need to be submitted to all unit owners and to local building officials.

  If approved, these rules would have an immediate impact on the market given that about 900,000 of the approximately 1.5 million condominium units in Florida are older than 30 years old.

  But is all of this enough? I think the devil is in the details.

  Under the House bill, unit owners would no longer be able to waive the collection of certain building reserves. But under the Senate bill, the requirements for waiver would simply be tightened. How tight? In all honesty, I don’t know the specifics. I haven’t read the bills. But the collection of reserve funds is paramount. And after reading the above WSJ article, I can’t help but feel like these new policies might still be less stringent than what we already have here in Ontario.

  Here are two excerpts from Ontario’s Condominium Act:

  

  

  Put more simply, all buildings and structures need to have regular inspections. Materials and systems naturally depreciate over time and so the point of a reserve fund study is to determine (1) what will need to be repaired/replaced, (2) when it will need to be repaired/replaced, and (3) how much it might cost. You then need to ensure that the money is in place to carry out the execution of said study. In all cases, there should be zero compromises around life safety.

  2022.03.06

• The world’s top performing luxury residential markets

  

  

  Knight Frank just released the 16th edition of its Wealth Report along with the disclaimer that, with everything going on in Ukraine right now, this outlook is of “little relative importance” and kind of doesn’t matter in the grand scheme of things. In any event, it includes the latest edition of their Prime International Residential Index (PIRI 100), which looks at the annual % change in luxury residential prices around the world. The chart is interactive, but I screenshotted (above) the top risers and fallers. Toronto is 4th in the Americas and 7th globally with a 20.3% year-over-year increase. Miami is also no surprise and came in 4th globally. The top three cities were Dubai, Moscow, and San Diego. Thankfully though, the number two city is in serious jeopardy right now and I suspect that its position will look quite different next year. Money will go where it feels safe and secure.

  2022.03.02

• Canada is a suburban nation

  Statistics Canada has started releasing some of the results from its 2021 survey and there is a new classification that is now being used in its analysis of Census Metropolitan Areas (CMAs). Instead of organizing city regions jurisdictionally, it is now using a new functional classification that is based on travel times to downtown.

  This has resulted in five new geographic categories: Downtown, Urban Fringe (<10 min to downtown), Near Suburb (10-20 min to downtown), Intermediate Suburb (20-30 min to downtown), and Distant Suburb (over 30 min to downtown). Below is chart from a recent Globe and Mail article that summarizes these classifications, but keep in mind that percentage growth is different than total population growth (the next chart from New Geography covers this one).

  

  This is more granular than their previous approach, which used to be fairly binary: city core vs. the suburbs. But at the same time, it reflects a very suburban and monocentric view of cities. Downtown is in the middle. People generally need to drive to said downtown for things like work and entertainment. And so how long does it take to do that?

  

  Though in all fairness, this lens is our reality. When you apply the above classification and look at Canada’s 41 largest metropolitan areas, only 4.7% of us live in a downtown and only about 28.5% of us live in what is presumably an urban setting (downtown + urban fringe). And the numbers are actually less urban in a CMA like Toronto, where 11.5% live in the urban core (downtown + urban fringe) and 88.5% live in the suburbs, whether near or distant.

  However, one could argue that we are at least becoming slightly more urban. Only 11.5% of Torontonians might currently live in the urban core (2021), but 16% of our growth from 2016 to 2021 went to it (see above chart). Of course, this is an incremental kind of shift. About 84% of our population gain also went to the suburbs, with the vast majority of it going to distant suburbs (a 30 minute commute in Toronto is nothing after all).

  As Wendell Cox points out in this recent New Geography article, Canada remains a suburban nation.

  2022.02.27

• Weekend link roundup — Ukraine and gas supply to Warren Buffet and Canadian housing supply

  I spent much of this morning reading about and listening to discussions about what’s happening in Ukraine and so, instead of a typical post this morning, I’m just going to share a mélange of links.

  • Monocle 24 Foreign Desk episode talking about Russia’s invasion of Ukraine. Speakers are Ukrainian MP Lesia Vasylenko, former NATO chief Richard Shirreff, Russian journalist Ekaterina Kotrikadze, and Russia expert Mark Galeotti. I found this helpful in better understanding some of the dynamics at play here and what might happen going forward — though, of course, who knows. All of this is both deeply sad and frustrating. [Link]
  • Discussion in Bloomberg Green about the feasibility of the EU shutting off Russian gas right now, as opposed to through a protracted transition. Currently, the EU satisfies about 20% of its total energy needs through gas and about 40% of it comes from Russia. [Link] Also, a chart showing Russian natural gas exports, by destination. [Link]
  • Warren Buffet published his widely read annual letter to Berkshire Hathaway shareholders this weekend. He likes to deliver news like this on a Saturday so that people have time to digest it before the markets reopen on Monday. The overall message was one that we have heard before: BH has a lot of cash (~$144 billion to be exact) and they’re not finding very many compelling opportunities in which to deploy it. [Link]
  • To add to the above, here is a longish Q&A session with Buffet’s partner, Charlie Munger. He continues to be worried about excess money in the system and high inflation. [Link]
  • Construction has been recently completed on a Mies van der Rohe design from 1952 that had been forgotten and buried in some archives. Originally commissioned to be a fraternity house at Indiana University, the building is now the Eskenazi School of Art, Architecture + Design. This is a supremely cool story, particularly for an architecture school. [Link]
  • Yet another simple example by Bobby Fijan on how highly restrictive zoning codes and design guidelines don’t always produce the end results that we might want. Different times and different contexts in this example. But it’s interesting to think about how best to promote design excellence in our cites. Is more creative market freedom the answer? [Link]
  • My friend Randy Gladman, who is senior vice-president of development advisory at Colliers here in Toronto, published an opinion piece in the Financial Post last week about the hidden costs of inclusionary zoning. It is consistent with the ad nauseam discussions that we have been having on this blog for the past few years, but it of course remains an important read. [Link]
  • Steve Pomeroy of Focus Consulting makes an argument in the Globe and Mail that elevated home prices in Canada isn’t primarily the result of a supply deficit. Using recent census data that allegedly shows that housing supply in Vancouver actually kept pace with demand (over how long of a period?), Pomeroy instead points to the other typical culprits: strong demand, low interest rates, unused homes owned by non-residents, and so on. This one likely deserves a dedicated post at some point. [Link]

  Ironically, the post turned out to be wordier than my usual ones.

  2022.02.26

• Philadelphia readies new inclusionary zoning policy

  

  When I was living in Philadelphia as a graduate student, new development was seen as a bit of a gift. I remember developers telling me that it costs the same to build in Philly as it does in New York, except that the rents are obviously a fraction in the former relative to the latter. So it was tough to make projects pencil.

  At the same time, Philadelphia had a 10-year residential tax abatement program in place. I think it’s still in place, but it may have been modified since I was there. Either way, it was essentially an incentive to develop or redevelop existing residential properties. In the case of a renovation, the taxes associated with any improvements were what got abated for the 10 years.

  Put differently, it was an invitation to gentrify. Come buy an old row home, fix it up, and then don’t pay any additional property taxes on those improvements. This was the way things felt at the time. So it was interesting to learn today that Philly’s current development boom is about to get throttled down with a new mandatory inclusionary zoning policy that will take effect later this year. Gentrification, it would now seem, is a problem.

  The policy requires that 20% of the units in any new housing development (with 10 or more units) must be affordable for at least a 50-year period. For rental households, affordability means 40% of the area median income (AMI). And for owner-occupied households, it means 60% of AMI.

  I have already said pretty much everything I can say about inclusionary zoning. But one of the unique things about Philly’s policy is that it is only going to apply to two of its Council Districts. It is not a citywide policy. This is going to create a strong disincentive to develop in these areas, and will likely force new development into surrounding ones. But maybe that’s part of the point.

  Photo by Dan Mall on Unsplash

  2022.02.21

• How to repair America’s broken housing systems

  As a general rule I don’t like to recommend books that I haven’t read yet. And so I’m not here today to recommend Jenny Schuetz’s new book about how to repair America’s crumbling housing policies. Instead, I’m just telling you all about it. You can then do your own research and decide if it’s worthy of your time. The premise sounds good though:

  Unequal housing systems didn’t just emerge from natural economic and social forces. Public policies enacted by federal, state, and local governments helped create and reinforce the bad housing outcomes endured by too many people. Taxes, zoning, institutional discrimination, and the location and quality of schools, roads, public transit, and other public services are among the policies that created inequalities in the nation’s housing patterns.

  This may be confirmation bias at work but I continue to feel like there’s a groundswell of interest in housing reform. In particular, there seems to be a growing interest in rethinking the privileges that we have decided to bestow upon low-rise housing (at least in this part of the world). But of course, that’s only one part of what is ultimately a complex set of systems.

  2022.02.19

• Opendoor is creating too many rentals

  Steven Levy over at Wired recently wrote a short piece comparing Opendoor’s iBuying approach to what Zillow was doing when it was in the space. (Thank you Robert Wright for forwarding me the article.)

  As we have talked about before, the fundamental problem with Zillow’s model is that it couldn’t accurately predict where home prices were going. It was losing too much money and so they shut down that side of their business.

  The article talks about Opendoor’s approach and how they’ve spent the last 8 years refining a valuation model/approach that is now apparently pretty accurate. That’s positive. But here’s another excerpt that I found particularly interesting:

  There’s one controversial aspect of the business model that Wong didn’t bring up. It appears that when companies like Zillow and Opendoor can’t easily sell a home, the fallback is what’s called an “institutional sale.” All iBuyers sell a small but not insignificant percentage to institutional investors with aspirations of being “mega-landlords.” While the marketing materials of the iBuyers emphasize clean sunny rooms and frictionless transactions, that segment of the market involves hedge funds like KKR and Blackstone snapping up properties for rental, limiting the inventory available for families seeking homes. Even the Biden administration has weighed in on the evils of this trend: “Large investor purchases of single-family homes and conversion into rental properties speeds the transition of neighborhoods from homeownership to rental and drives up home prices for lower cost homes, making it harder for aspiring first-time and first-generation home buyers, among others, to buy a home,” said a recent White House dispatch.

  It’s interesting for two reasons.

  First, these highly tuned valuation models are now being used to scale the acquisition of single family homes. No specific figures are given, but Levy speculates that some iBuyers could be feeding up to 20% of their homes to institutional buyers. Economies of scale are a challenge with this asset class. Here technology is helping.

  Second, I don’t like the tone toward renters in the above White House dispatch: “[It] speeds the transition of neighborhoods from homeownership to rental.” This line in particular implies that renting is perceived as being suboptimal to homeownership and that “speeding”’ towards the former is something that should be avoided for reasons of social good.

  Even the words that are used here suggest biases. A single-family home is called, well, a home. But a rented one is a rental property. I reckon that a home is a home regardless of whether it’s low-rise, high-rise, rented, or owned.

  2022.02.18

• Do rent controls actually function as intended?

  In 2020, Berlin implemented a rent cap that applied city-wide to both new and existing rental housing contracts. The policy was later found to be unconstitutional and so as of April 2021 this is no longer in place. But for a brief period of time, and for better or for worse, Berlin had a blanket rent control policy. Berlin is, of course, not alone when it comes to rent caps. They are seen by some as a solution to rising home prices, gentrification, and displacement. But do they actually work?

  This recent working paper argues that the answer is no. And that there are other better tools available. Yes, overall rents do tend to decline. But when you have a city-wide policy, it means that rents also decline for high-income households. And in this paper, the economists argue that this tends to benefit the rich more than the poor. Rent caps also tend to decrease overall housing supply, which, as we all know, is counterproductive when you’re trying to make something more affordable/accessible.

  But perhaps the key argument is this one here: Rent controls create a misallocation of housing that can actually decrease overall welfare for lower-income households. The reason behind this is that homes stop getting allocated to those who value it and need it the most. Instead, you get people who may be overhoused or underhoused, but who remain firmly put because of what are below-market rents.

  There are a number of ways in which this distortion might play out. But it could involve someone with a very large older apartment who now no longer needs a large apartment, but is staying put because of their favorable and irreplaceable rent structure. This in turn precludes someone who desperately needs a large apartment from finding a suitable place. And since overall supply has also decreased because of the controls, the problem is exacerbated.

  It can all get a bit complicated, but if you’re interested in this topic, here is another technical research paper from Edward Glaeser and Erzo Luttmer that deals specifically with the misallocation of housing under rent controls.

  2022.02.11