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.
A few weeks ago I was invited by Toronto realtor Andrew la Fleur to participate in his True Condos podcast series. I had actually never met Andrew before in person, but I knew of him because of Twitter, his blog, and because he was an early user of my past startup, Dirt.
I was initially a bit apprehensive about being on a realtor podcast, because I thought it might end up as some sort of cheesy marketing piece. But I’ve come to learn that Andrew is not that kind of guy. He’s also interviewed some really great people in his podcast series (here’s the full list), so I feel honored to have been invited.
I’ve embedded the podcast below, but if for whatever reason you can’t see it, click here to be redirected to Andrew’s site. We talk for about 30 minutes, with a big focus on openness and transparency in the real estate industry. Thanks again for the invite Andrew. It was great to meet you in person.
I was at a good friend’s wedding last night (congratulations again to Adrien + Rachel!), and one of the topics that came up at our table was whether it is better to own or rent your home. Now, in North America, conventional wisdom would suggest – almost mandate – that you have to own your place. If you’re still a renter, well then you’re “throwing away your money” my friend.
But are you really?
A big part of the value of owning your home is that it’s forced savings. Every month when you make those principal and interest payments, you’re paying down your mortgage and socking away money for the future. And this can be a great thing for a lot of people, particularly if you’re not disciplined enough to save otherwise.
But when you own a home, you’re also spending time and money on maintaining that home, and you’re also tying up capital that could be used elsewhere. So consider this: what if, instead of putting your savings towards a downpayment, you simply continued to rent and created an investment portfolio that you then contributed to on a regular basis just as you would a home?
Similarly, I remember being told in business school that companies that own their own real estate tend to under perform those that do not. And the rationale is that owning lots of real estate ties up capital that could otherwise be reinvested in the core business. In other words, if your core business is making widgets, then invest your money in making better widgets, not in real estate.
But this is not to say that everybody should rent. Obviously I’m a big believer in real estate. And for a lot of people, owning may make sense. This post was really just to say that the owning vs. renting decision may not be as black and white as you might think.
Last week a friend of mine sent me a really fascinating article from The Economist talking about the role of foreign investors in Vancouver’s housing market. If you subscribe to The Economist, you can click here to read the article. If you don’t subscribe, you’ll have to rely solely on what I’m about to say.
In case you weren’t aware, Vancouver is an incredibly expensive city when it comes to real estate. The average price for a single-family detached house is now around C$1 million. By some measures, that makes it the most expensive housing market in North America. Here’s a chart that looks at house prices as they relate to household income:
According to The Economist, the median household income in Vancouver is $68,970. This places them 23rd out of 28 in terms of Canada’s major cities. So how is it that homes are, on average, selling for $1 million? The locals don’t seem to be able to afford them.
Well, it’s a well known fact that Chinese buyers continue to be an integral part of Vancouver’s housing market. In fact, up until this year, Canada offered a fast track option for citizenship applications if you brought at least $800,000 into the country.
So we know that foreign buyers are having an impact. It’s a phenomenon we’re seeing in many other cities around the world, such as London. But to what extent is hard to measure–which has forced analysts to get creative.
To try and figure out what percentage of homes are going to foreign buyers, analysts have been looking at macro data, filing through sales records, and even monitoring utility bills to see which homes might be sitting empty.
What they found is that there’s a fairly significant correlation between economic activity in China, and Vancouver’s housing market. When the Chinese economy does well, so do Vancouver homes. Interesting. Still, that doesn’t quantify impact.
When analysts looked for utility bills that would suggest an empty home, they found that only about 8% of high end downtown condos were likely sitting empty. That’s a relatively small amount. It could be vacancy rate.
But when they looked for “mainland Chinese-sounding names” on sales records, they found that for homes priced $3M and up, almost ¾ of the buyers could be from mainland China. Now that’s a significant number!
I found this all rather fascinating and I thought you all might as well. It yet again reminds me of how much opacity there is in real estate markets. We’re all craving better data. Why else would people be scouring utility bills?
Toronto Life recently published an interesting article called Stuck in Condoland. A lot of people have mentioned it to me, so there seems to be a lot of interest in the topic. It basically profiles the lives of a few young families who live downtown and are trying to raise young children in relatively small condos (think 700 square feet).
I thought it was interesting because I like the idea of small and efficient living. The average post-war bungalow in Toronto was probably less than 1,000 square feet. And so this modern notion that you need a big house in order to properly raise a family is a relatively recent phenomenon. Although we’re a richer city today and that’s what happens when people become wealthier: they consume more.
But the article also makes it seem that developers only want to build small condos and that larger condos and single-family homes just aren’t profitable enough. Thus the reason all these families are being forced to into tiny shoeboxes in the sky. But that’s not really true.
Look, just like every other for-profit business on the planet, developers are concerned with making money. And so they will always look for ways to increase efficiency, drive down costs, and so on. But there are certain realities of the market that developers don’t have control over.
First, developers aren’t building new single family homes in the city (at any sort of meaningful scale) because there’s no land to do so. And because the land use policies in place and the current thinking around how we can more sustainably build our cities for the future dictate that we should be building more intensely. In other words, building up. So it’s not a question of developers not wanting to build single family homes; it’s a question of not being able to.
Second, trust me when I say that if the market wanted large 3 bedroom family units, developers would build them. Mandating them is a useless exercise if people don’t want them or are unable to afford them.
The challenge we face is that a reinforced concrete condo tower is more expensive to build than a wood-framed single family house. So until land values get to a point where single family homes become the more expensive option (compared to condos), I don’t think we’ll see a huge rush towards 3+ bedroom suites.
This is my hypothesis at least. Because when you buy house, you’re really buying two things: the house itself and the land. If the house itself (wood) is cheaper to build on a per square foot basis than a condo (concrete), then the variable that will make a difference is the land. And as people like to say: “buy land, they ain’t making any more of it.”
So what I’m saying is that I just don’t think the situation is as simple as: “developers are bad, all they want to do is build tiny condos and make lots of money.” It’s more complicated than that. But I do believe the question of how families are going to live in the city is an important one.
I have a friend in town visiting me from New York this weekend. And since today was such a beautiful day in Toronto, we decided to spend the afternoon on the Toronto Islands–Ward’s Island to be exact. The islands are such an incredible amenity in the city. I try and go as often as I can during the summer. It’s my Central Park.
But in addition to parks and beaches, many people also live on the islands. There are 262 residential properties across the archipelago. Below is what a residential street looks like. There are no cars allowed. It’s a gorgeous place.
But if you want a house on the Toronto Islands you have to get on a waiting list. There only 500 spots and it’ll probably take you about 30 years before you get to a meaningful position on that list. But even then, you’re only buying the house. The land itself is on lease.
But if we didn’t regulate, the islands would be a very different place. 262 homes is not a lot of housing. In fact, it’s less than most of the new condo buildings going up downtown. So it’ll probably always be a heavily regulated market.
In addition to having an incredible mountain just 12 miles away, the town of Jackson is also a really cool place in its own right. It’s a cowboy town with endless wilderness all around it. But since it’s such a big tourist destination, the town is filled with great restaurants, art galleries, and the obligatory real estate brokerages trying to sell vacation properties.
But from a land use standpoint, I also find the town really interesting because of its network of fine grain alleys. Here’s a picture of Gaslight Alley. For those of you who are regular readers of this blog, you’re probably aware that I’m a big supporter of laneway housing in Toronto. I think it’s a hidden opportunity. It could be another—more intimate—layer to the city.
Today, building a laneway house is virtually a non-starter with the City of Toronto. Whether it’s issues of utilities or the fact that laneways don’t easily accommodate service vehicles (maybe we need smaller service vehicles), the city has a litany of reasons for why they just won’t work.
But I’m absolutely certain that we could figure out solutions to all of the obstacles if we really put our minds to it. It’s not a question of not being able to do it, it’s a question of not wanting to do it.
One of the things I’ve always found funny about San Francisco is that, despite being a bastion of liberalism, it’s a city that’s incredibly anti-development. From the outside, it seems like a city filled with NIMBYs. Doesn’t that seem odd given its reputation as one of the most progressive cities in America?
Of course, many would argue that part of the reason so many people love San Francisco is because it’s done such a great job of preserving its history. And don’t get me wrong, I think that’s important. But as I’ve argued before, development should be about a balance. We should be looking to the future, while not forgetting the past.
Let’s put some numbers to this discussion.
According to Atlantic Cities, San Francisco has produced on average 1,500 new housing units each year over the past decade. Seattle does about 3,000. And in the Greater Toronto Area, we’re probably around 30,000. I’m not sure if the Atlantic Cities numbers represent only the city proper but, either way, the spread seems massive. Even still, market analysts, such as George Carras of RealNet, have argued time and time again that the Toronto region needs 40,000 new housing units a year just to keep pace with demand!
So what happens when supply doesn’t keep up with demand and you have a robust economy that continually draws in people from around the world? You get San Francisco. And you get expensive real estate and high rents that relatively few people can afford. San Francisco regularly tops the list of most expensive real estate markets in the US.
This is a phenomenon that I don’t think many people appreciate: When you fight development you restrict supply and when you restrict supply you hurt housing affordability. This is the argument that economist Edward Glaeser makes in his book, the Triumph of the City, when he talks about why housing is so affordable in Houston.
Now, if you think about it for a second, this actually means that it’s entirely contradictory to be a NIMBY and, at the same time, an advocate for affordable housing. The two are at odds with each other. Do you want an exclusive city with only enough housing for rich tech moguls? Or do you want an inclusive city with enough new housing supply for the middle class?
When asked, I’m sure many liberals would choose the latter of those 2 scenarios. But in practice, at least in San Francisco, it would appear that many are opting for the former. And it’s happening because residents want their perfect community to remain unchanged. However, in the process, the values that supposedly underpin that community are being threatened.
Which makes me wonder: Is San Francisco so liberal that it’s actually conservative?
Not surprisingly, Canada is on the list. There is, of course, lots of talk both locally and abroad about the stability and sustainability of our housing market. Here’s what the article had to say about Canada:
“With real home price appreciation near 20 percent, Canada’s home price growth has been raising eyebrows. Bank of Canada governor Stephen Poloz doesn’t see a bubble, but others aren’t so sure. Climbing alongside housing prices have been levels of household debt, which surmounted 165 percent of income in the second quarter of 2013. (That’s not too far from where they were in the U.S. before it suffered its housing crisis.) And the Bank of Canada itself has even warned about risks posed by frothy condo sectors in big cities like Toronto. A few hedge funds, such as San Francisco-based Hyphen Partners, have even made high-profile bets on a Canadian housing bust. They haven’t paid off, yet.”
And here’s the full list of countries:
Overall, it’s not surprising to see that Canadian home prices have risen so dramatically since Q1-2009. As the US sank into deep recession (2008-2009), Canadian credit became cheap in order to stave off a recession of our own. This fuelled the housing market, which is an asset class that’s inextricably linked to financing costs.
The same thing happened in Ireland, which today sits at the bottom of the above list. It has seen real prices drop roughly 40% since Q1-2009. By adopting the euro currency, Ireland no longer had control over its own monetary policy (this is one of the downfalls of a centralized currency). So when the economies of the larger continental countries stuttered, interest rates were dropped. For the strong Irish economy, it ended up creating a housing bubble.
I worked in Ireland in the summer of 2007 and I remember people telling me about this. Already at this point there was concern that the market had become overheated. There are obvious parallels to what has happened in Canada, even though we don’t share a common currency. The Canadian and US economies are inextricably linked.
So will the same thing that happened to Ireland happen here in Canada? Nobody knows for sure, but I think we can take comfort in the actions taken by the feds to tighten up lending. They’re acutely aware of what easy credit has done to the housing market and they’re trying to temper it. And it’s certainly had an impact.
Early this week when I was on the panel about investing in condominiums, I asked a lot of the realtors about what they were seeing in the residential marketplace. A great number of them told me that their clients were struggling to obtain financing. A lot of deals were falling through because of it.
If you’re worried about our housing market, this should be taken as great news. Choke off credit and you choke off real estate.
Every time I bring my car in for service, I’m reminded of how expensive it is to maintain one. Between car payments, insurance, gas, parking in the city and service, owning a car eats into a lot of disposable income.
So for cities where the residents don’t need a car to get around, there’s potentially a lot of additional income that can get placed in other sectors of the economy.
Richard Florida, and others, have argued that we’ve historically been overspending on housing and transportation, and that it restricts capital from flowing into other, more productive, areas of the economy.
I’d be curious to see a study that compares transportation spending versus other local economic measures. How would a driving city compare to a public transit or biking city?
