As is the case every quarter, Bullpen Research & Consulting and Batory Management have just published their latest Greater Toronto Area land insights report (for Q3-2022). The average price per buildable square foot (pbsf) in this report remains the same as in Q2 at $95.
But once again, it's important to keep in mind that this represents a fairly small sample size (34 land sales in the quarter versus 46 in Q2); that the range in land pricing can be significant across the GTA (here it is $24-274 pbsf); and that there can sometimes be a lag between a deal being struck and actual closing. Here is the summary data:
Another interesting data point from the report is land price compared to building height. The average price for high-rise development land was $88 pbsf, and the average price for mid-rise development land (5-15 storeys) was $131 pbsf.
This once again speaks to the cost differential between high-rise and mid-rise housing. The mid-rise scale is certainly a desirable form of infill, but it is also a more expensive form of housing.
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.
As is the case every quarter, Bullpen Research & Consulting and Batory Management have just published their latest Greater Toronto Area land insights report (for Q3-2022). The average price per buildable square foot (pbsf) in this report remains the same as in Q2 at $95.
But once again, it's important to keep in mind that this represents a fairly small sample size (34 land sales in the quarter versus 46 in Q2); that the range in land pricing can be significant across the GTA (here it is $24-274 pbsf); and that there can sometimes be a lag between a deal being struck and actual closing. Here is the summary data:
Another interesting data point from the report is land price compared to building height. The average price for high-rise development land was $88 pbsf, and the average price for mid-rise development land (5-15 storeys) was $131 pbsf.
This once again speaks to the cost differential between high-rise and mid-rise housing. The mid-rise scale is certainly a desirable form of infill, but it is also a more expensive form of housing.
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.
Let's say that we have a piece of development land worth $100. That is the market value of the land based on its highest and best use at this particular point in time. Now let's assume that the land was just encumbered with a new burden: inclusionary zoning. All of a sudden there is now a requirement to make available X% of any residential units built at 50% of average market rents for the area.
Technically, the land is now worth less than $100. And there is a school of thought out there that, in instances like this one, the price of all land should automatically reset downward to offset and account for the inclusionary zoning burden. But as I have argued before on the blog, land prices tend to be fairly sticky, unless the owner is distressed and really needs to sell.
So what can often happen is that the land owner will stubbornly cling to the original $100 number. The thinking being, "I was once told that my land is worth $100 and so that's the minimum price I'm willing to accept." In this scenario, you may need a broad increase in rents in order for a transaction to occur. This way the market rate units might be able to fully subsidize these new affordable units, preserving any margins and justifying the original $100 number.
Of course, the impact of inclusionary zoning is a hotly debated topic and there are a number of variables to consider. And so I will leave it at that for today. The real purpose of this post is to consider another permutation. Let's once again say that we have a piece of development land worth $100. But instead of being owned by 13 siblings -- and 3 cousins that live abroad and can't be reached other than by fax -- it's owned by the government.
In this case, the government wants to sell the land and is considering two options. It can either (1) sell it for $100 and maximize immediate taxpayer revenue or (2) it can sell it for $80 with the condition that the buyer agree to deliver X% of affordable units (and a bunch of other goodies and positive externalities). I would also add that this fictitious town is experiencing what some might call a housing crisis.
If you were a private sector actor, you would probably choose option 1. You would take the additional $20 and retire to Florida (I'm off by a few zeros). But this is the government we're talking about and presumably the government is thinking about the broader public good. Which option do you think is better at maximizing that?
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.
Let's say that we have a piece of development land worth $100. That is the market value of the land based on its highest and best use at this particular point in time. Now let's assume that the land was just encumbered with a new burden: inclusionary zoning. All of a sudden there is now a requirement to make available X% of any residential units built at 50% of average market rents for the area.
Technically, the land is now worth less than $100. And there is a school of thought out there that, in instances like this one, the price of all land should automatically reset downward to offset and account for the inclusionary zoning burden. But as I have argued before on the blog, land prices tend to be fairly sticky, unless the owner is distressed and really needs to sell.
So what can often happen is that the land owner will stubbornly cling to the original $100 number. The thinking being, "I was once told that my land is worth $100 and so that's the minimum price I'm willing to accept." In this scenario, you may need a broad increase in rents in order for a transaction to occur. This way the market rate units might be able to fully subsidize these new affordable units, preserving any margins and justifying the original $100 number.
Of course, the impact of inclusionary zoning is a hotly debated topic and there are a number of variables to consider. And so I will leave it at that for today. The real purpose of this post is to consider another permutation. Let's once again say that we have a piece of development land worth $100. But instead of being owned by 13 siblings -- and 3 cousins that live abroad and can't be reached other than by fax -- it's owned by the government.
In this case, the government wants to sell the land and is considering two options. It can either (1) sell it for $100 and maximize immediate taxpayer revenue or (2) it can sell it for $80 with the condition that the buyer agree to deliver X% of affordable units (and a bunch of other goodies and positive externalities). I would also add that this fictitious town is experiencing what some might call a housing crisis.
If you were a private sector actor, you would probably choose option 1. You would take the additional $20 and retire to Florida (I'm off by a few zeros). But this is the government we're talking about and presumably the government is thinking about the broader public good. Which option do you think is better at maximizing that?
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.
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