I recently tweeted this photo of St.-Anna-Strasse 16 in Munich (the building in the centre) along with a pithy comment about how I really like the look and scale of this neighbourhood. It's beautiful, right? The tweet blew up and, as of right now, it has over 170k views. Pithy comments with pretty pictures always seem to outperform anything more nuanced that I might share. But in the spirit of yesterday's post about housing affordability, let's dig a little deeper.
Developed by Legat Living and designed by Munich-based Landau + Kindelbacher, the mixed-use building is located in Lehel, which I understand is one of the most desirable areas in the city. It's about 960 m2 and has five apartments (ranging from 140 to 200 m2) and one commercial unit at grade. Each home has direct elevator access and its own landing. To give you a better sense of the suites, here's a photo of the rear elevation:
What is clear is that this is a luxury, boutique offering. Based on a cursory review of the Munich real estate market, Lehel seems to be the most expensive neighbourhood, with an average apartment price of €12,468.33/m2. If we apply this average to their smallest apartment, that's a starting price of €1,745,566. But presumably, this isn't your average building. It was completed in 2020, so I'm going to assume these homes sold for meaningfully more.
All of this leaves us with a really beautiful building and a nice urban scale, but certainly not the secret to a magically affordable city. This is not a criticism of the project by any means. I stand by my original tweet. It's a beautiful development, but it does demonstrate some of the affordability challenges of building urban. Legalizing urban infill housing is not a silver bullet in and of itself.
Photos via Landau + Kindelbacher
Because of how long it takes to build a building, real estate markets almost always overbuild at the top, and underbuild at the bottom (see yesterday's post about the pig in the python). In a theoretically perfect economic model, supply would adapt instantly to changes in demand. But in the real world of development, this adaptation can take 5 to 10 years.
At the same time, it's not just about the quantity of real estate being delivered at any given time; it's also a question of what kind of real estate. We talk a lot around here about this moment in time being a healthy reset for Toronto's housing market (and other markets). But what exactly are we resetting? I find it helpful to think of it in terms of three prongs.
First, there's customer type. Who will be the buyers and tenants during the next cycle and what will they be looking for? For instance, when it comes to pre-construction condominiums, to what extent will individual investors factor in like they did during the last cycle? Many think they will play a much smaller role.
Second, there's the cost structure. The cost of building is changing, and hopefully we will see continued efforts to make housing more cost-effective to deliver. And third, there's a question of building typology. As the demand profile changes and as costs evolve, it is naturally going to have an impact on the kind of buildings that get built.
My gut is that we will see more housing geared toward end-users in medium-density builds, but only time will tell.
Cover photo by Lennon Kong on Unsplash
Here is a chart that we have all seen many times before. This one is from a recent New York Times opinion piece called, "America Needs to Build More Housing" and it shows the relationship between home prices (the price-to-income ratio) and houses built (average housing starts per 1,000 households). In this scatter chart, the four quadrants are as follows:
Cities that don't build a lot of housing and are expensive (San Francisco)
Cities that don't build a lot of housing but are still relatively affordable (Chicago)
Cities that build a lot of housing and are affordable (Austin)
Cities that build a lot of housing but are still relatively expensive (Hilton Head Island)
This last quadrant has the fewest number of data points and a number of the locations are resort or second-home destinations, which have their own unique market dynamics. Similarly, the lower-supply cities, like Chicago and Detroit, have managed to maintain some degree of affordability by virtue of the fact that their population and economic demand haven't grown as quickly as in other cities.
But generally speaking, the correlation is as one would expect: more homes equals lower prices. It is, however, worth pointing out that not all homes are created equal. The cost and time required to build a low-rise, wood-framed house in the suburbs is not the same as building a high-density, reinforced-concrete tower in the city.
Still, we know that all forms of supply ultimately improve affordability in a market. With this in mind, how might one describe Toronto today? We've been told we're in the midst of a housing crisis, and yet there are lots of available homes on the market, both to buy and rent. Indeed, it's a buyer's and tenant's market. So what's going on?
Well, it's important to keep in mind that a chart like this represents a long-term historical average and that building new housing generally takes a long time (too long, I might add). Right now, we could describe the Toronto housing market like the proverbial "pig in a python."
The market is in the midst of absorbing a huge influx of completed supply and, as our chart suggests, this is having a deflationary effect on home prices in the short term. However, once this pig gets digested, there's absolutely nothing next in the pipeline to digest, and according to basic economics, we know exactly what that will mean for the market.
Cover photo by Artem Labunsky on Unsplash
Chart via the New York Times