Category: Housing

• Canada is growing a lot

  This week it was announced that Canada’s population grew by approximately 430,000 people over the last quarter (+1.1%). And that it represents the highest population growth rate of any quarter since the second quarter of 1957. Even more impressive, though, is the fact that in the first 9 months of this year we have already added over 1 million people in total. This beats all full-year periods since Confederation in 1867!

  Here’s what all of this starts to look like visually:

  

  The unfortunate side of these records is that it is coming at a time where we’re, perhaps counterintuitively, building a lot less new housing; which is to say that construction starts are declining. In fact, I was on a call this week where people who examine development and construction costs all day were predicting a 5-6% decline in hard costs in the Toronto region next year. And this is a direct result of fewer new projects getting started.

  Broadly speaking, this is how things tend to work in real estate development: there are heavy lags between changes in demand and changes in supply because of how long it takes to build new buildings. But what’s happening right now is more than this. Interest costs are impacting everyone. And investor interest in pre-construction homes has softened significantly, demonstrating how much our industry relies on individual investors. Many projects cannot go.

  What I ultimately think this is going to do is exacerbate our current supply-demand imbalances. Meaning that when the market does come back — and it of course will — it’s going to come back with a vengeance. And that’s because it is going to need to catch up to all of the new demand that is accumulating as we speak.

  2023.12.21

• How effective will a catalog of home designs be at improving housing supply?

  Last week, the Canadian federal government announced that it will be developing a catalog of pre-approved housing designs in order to accelerate the delivery of new homes.

  This is not a new idea. A similar approach was taken after the Second World War in order to quickly house veterans returning home. But in this current iteration, the catalog is expected to be focused on missing middle housing such as small multiplexes and student housing, and then later on higher-density construction.

  We have also spoken about this idea before in the context of ADUs in Los Angeles. And at that time, I wrote that the way to encourage more of something is to reduce friction. I continue to believe that this is the case, and so I do think that pre-approved designs are a positive thing, especially for smaller projects.

  However, it’s important to keep in mind that this is not the biggest barrier to new housing supply. The problem is not that developers and builders are all sitting around thinking “if only I had a design for a 5-unit multiplex.” The problem is that they’re sitting around thinking “if only I could make some money building a 5-unit multiplex.”

  So while reducing the barriers to entry is a good thing, the really important question for the designs in this upcoming catalog is: Can developers actually make any money building them? Because if the answer is no, it doesn’t matter that they’re pre-approved and ready to go. They won’t be built.

  Hopefully somebody is thinking about this because it will take some work. Every market is different. What works in one place, may not work in another. On top of this, what works today, may not work tomorrow.

  2023.12.18

• It shouldn’t take 17 years to build affordable housing

  If you are the Los Angeles County Metropolitan Transportation Authority and you own excess land next to a transit line that you’ve just recently built, one possible option could be to give this land to a non-profit housing developer so that they can build some affordable housing. And this is exactly what was agreed to in 2007 with the Lorena Plaza site in the Boyle Heights neighborhood of LA. The proposal: 49 affordable units geared toward people making 50% of the AMI.

  However, like all things in development, things do take time. And when building new 4-storey housing complexes, there is always the real possibility that you might face several years (or longer) of fierce opposition. In the case of Lorena Plaza, it apparently took the developers from 2013 to 2020 to reach a settlement with the local councilman and their immediate neighbor (a commercial plaza). In the end, this project is now expected to occupy next summer (2024), which brings the total project timeline to 17 years.

  This is probably an extreme example and, thankfully, some of the rules have since been changed to help speed up projects like this one. Still, it is no wonder we can’t build enough new housing. (Los Angeles wants to build some 450,000 new homes by 2029.) Time isn’t free. And according to the WSJ, this relatively small project ended up costing US$34.2 million to build. That’s nearly US$700k per suite. A number that will buy you a lot of home in many cities across the US.

  2023.12.14

• Interest rates are expected to start coming down this summer

  

  Last week was “forum week” in Toronto. (That is, it was the Toronto Real Estate Forum.) And as is the case every year, Benjamin Tal, deputy chief economist of CIBC, opened up the event with his usual macro view of the world. For those of you who missed it (as I did), here are some of his key points (via RENX):

  • The Bank of Canada’s overnight rate will ultimately/likely settle into the 2.75-3% range (currently it sits at 5%). He expects rates to start coming down this summer.
  • Inflation is down, but we’re not yet at the 2% target. The “last mile” is always the toughest.
  • But as we know, the BofC will take a recession over high inflation, any day.
  • The mortgage market has fallen faster than in the early 90s recession. Tal said that the residential real estate market in Canada is right now facing “the biggest test” since then.
  • Canada is in what he calls a “per capita recession”. But for the million or so immigrants that the country accepted over the last year, we’d be in a full-blown official recession.
  • Finally, he called this correction in the housing market both “real” and “healthy”; he spoke about normalcy returning in 1-2 years; and he posited that the market will be “crazy” when it does return because of a supply deficit.

  This last point is an important one. New housing supply is mostly shut off right now. I say mostly because there are obviously still projects under construction, and there have been and there will continue to be some successful launches. But by and large, most developers are waiting right now, principally because the absorption isn’t there. They have no other choice.

  But Canada continues to grow. People from around the world continue to want to move here. And there continues to be a need for a lot more new housing. So when the market does return — and it, of course, will — there is going to be a supply-demand imbalance. And as is always the case in real estate, there will be a lag in responding to this imbalance.

  This is what Tal means by “crazy”.

  Photo by Wiktor Karkocha on Unsplash

  2023.12.03

• Sub-divided mansions

  

  In the second half of the 19th century, the way Londoners had historically lived, started to change:

  In the 1870s, a striking change was occurring in the residential habits of London’s elite. After centuries of living close to the ground in houses, Charles Dickens Jr. (son of the famous writer) observed that wealthy residents were starting “to avail themselves of the continental experience … and to adopt the foreign fashion of living in flats.”

  The resulting housing typology was something known as the mansion block. And as the name suggests, one of the principal design ideas was that these blocks should, ideally, look like a single giant mansion. In other words, the individual homes were to be obfuscated:

  The mansion block was a grand building that borrowed elements of the English terraced house (as a row house is known in British English), particularly the elite “palace fronted” terraced houses designed by Scottish architect Robert Adam and his brothers a century earlier, which concealed individual houses behind a grand facade to resemble a single palatial structure.

  It is a design approach that makes sense. I mean, I can see wealthy people wanting to appear as if they’re living in a palatial mansion. That said, it is an approach to multi-family housing that feels somewhat foreign today. Most people don’t look up at tall buildings and wonder if it’s one person’s home.

  And we don’t aim for that.

  Presumably this is, at least partially, because scales grew, builders were looking for economies of scale, and because modernism told us that mansion-looking structures were outdated. Whatever the reasons, multi-family buildings today are not generally conceived of as sub-divided mansions.

  What’s maybe ironic about this shift, though, is that we went from elaborate and varied facade designs intended to communicate single structures, to modern and repetitive facade designs that, somehow, better communicate the individual homes.

  I suppose we got used to the “foreign fashion of living in flats”.

  Image: Josh Kramer for Bloomberg CityLab

  2023.11.26

• Why your city is still struggling to build missing middle housing

  About Here makes excellent videos about cities. Here’s their latest about missing middle housing:

  In my view, there are two key takeaways.

  The first is that cities need to spend way more time understanding the economics of missing middle housing. As Uytae Lee says in the video, our land use policies need to respond to real math and overall financial viability.

  The second is that there’s real potential here. Uytae gives the example of Auckland which, according to the video, managed to deliver 20,000 new missing middle homes in a 5-year time period.

  This is meaningful! And, it is suggested that this has reduced rents in the city by somewhere between 13-35% compared to where they might have gone had this new housing not been built.

  As I’ve said many times before on the blog, the devil is in the details. The headline may sound really great that some city is now allowing 4 or 6 homes on every single-family lot, but that doesn’t necessarily mean that any new homes will actually be built.

  It’s important we change that.

  P.S. Thanks to Michael Geller for sharing this video with me.

  2023.11.24

• The Housing Supply Challenge

  Back in 2019, Canada’s federal budget allocated $300 million toward something known as The Housing Supply Challenge. The overarching objective was, and still is, to reduce the barriers to housing supply and affordability, and the approach has been to find solutions through a series of “challenges”. So far, they — they being the CMHC Housing Supply Team — have completed four rounds. And right now, they are on round five. This is the challenge:

  Increase the adoption of system-level solutions that transform Canada’s ability to produce more community and market housing.

  This fifth round represents $65 million of the $300 million total budget. Meaning that $65 million will be awarded to groups and solutions that have the potential to accomplish the above. The funding will be distributed in three stages. First to 20 foundational solutions ($1 million per solution), then to 10 next-level solutions ($3 million per solution), and finally to 3 game-changing solutions ($5 million per solution).

  If you have a solution (i.e. something that can be executed on), I would encourage you to check out their site. And if you’d like to apply, you have until December 18, 2023.

  2023.11.23

• BC has proposed building more housing near transit

  These days, it is cool to be pro housing.

  Unaffordability has apparently gotten so bad that we are now seeing a groundswell of support for increasing overall housing supply. So politicians are doing things. And this week, the Province of British Columbia proposed some new legislation related to transit hubs.

  As proposed, the legislation will require BC municipalities to designate Transit Oriented Development Areas (TOD Areas), mandate minimum heights and densities within certain radii (broadly 800m in the case of rapid transit stations), and remove parking minimums.

  Not surprisingly, a lot of people are excited about this and, there’s no question, that this is directionally the right thing to do. But I have two immediate thoughts.

  The first is that the devil is always in the details. This all sounds good, but: Are the proposed minimum densities and heights going to be enough to stimulate development? For example, is 4 the right minimum FAR for 300m from a transit station?

  The second thought has to do with the level of excitement surrounding this announcement. (I’m going strictly based on Twitter, which admittedly could just be my bubble). The fact that city builders are so excited about this announcement tells us a lot about the current state of affairs.

  Because what this proposed legislation is more or less saying is the following: “Hey, here’s a great idea! Let’s build more housing around higher order transit and not force the market to build unnecessary parking.”

  Is this really something that should be considered novel? I thought this was just how cities should work.

  2023.11.09

• A lot less new housing

  During COVID, every developer was terrified that their costs were going to run way from them. According to this recent Globe and Mail article, residential building costs increased 55% since 2020. At the same time, city fees were being increased and some people, for whatever reason, believed this would not have an impact on home prices. Developers will always seek to profit maximize and charge whatever the market will bear, so why bother trying to reduce costs? This is/was one school of thought.

  Despite this cost fear, the market managed to keep up for a period of time. Capital was cheap, as we all know. And that kept things going, until it was no longer the case. According to the same Globe article, there are 83 residential projects and 28,428 homes that have not launched (sales) over the last two years in the Greater Toronto Area because of market conditions. This year alone, the number is estimated at 14,000 homes. So supply has fallen off, and that’s because demand and buying power have fallen off.

  But let’s think of this in economics terms. Price and quantity demanded are usually inversely correlated. Meaning, if the price of something goes up, demand will go down. And if the price of something goes down, demand will go up. So in theory, there are still prices that will get 28,428 people excited to buy a new home. I mean, if I were to list a condo in downtown Toronto for $500 psf right now, I’m pretty sure that most with the means would jump at the opportunity.

  The problem is that whatever these prices are, they are largely beneath the floor price of where most developers can build to today. Developers weren’t bluffing, costs really are too high now. And when this happens, the answer is simple: you can’t build. A new equilibrium will eventually be found. But in the short-term, we should all expect new housing supply to remain limited. And because there’s always a lag with real estate, the effects of this shortage will be felt in the years to come.

  2023.11.01

• Family-sized apartments are a luxury good

  My friend Alex Feldman sent me an article from the Philadelphia Inquirer this week called: Why is it so hard to build family-sized apartments in Philadelphia? As is the case in many/most North American cities, the article talks about how the majority of new multifamily builds are filled with studios and one bedrooms.

  It then goes on to suggest that some of the reasons for this include: cultural biases in favor of suburban living, antiquated building codes (such as the requirement for two means of egress), exclusionary zoning ordinances, bad urban schools, financing availability, and so on.

  This is something that we have talked about many times before on the blog and, while I do agree that it’s complicated and that there are many variables to consider, I think the key factor remains price. As I said before: “Everybody wants a 3 bedroom condo until they see what they cost.”

  So I think this is probably the most important point in the article:

  Partly that’s because Philadelphia, unlike Boston, New York, and Washington, has a vast supply of rowhouses that are still affordable to people in a position to buy. For those who prefer new construction, the past couple decades have seen a burst of modern rowhouse building.

  If large multi-family apartments were more cost effective than Philadelphia’s vast supply of rowhouses, I am certain that demand would increase markedly. But that is not the case. So I think a more accurate way to view large apartments is as a luxury good. They’re a terrific way to live, if you can afford it.

  2023.10.24