Tag: globe and mail

• Canada has an existential productivity problem

  

  Canada has a lot going for it:

  By land mass it is the second-largest country in the world, with the longest coastline. Bookended by the vast Pacific and Atlantic oceans it has enormous trading advantages, alongside access to the largely untapped Arctic to its north. It is a net energy exporter; it has the third-largest proven oil reserves and is the fifth-largest producer of natural gas — but it also boasts large deposits of critical minerals vital to the green energy transition. And, of course, it borders the world’s largest economy.

  And yet:

  By purchasing power parity, its economy is ranked 15th globally by size, behind the likes of Turkey, Italy and Mexico. The OECD has forecast Canadian per capita gross domestic product growth up to 2060 to be the lowest among advanced nations.

  The problem:

  Poor productivity is at the heart of the country’s growth challenges. In an hour a Canadian worker produces just over 70 per cent of what an American can — that’s below the euro area and even the UK based on 2022 data. Many would have expected the resource-rich economy to benefit as globalisation powered forward, but its relative labour productivity has actually slipped since 2000.

  The solution is probably a simple one: We need to innovate, invest more in R&D, and create stronger links between research and Canadian businesses. But executing on this has proven difficult:

  Enormous efforts have been made to understand why businesses in Canada invest so much less in R&D than their counterparts in the U.S., much of Western Europe, South Korea and Japan. Is it our reliance on the export of natural resources and agricultural products? Is it reduced incentives to innovate for our heavily regulated and profitable oligopolies in sectors such as banking and telecommunications? Is it our decades-old reliance on incentivizing industrial R&D through federal and provincial tax credits?

  It’s hard to imagine a more important topic affecting all Canadians. So I would encourage you to read this recent opinion piece by David Naylor (president emeritus of the University of Toronto) and Stephen J. Troops (president of the Canadian Institute for Advanced Research).

  It’s a balanced piece. Neither of them are arguing for “empty credentialism” or for research that remains in academia. What matters is what we do with the work that our smartest minds are doing. And the overarching point is that innovative research needs to find demand within Canadian businesses.

  Right now, we’re very bad at this. That needs to change.

  Chart: Globe and Mail

  2023.10.28

• Thoughts on Dupont Street in Toronto

  

  This morning I spoke to the Globe and Mail about the evolving nature of Dupont Street here in Toronto. The impetus for the discussion was this: Dupont Street is now seeing a lot of residential intensification, but the street itself remains a bit of a crosstown highway. It’s not yet a “complete street.” And since Junction House is effectively on the west end of this midtown artery, John Lorinc asked to get my thoughts.

  The point I tried to make is that, in my opinion, this is first and foremost a zoning issue. Dupont Street is seeing intensification, but it is largely happening on the north side of the street, abutting the rail corridor (purple and red in the above Official Plan map). The south side of the street is, for the most part, a low-rise neighborhood (yellow in the above map).

  This kind of edge condition is somewhat unique in the city: low-rise on one side of the street; higher density housing, retail, and office on the other. But it is particularly problematic if you’re trying to create a great main street, because single-sided retail streets generally don’t work very well.

  We could certainly have a discussion about sidewalk widths, bike lanes, and other streetscape improvements; but in my mind, there is nothing inherently bad about the cross section of this street. The right-of-way width is 20 meters, meaning there are generally two lanes going in each direction. This is a dimension you’ll find all over the city, including on beloved streets like Queen Street.

  The problem here is what is abutting the street, and it is something that is systemic across the city: we have too many arterial roads that only allow for low-rise housing. So if you were to ask me what to do next, and I was asked this morning, the first thing I would do is up-zone the south side of Dupont and allow for non-residential uses at grade.

  And once this is done, I am certain it will snowball many other positive improvements.

  2023.08.04

• The neutral rate and housing supply

  Below are two interesting excerpts from this recent Globe and Mail interview with Tiff Macklem (the current governor of the Bank of Canada of the former dean of the Rotman School).

  The first has to do with where he believes the “neutral rate” will be in the foreseeable future. He believes it will be higher than where it has been in the past:

  We have different models we use to estimate the neutral rate [the central bank’s estimate of where its policy rate would settle if the bank were neither trying to stimulate nor restraining the economy]. … Those models, based on the data we have, still suggest a neutral rate in the range of 2 to 3 per cent.

  When we look forward, and we look at a number of the forces, it seems more likely that the neutral rate is going to be higher than that … [rather] than lower than that. We don’t have that data yet. But there are a number of factors.

  More people are retiring. The labour market looks like it could be sort of structurally tighter going forward. Globalization has at least stalled, if not reversed. That could create more cost pressures. We’re going to need a lot of new investment in cleaner technologies if we’re going to meet our emissions-reduction targets. When I say ‘we,’ it’s the world – so that’s going to affect global real interest rates.

  So when you look forward, it seems more likely that the neutral rate is higher, not lower. And the message is that households, businesses, governments, the financial system, they need to be prepared for that possibility.

  The second is about his view on Canadian housing:

  The fundamental issue in the housing market, and this has been an issue in Canada for 10 years, at least, is structurally the demand for housing is growing faster than the supply. And so yes, interest rates go up, the housing market will slow. But it’s only going to slow so much because there is a sort of structural shortage of supply relative to demand.

  I think what you’re seeing is that with supply growing less than demand, the housing market has started to tick back up, housing prices have started to tick back up. That’s something we need to take into account in monetary policy. But we’re not targeting the housing market. We have one target: CPI inflation.

  These two forces are opposing ones. Higher rates create downward pressure on home prices. But, as we all know, a structural housing supply problem does the opposite. Where these two forces balance out is anybody’s guess. But as Tiff mentions above, his concern is not home prices; it is inflation.

  I am not an economist, but my view is that the broader real estate market is still going through its reset. There will be more pain and less housing supply overall in the short-term. Risk and leverage are still being unwound and that takes time. It also sucks.

  Because of this, I think if you ask most people today, they will likely tell you to wait: “We haven’t yet hit the bottom of the market.” This is likely true. But I have zero ability to time the bottom of a market. And at the same time, the future does feel a lot more knowable compared to a year ago.

  My philosophy is more akin to what I blogged about earlier in the week: If it’s cheap, if the thesis is sound, and if you have the ability to think long-term, then these downturns are when you want to buy. And that is how I’m starting to feel about things right now. This includes everything from real estate to NFTs.

  Disclaimer: This is not investment advice.

  2023.07.15

• Real estate investors are outbidding people who own strollers

  Here’s a potential scenario:

  “When you have investors competing with first-time buyers who walk in with a couple of [baby] strollers, typically the investor is going to win,” Mr. Pasalis says. “They are well capitalized. They can pay a higher price. And this is why our home ownership rate is declining, because more and more homes are actually going into the hands of investors who rent them out, and amplifying home and amplifying condo prices. We are seeing that.”

  But let’s break this down a little.

  Where are these first-time buyers walking into? Is it a resale home showing or is it a pre-construction showroom? If it’s the latter, then we know it’s going to be difficult / atypical for them to make a buy decision so far in advance. They already have multiple strollers in hand, do they want to wait 4-7 years for their pre-construction home to be ready?

  I would also add that in our current environment — where investor demand for pre-construction homes has waned significantly — the development industry has not seen a marked uptick in end-user demand. Why are they not stepping up now that they’re not being outbid by investors? In my opinion, it’s an ideal time to buy!

  One reason could be that people who own strollers still largely prefer low-rise housing. Maybe it’s for reasons of affordability, maybe it’s a cultural bias, or maybe it’s a genuine preference. Either way, let’s turn our attention to resale homes. In this scenario, who is likely to pay the most?

  If you’re an investor, then you are looking for a specific yield. And so in theory, it should be a mostly dispassionate decision: “Here’s the most that I can pay in order to meet my minimum returns. Do not exceed.” But the question is whether is this is going to be more or less than what a stroller-owning group of people would pay.

  The answer is probably that it depends. However, if the answer is that the investor wins and they then turn around and rent it to people who own strollers, is this actually a problem? And if this same investor happens to own 25 other rental homes and they’re all rented to people who own strollers, is this an even greater problem?

  I suppose it is a problem if you’re worried about Canada’s homeownership rate, which has in fact declined from about 69% (in 2011) to 66.5% (in 2021). But what does this even mean? Is a higher homeownership rate always better? Does Canada have a target number? As of February of this year, the homeownership rate in Switzerland was only about 36.3%. And the last time I checked, it was still a rich country.

  There is nothing wrong with renting. I know wealthy people who have opted to rent their entire life because they enjoyed the flexibility and/or had better places to put their money.

  All of this said, the argument in the above scenario is that, but for investors outbidding people with strollers, these homes would be more affordable and that would in turn increase the homeownership rate. It’s a similar argument to, but for foreign buyers or but for Airbnbs, these homes would be more affordable.

  But in a city like Toronto, we are building very little in the way of new low-rise houses. New supply is virtually non-existent. Similarly in Seattle, they are now building more accessory dwelling units than they are single-family houses. So it is any wonder that demand is constantly outstripping supply and that prices are being bid up?

  In my opinion, a better solution is to rethink how we build our low-rise neighborhoods. And here and here are two good places to start.

  2023.07.08

• Less new housing — for now

  Approving new housing is one thing. And it is an important one thing. But you also need to sell/lease and finance the project. And that is a lot more challenging in today’s environment compared to a few years ago. I think a lot of people look at our cities, see a shortage of housing, and wonder why developers don’t just build more of it. But it’s not that simple:

  “Our industry is now taking a second look at our [calculations] and saying it’s costing more to build, it’s costing more to lend,” he said. “And there is a threshold in regards to what a purchase price or sale price can be. So there’s a bit of a pause in the market right now in regards to starting construction.”

  Throughout this last development cycle and, in particular, during the pandemic, development costs increased dramatically. But the revenue side was also increasing — meaning you could sell and/or lease space for more. That kept development going. You could still successfully underwrite new projects.

  But now the cost of debt has increased and the revenue side has expectedly slowed both in terms of pricing and velocity. This dramatically changes the feasibility of new projects, which means the market is going to need time to adjust to this new environment. This, of course, will happen. But in the interim (i.e. right now), it is going to mean a lot less new housing.

  This should not come as a surprise.

  2023.06.18

• From unfashionable, dirty, and full of prostitutes, to too many tourists

  Cities are complicated. And we have spoken before about how it can sometimes feel like they never really reach homeostasis. In extreme cases, it might seem like they’re either decaying and losing people, or they’re too successful.

  I was reminded of this again this morning while reading an article about how Rome’s historic city center is being overrun with Airbnbs and tourists, and how it is pushing out the locals. It has, arguably, become too successful as a tourist destination.

  

  Of course, this problem isn’t unique to Rome. Venice has the same thing going on, though probably to a greater extent. And Amsterdam is currently working to attract more highbrow tourists and to move their red light district out of the city center.

  But the question I have is: What’s the right amount of tourism? If 25,000 listings is too many for Rome, what’s the right number? And do cities ever really achieve homeostasis, where, you know, things feel just right? Here’s an excerpt from the above article that describes what parts of Rome were like before the tourism boom:

  Ms. Rapaccini remembers when Monti was a quiet, authentic haven for arty types and locals. She and her late partner, the film director Mario Monicelli, who received six Oscar nominations, moved to Monti in 1988. The area was unfashionable, dirty and full of prostitutes, but beautiful in its gritty way, “like a little village” even though it was in the heart of a big, bustling city, she recalls. The apartments were cheap and the area began to attract film types, journalists and artisans – none of them rich – who mixed easily with local workers and shop owners.

  It’s a romantic description of what sounds like a pretty gritty area. Unfashionable, dirty, and full of prostitutes is apparently better than full of annoying American tourists. And perhaps it is. But then what was the area like before it was unfashionable, dirty, and full of prostitutes? Was that also better?

  I have no idea. But cities are constantly changing and evolving, and they were doing it long before any of us arrived, especially in the case of an ancient city like Rome. Maybe that’s what makes it so difficult to hang onto that exact moment in time when everything was just right.

  Chart: Globe and Mail

  2023.06.11

• EVs are cool, but what about high-speed rail?

  As many of you know, I am an advocate for high-speed rail in Canada. Specifically along the Windsor-Quebec City corridor, which is the most densely populated part of the country. And so I found this comparison interesting:

  “If there is one project that would create thousands of jobs, improve business productivity, clean up the air, reduce the output of greenhouse gases and cut the demand for endless highway construction, it would be high-speed electric rail between Toronto, Ottawa and Montreal, where population densities are high enough to make the project sensible. Cost estimates are all over the map. The University of Toronto’s Munk School of Global Affairs & Public Policy put the price tag at about $12-billion, which is $2-billion less than the bucks being thrown at the Volkswagen battery plant alone. But forget it – the Canadian government wants more cars, not fewer. Canadian cities will remain car sewers forever.”

  The above excerpt is from this opinion piece talking about EVs and the public subsidies being paid to encourage battery production within Canada. I get that we want to be part of this important mobility shift. But we are way behind when it comes to high-speed rail.

  And by behind, I mean that we don’t have it at all in this country.

  2023.06.09

• Leadership is a great burden

  I went to bed last night watching President Biden’s address to the Canadian Parliament (full transcript, here.). And I woke up this morning to this Globe and Mail article about Canadian competitiveness. In it, Tony Keller talks about some of the things that are broken in this country (shockingly housing comes up), and compares Canada to Argentina (an example of too many bad decisions) and to South Korea (an example of many good decisions).

  All of this got me thinking about leadership.

  Leadership is a great burden. As a leader, people are looking to you for decisions, for direction, and for you to instil confidence. They are also scrutinizing your every word and action. And in today’s world, they are waiting to criticize you on social media and/or make a funny meme out of your most recent misspeak. As a developer, I get to interface with municipal politicians probably more than your average person, and I can tell you with confidence that it is a thankless job I would never want.

  I can only imagine having to constantly worry about your employment and what people are thinking. Given this incentive structure, I’m sure we’d all act accordingly. It is truly public, service. At the same time, I know that it is not only unproductive — but dangerous — to pander to just what is thought to be politically popular. And we have spoken many times before on this blog about housing and land use policies that may be popular, but aren’t at all effective — or worse, are counterproductive.

  What we should be demanding from our leaders are difficult decisions. These are the decisions that probably feel uncomfortable and that may require some personal sacrifice, but that are ultimately the right decisions for our collective long-term prosperity. It is about ambitiously deciding where we want to go and who we want to become, and then taking meaningful actions, however unpopular they may be, to get there.

  Don’t just tell me what I want to hear. Lead me. Push me. Be bold. In the end, we will respect you for your personal sacrifices and the difficult decisions you are making on our behalf. This is the great burden — but also the great opportunity — of leadership, and it behooves us to empower it. To borrow from Tony Keller, “there’s no reason we [Canada] can’t be the most prosperous and successful society on earth.”

  2023.03.25

• It’s not too late for the Gardiner Expressway East

  Boy, time sure does melt away when you’re writing a daily blog and trying to build buildings. It’s hard to believe that it has already been 7-8 years since I was writing incessantly about the merits of Toronto removing the eastern portion of its elevated Gardiner Expressway.

  For those of you who may not be familiar, Toronto has an elevated highway that runs along the waterfront. It is old. Pieces sometimes fall off. Lots of water will drip on you. And so remediation works are underway. Several years ago, there was also a great debate that took place in the city about what should happen with its eastern leg. I even spoke at a Jane’s Walk where I was, for the most part, not very popular.

  The two options under consideration ended up being: 1) remove it and replace it with a grand surface boulevard or 2) remove it and rebuild it with a slightly different alignment. This second option was dubbed the “hybrid” option, but that was mostly political speak so that it sounded like some sort of generous compromise. You can think of it as the more expensive rebuild option.

  What should Toronto do with the eastern portion of the Gardiner Expressway? #TOpoli

  — Brandon Donnelly 🇨🇦 (@donnelly_b) October 21, 2022

  City Council voted on these two options as one would expect. Councillors in the core of the city did not want an elevated highway running through their neighorhoods, and the Councillors and people in the inner suburbs — who might use it for commuting — were by and large more accommodating. Apparently there are somewhere around 15,000 commuters who use it each rush hour.

  But here’s the thing.

  This vote took place in June 2015 and the thing still hasn’t yet been rebuilt. So maybe it’s not too late! Maybe there’s an opportunity to save a few hundred million dollars between us friends. Also, if anyone is interested, I’m still available for controversial Jane’s Walk presentations. One new idea I have is an elevated highway that runs through the inner suburbs and connects the best weekend brunch spots.

  2022.10.21

• Stairs and balconies

  Perhaps the two most distinctive features of Montreal’s low-rise architectural landscape are (1) lots of exterior stairs and (2) lots of balconies. (Their density is, of course, also noteworthy, particularly in a North American context.)

  The exterior stairs are somewhat curious to outsiders given all the snow the city gets. But it’s maybe a good case study and follow-up to yesterday’s post about 1925 Victoria Park Road and its proposed exterior corridors.

  As for the second feature, the Globe and Mail recently published this wonderful little ode to the Montreal balcony. It is a great reminder that, when designed well, people really do love balconies and exterior spaces.

  This is an ongoing debate in the world of multi-family development, and the outcomes often vary by city and sometimes by housing tenure. But at the end of the day, I have yet to meet anyone who doesn’t appreciate getting outside in the summer.

  2022.08.21