Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
By some measures, housing affordability is, in aggregate, the worst it has been in Canada going back to the 1980s. Below is a chart from RBC showing homeownership costs as a percentage of median household income.
The previous spike came around the early 90s, but following that, we saw 3 decades of relative affordability. In fact, for a large portion of this timeline, condo apartments look to be hovering around 1/3 of median household income. This is a common rule of thumb for measuring affordability.
Now obviously things changed pretty dramatically during the pandemic. But that time has ended and a reset is underway. New housing supply has slowed dramatically. Developers are sitting on record levels of inventory. And sellers of all shapes and sizes are clinging, as best they can, to yesterday’s prices.
With so much uncertainty, it’s challenging, if not impossible, to know exactly how all of this will play out in the coming years. But I suspect that, as time goes on, the above chart is going to start to mirror what we saw in the early and mid-90’s. In other words, affordability is going to improve.
I was a little surprised by some of the numbers here, namely municipal fees. But that is not the point here. The point is that this is a great idea and that, judging from the comments on Twitter, many people seem to want this.
The obvious benefit is that it allows consumers to better understand where their money is going. But I also think that by showing people all of the costs that get levied on new housing, it could benefit the overall development industry.
What do you think? Should developers in Toronto adopt a similar approach? Let me know in the comments below.
Charlie Bilello shared this interesting housing chart in his weekly newsletter:
Shelter is one of the largest components of the CPI index (about a third). And at 7.9% (see above), this is the highest rate of housing inflation since 1982. However, the shelter component — which is largely a combination of rent on a primary residences and the implicit rent that owner occupants would pay if they were renting their homes — has historically been a lagging indicator. Apparently it has something to do with the way that it’s calculated. So for this reason, the shelter CPI has only increased 14.9% since the start of 2020, whereas home prices nationally increased by about 40% and rents increased by about 20%. It’s also why there appears to be a disconnect (in the above chart) with rents. All of this is to say that we might see shelter jump up a bit further as it continues to record what happened over the last few years.
There’s lots of data out there to suggest that there is a correlation between urban density and housing unaffordability. Take Hong Kong. It is very dense, and also one of the most expensive housing markets in the world. But I think the real question is: does urban density actually cause housing unaffordability, or do the two simply tend to be correlated when you plot a country’s biggest cities?
One the one hand, there are factors that do drive up home prices when you build more densely. Building a reinforced-concrete high-rise is always going to be more expensive on a per square foot basis than building a wood-framed bungalow. But of course, the former also uses land a lot more efficiently, which is what you need to do in big and supply-constrained cities.
Michael Lewyn’s view (credit to Robert Wright for sending me the article) is that density is incorrectly used as a scapegoat to fight compact development. It does not actually cause higher rents. One counter example he gives is that of Manhattan, which went from 2.3 million people in 1910 to just under 1.7 million in 2020. In other words, it got less dense, while at the same time its rents grew exponentially.
Like most important city matters, the answer is complicated. But this is an interesting topic that I think we should spend more time on here.
The central bank tightening and interest rate hikes that we saw last year will come to an end in the first quarter of 2023 as inflation gets under control. This will ultimately lead to a recession but my sense is that it will be more mild than severe. For this reason, I don’t think anyone should expect ultra-low rates to return in the short-term.
Much of the real estate sector went on pause in the second half of 2022. But ultimately this reset to a more balanced market is going to be necessarily painful for some. And I think we will see that pain play out in the first half of the year. This will obviously be bad for some, but it will create opportunities for others.
Construction costs tempered in the second half of 2022 and started to show some evidence of price softening. I think we will see more of this in 2023, which will be healthy for the market. Cost management over the last few years has been a meat grinder for the development industry.
Pre-construction condominium sales for well-located projects will return in a more fulsome way by the spring. This will be driven by buyers now having clarity around where interest rates will be hanging out in the short-term and, in the case of Canada’s largest cities, by record-high immigration levels.
For the tertiary/fringe housing markets that saw big run ups in pricing during the pandemic, I unfortunately think it will take many years for prices to fully rebound. The price increases we saw in these submarkets were of course a result of low rates, but it was also driven by a view on urban decentralization that in my view did not actually materialize.
The desire to add more housing to single-family neighborhoods will continue to pick up steam across North America. How exactly this plays out will be market specific, but in Toronto I expect to see new planning policies put in place, as well as supportive building code changes.
Public transit ridership will remain below pre-pandemic levels throughout 2023. This will continue to exacerbate public finances.
Autonomous taxis will grow rapidly this year. Companies, such as Cruise, will expand into a number of new US markets and, at some point during the year, I will take my very first ride in an autonomous vehicle.
2023 will be a big year for augmented reality and “phygital” goods. Last year I thought Apple would release a new product in this space. That didn’t happen, but it will this year. At the same time, we will see more companies releasing products that blur the lines between our online and offline worlds (hence “phygital”). This will include NFTs and other crypto-related things that will start to operate more seamlessly in the background of consumer-facing products/services.
I continue to be bullish on Ethereum and I think it will overtake Bitcoin in terms of market cap in the next 2-3 years. But I was very wrong about Solana last year. And now I am struggling with its value proposition. Today, layer 2 chains such as Polygon feel more likely to win out. Broadly speaking, I suspect 2023 will be a positive year for crypto, but not a record-setting one.
In summary, I think we are going to see more pain at the beginning of 2023, but that on the other side of it will be healthier and more balanced markets. This means that we can look forward to the end of the year feeling much better than it does right now. All of this said, please keep in mind that I’m often wrong and that nothing in this post should be construed as actual advice.
Matt Levine’s latest Money Stuff column does a good job explaining why a lot of smart people are trying to figure out a market-making model for homes (see companies such as Opendoor):
People want to apply the market-making model to homes. This makes sense. Buying or selling a home is a long slow uncertain annoying process. The value of immediacy is high, especially for a seller. If you decide to sell your house and go to a website and spend 10 minutes filling out a form and then someone wires you cash for the value of your house, that is much much much better than hiring a broker and listing the house and holding open houses and so forth. You’d be willing to pay a market maker a lot for that immediacy. (By selling your house to the market maker at a discount.) And if the market maker is good at acquiring houses, then it will have a lot of inventory, which will make it a good seller of houses. If you want to buy a house, you will naturally go to the market maker’s website, because it’s where the houses are.
Levine also explains why a market-making model is that much more difficult for homes compared to things like stocks. In a slowing/slumping housing market, it’s pretty easy to lose money as a market maker. (That is, unless you can somehow accurately predict that a slump is coming.)
Last month, Opendoor lost money on 42% of its home transactions. This is a result of them buying homes from people when prices were X and then selling these homes many months later when prices were less than X.
However, I’m not so sure that this has to be an existential problem. Opendoor’s primary value proposition is instant liquidity for homeowners. And this value proposition is at its strongest when the market is in fact slumping. Because the alternative — selling with a broker — is less attractive.
So the current environment may eventually turn out to be a boon for Opendoor. Of course, we won’t know for a number of months.
Full disclosure: I am long $OPEN. And yes, it is painful right now.
Last year was a pretty good year for people who own a home in the US (or in Canada and many other places). Current estimates peg the total value of US residential real estate at somewhere around $40 trillion.
But of course, a lot of this real estate has debt on it. The Federal Reserve considers this in their calculation of “homeowner’s equity,” and so the net number, as of the end of last year, was just over $26 trillion (see above chart). This is up from about $10 trillion in 2012, following the financial crisis.
Not surprisingly, a lot of these gains are accruing to a pretty specific demographic. According to City Observatory, about 67% of residential real estate in the US is owned by non-Hispanic white people. And about 44% of owners are 55 years or older.
Oddly enough, this also happens to be a demographic group with a disproportionate say over the kind of new housing that we’re allowed to build in our cities. Scarcity is a very good thing when you already have and own some.
According to this RedFin data from 2019 — which looked at normalized sale prices and Walk Scores above 50 — it is about 23.5% or $77,668 for 16 major US metro areas. Again, this is 2019 data and so things may have changed a bit, especially with the whole COVID thing.
It also varies by metro area in this data set. The premium in Boston, for example, is almost 30%. Whereas the premium in Oakland is actually a slight discount (-1.3%). There are going to be local conditions that play a role.
But as a whole there is an economic trend here that makes intuitive sense to me. Though it’s not just a question of how pricey your home is. You also need to consider your transportation costs, the value of your time, and the health benefits of living in an environment that promotes consistent and moderate activity.
When you factor all of these things, maybe “premium” isn’t the right way to look at this.
The Toronto Regional Real Estate Board released its 2020 housing figures this week. And I suspect that the numbers are probably directionally similar for many city regions around the world.
2020 saw more home sales than 2019 with 95,151 homes changing hands. This represents an 8.4% increase compared to last year. December was also a record month with 7,180 sales — a 65% year-over-year increase!
The average selling price in the Greater Toronto Area also reached a new record of $929,699. This represents a 13.5% increase compared to last year. Once again, December was a record setting month with an average selling price of $932,222.
When you look at sales and average prices by home type, the biggest drivers were low-rise homes outside of the city. No surprises here.
But consider the price spread that now exists between condos and detached homes. In the City of Toronto (“416”), we’re talking about an average price delta of nearly $850k. That would be an expensive home in many other markets.
Of course, condos tend to be smaller than detached homes. And so different prices per pound. But total price matters a great deal and historically a widening spread has moved many buyers over to the condo market.
I can’t open Twitter these days without seeing someone in the tech industry talking about moving or talking about someone who just moved to either Austin or Miami. “What’s the best neighborhood in Miami for startups? My friend just moved to Edgewater. Where did so-and-so move?”
Here’s a recent article from the WSJ talking about how accelerated tech-fueled growth is straining Austin. And below is a set of charts (from the article) comparing home prices in Austin and San Francisco. (Reminder, the California-to-Texas migratory pattern recorded the highest number of “net movers” last year.)
But in reading through the article, I am reminded that the challenges facing Austin are not entirely unique. Growing cities all around the world are being put in a position where they need to decide whether they want to remain car-oriented and relatively low-density, or if they want to make the shift toward more transit-oriented urbanism.
It’s admittedly not easy, both politically and practically speaking. It’s hard to rewrite deeply entrenched built form. But Austin is naturally looking at what happened in San Francisco, where restrictions on new development are thought to be partially (largely?) responsible for the city’s unaffordable housing.
According to the same WSJ article, voters in Austin turned down two previous transit proposals. One was in 2000 and the other was in 2014. There was concern over too much urbanization. There was concern it would induce more people to move to the city. And there was concern that it would threaten the city’s low-rise single-family homes.
But this year a transit plan was approved that includes three new rail lines, one of which will tunnel through downtown. Provided that Austin can effectively pair this with more housing, more uses, and more density — which is generally what you need to make transit work — then it may be well on its way to crossing, if you will, the chasm of urbanity.
