Tag: housing

• New condo sales totaled 5,385 units last quarter

  Urbanation released its Q1-2021 quarterly condo market update for the Greater Toronto Area at the end of last month. And there’s some good stuff in it. New condo sales totaled 5,385 units in the first quarter of this year, which is higher than the 10-year average of 4,924 units and only slightly below sales from a year ago (Q1-2020). By and large, the numbers are starting to feel a bit pre-pandemic-like.

  If you remember what happened back in the second quarter of last year, there was a quick shift in demand toward the suburbs and outskirts of Toronto. Part of this was driven by affordability. But I guess part of this was also driven by the fact that some people seemed to think that our cities had never before experienced a health crisis and were going to somehow die. Or perhaps it was because Zoom is so much fun (and not at all exhausting) and that this time was destined to be different. Either way, I never understood this.

  Fast forward a year and the core is not surprisingly coming back. The oldest part of the city (former City of Toronto) saw 2,886 new condo sales in the first quarter of this year. This is actually higher than sales in Q1-2020. New condo openings in downtown Toronto sold for an average price of $1,419 per square foot. And overall absorption was about 76% in the quarter, which is the highest it has been since 2017.

  Some of you may be looking at these numbers and thinking WTF. But when developers look at the costs in their pro forma, as well as what’s on the horizon — ahem, inclusionary zoning — it’s usually that same feeling. So it’s hard to imagine average prices and rents going anywhere but up.

  2021.05.10

• The Monocle Book of Homes

  

  

  

  Monocle has new book coming out called The Monocle Book of Homes. It’s a guide to 20 exceptional residences from around the world, spanning everywhere from Mexico and Australia to Finland and Lebanon. In addition to these home tours, the book is intended to serve as a kind of how-to guide for improving your own living space. There’s also a portion dedicated to inspiring neighborhoods and community-driven urban projects. I don’t have a copy of this book and so I can’t vouch for its life-enhancing abilities. But Monocle generally has good taste and always takes nice photos. So I think many of you will appreciate this book. It’s available for pre-order over here.

  2021.04.23

• Penthouse at 388 Richmond Street West sells for $2.4 million

  My friend Christopher Bibby — who is a real estate agent here in Toronto — is in the Globe and Mail today talking about how Toronto-area buyers have returned to downtown. The article is by Carolyn Ireland and in it Bibby cites two of his recent deals: A large 2 bedroom suite at 168 King Street East that just sold for $1.2 million and an even larger penthouse at 388 Richmond Street West that just sold for $2.4 million.

  (Sidebar: 388 Richmond Street West is one of my all-time favorite buildings in the city and was developed by Howard Cohen nearly two decades ago. For more on Howard, check out this post I wrote back in 2016.)

  These are two examples of buyers who want to live in the city. Of course, there are countless others who are making moves right now. As Bibby points out in the article, the mood has certainly shifted from what we were seeing last year in the condo space. Condo buyers today are even starting to comb through expired listings in the hopes of finding off-market deals.

  I view this kind of real estate activity as a leading indicator for what’s to come in the the city. Rental activity is naturally going to lag until people starting returning to offices en masse and downtown life fully resumes. It’s more of a short-term “buying” decision. But as a condo purchaser, it’s easy (and probably better) to look through the short term.

  I think that’s what people are doing right now and they’re saying to themselves, “yeah, I want to be in the city.” I know that’s how I feel.

  2021.04.07

• From social housing to highly desirable in Stockholm

  

  Feargus O’Sullivan is back with another Bloomberg CityLab article about “the iconic home designs that define our global cities.” In this recent article he focuses on the Barnrikehus of Stockholm (and also talks about Sweden’s housing market in general). Originally built in the 1930s, the slab-like midrise buildings were largely intended to address two pressing problems: 1) the need for affordable housing and 2) Sweden’s incredibly low birthrate (supposedly the lowest in Europe at the time).

  The Barnrikehus template was deployed on the edges of Stockholm and other Swedish cities. The designs were/are fairly simple. Very little ornament (this is Scandinavia). Four or five storeys usually. And no more than about 12 meters deep. This allowed for better natural ventilation, which was important for stymying the spread of tuberculosis. The rents were also heavily subsidized and declined even further with every child in the family. In other words: the more kids you had, the less rent you had to pay.

  The suites were fairly compact, with many around the 430 square foot mark. This kind of space might have housed a family of six according to O’Sullivan. But compared to the other available housing options at the time, this was a significant improvement. Perhaps not surprisingly, these “child-rich houses” (which is how the name translates) developed the same kind of social housing stigma that was prevalent in many other countries and cities around the world.

  But that perception changed over time and, today, these rent-controlled apartments are apparently highly sought after. (Here’s a listing to give you a taste of what they’re like.) Originally on the fringe of cities like Stockholm, they are now very well located and offer a high standard of living. (You also can’t go wrong with white walls and pale woods.) To learn more about the evolution of Stockholm’s depression-era housing, click here.

  Photo by Jon Flobrant on Unsplash

  2021.04.04

• Second home and investor mortgage applications accounted for 14.1% of all applications in February

  

  As a follow-up to my recent post about the rise of the second home, here is a chart (via the WSJ) showing second home and investor mortgage applications as a share of all applications in the US. In February of this year (2021), second home and investment properties accounted for 14.1% of all applications. This is a record number going back to January 2010.

  What’s also interesting about this chart is that, but for COVID, it shows a general decline over the last decade. I’m not sure what the split is between vacation and investment properties, but can we conclude that pre-COVID Americans were becoming less interested or perhaps less able to own a second home? And could the reason be that instead of owning a second home, more people simply started relocating permanently?

  There is also an obvious seasonality to these applications. Each of the above valleys tend to correspond to the spring and summer months. It’s almost as if every fall/winter we start thinking to ourselves, “Right, winter. Let’s look for a place somewhere else.” Is it that, or are there other forces at work here?

  2021.04.01

• Need vs. want and what that means for pricing

  

  Seth Godin recently posted this four quadrant chart on his blog. It is for plotting different products based on price and based on want vs. need. In his post, he asks his audience to think about what they’re offering and which quadrant it fits within. It can only be in one.

  I am fascinated by questions of pricing. At at some point on this blog, I wrote about a pricing class that I took at Rotman while I was doing my MBA about a decade ago. It stands out to me as one of my favorite university classes.

  So let’s consider these four quadrants.

  In the top left, you have inexpensive products that are wants and not needs. This quadrant is where you’d place those novelty sunglasses you picked up for your friend’s theme party. Fun for that moment, but if they break or you lose them, that’s probably okay.

  In the top right are expensive wants. Seth uses the example of a Hermès purse. The need is a place to put your belongings, but that’s not how these sorts of items are priced. The real value, arguably, comes from their “signaling” and how they make the owner feel.

  This is the luxury goods category. Demand will likely be cyclical and sporadic, and so you’ll need to make sure that you have fat margins.

  In the bottom right are expensive needs — like a pacemaker. Seth’s point is that these products need to work exceptionally well, all of the time. In the case of a pacemaker, it is truly a matter of life or death. At the same time, there’s going to be less price sensitivity.

  In the bottom left are the inexpensive wants. Low cost products that people really want and are infinitely useful. Seth’s example is Amazon Web Services.

  This quadrant of products is attractive because demand will naturally be extremely high. Cheap and invaluable will do that. However, Seth’s caution is that you still need to sustainably deliver the goods. These aren’t novelty sunglasses.

  I find it helpful to think of products as existing in only one quadrant. But most offerings aren’t going to exist all they way in one corner. It’s perhaps important to consider the “job to be done.” (To borrow from the late Clayton Christensen.)

  Take, for example, housing. On a fundamental level, it’s a need. We all need shelter. But it can also be a want, or have aspects of want. I need a place to live. But I want a place in the mountains. This subtle difference means something very different when plotted precisely.

  Image: Seth Godin

  2021.03.27

• Accessory dwelling unit (ADU) supply in California

  This recent article by Bloomberg CityLab, about “how California set off a backyard apartment boom,” has some interesting stats about the extent in which accessory dwelling units (ADUs) are quickly being adopted and delivered across the state.

  For one, a majority (87%) of jurisdictions have enacted at least one ordinance related to ADUs, though many have several. These policies might include everything from by-right zoning to some form of financial assistance if you build. Here is a graph showing the cities and counties that have created ADU ordinances since 2013:

  

  All of this has translated into housing supply. In 2019, California homeowners brought over 12,000 accessory dwelling units to the market (based on permits issued). Though a relatively small quantity based on the state’s overall housing deficit, this number is surely growing thanks to policies and programs, like this one here, that are working to remove the barriers to building.

  

  For the full CityLab article, click here.

  2021.03.26

• To yield or not to yield

  If you’re building a multi-family rental building, you’re almost certainly building it “on spec.” What this means is that you’re building an empty building and, once it’s done, you will then work to rent it out. (Nobody rents an apartment years in advance.) In this scenario, you will know what your costs are once the building is complete, but you won’t really know what your revenue will be until you start leasing. If demand is strong and the market has moved since you started building, maybe your rents will be a pleasant surprise. If the market has moved in the opposite direction since you started building, your rents might be an unfortunate surprise. The laneway house I recently completed is an example of a spec rental building. I built it without a tenant, but I assumed that I could rent it out upon completion. That proved to be true, but mind you it was only one unit. So it was relatively low risk.

  If you’re building an office building, it is bit more common to have some pre-leasing in place. Early on in my career, I worked on an office development where we started construction with about 25% of the leasing complete. This wasn’t enough for construction financing, but we saw that demand was strong and we needed to start right away in order to meet our lead tenant’s occupancy timing. And so we made the decision to go. We ran on equity for the first bit of construction, but once we completed enough leasing we were able to place our construction facility and lower the project’s overall equity requirement. We took a chance and everything ended up working out okay. But it could have not worked out. What would have happened if a pandemic hit after we started construction? Leasing activity would have completely stopped.

  If you’re building a condo building (at least in this city), you’ll likely be pre-selling your suites. You don’t necessarily have to do this. There are examples of well-capitalized condo developers building on spec without any pre-sales whatsoever. (Build, lock in your costs, and then sell.) But generally most developers will pre-sell, secure their construction financing, and then begin construction. In some ways this lowers your risks, as well overall systemic risk in the market. It also lowers your equity requirement as a developer. But it does create another possible risk. Once you pre-sell, you’re effectively locking in and capping your revenues. So you better have a very good handle on your costs. Otherwise you could be exposing yourself to cost escalations without any way to claw back some of your margins.

  The other thing to consider is whether you want to yield or not. Is it better to sell all of your suites as soon as possible (bird in hand) or sell only what you need, holdback the rest, and hope that prices increase going forward? I don’t think there is a right or wrong answer here. Some developers don’t want any market risk and so they take the bird in hand when they can. Other developers prefer to profit maximize and/or safeguard themselves against unforeseen costs, and so they sit on inventory. If you have unsold suites, you can always push revenues. Either way, what is hopefully clear from this post is that development is risky. This is just one example of some of the decisions that need to be made. There are countless others. Sometimes you’ll get it right. And sometimes you won’t. Hopefully the former happens more than the latter.

  2021.03.23

• Housing supply and house price dynamics in the UK

  In the fourth quarter of last year, the average house price to earnings ratio in the UK was about 8.4x. Apparently this is about as high as it has been in the past 120 years. But interestingly enough, if you go back to the 19th century, this ratio was even higher. It was over 12x back in 1845, but then went on a steady decline until about the 1920s. What changed, according to some researchers, is three things: homes got smaller (making them more affordable), incomes rose, and supply increased.

  So what’s going on today? The obvious answer is perhaps that interest rates are low. But in this recent FT article by Martin Wolf, he argues that that’s not really the primary driver. Part of his logic is that low interest rates are a global phenomenon. And so how is it that real home prices in the UK rose 93% between 2000 and 2020, but only 29% in Germany? There must be some other structural force(s) at work. (Germany has a lower homeownership rate for whatever that’s worth.)

  

  Wolf argues that it’s a problem of housing supply. Very little housing was built during WW2, for obvious reasons, but housing delivery did really spike in the post-war period in the UK. Local authorities also played a major role. If completions from 2000 to 2019 had averaged the same rate seen between 1950 and 1970, the country would have 2.9 million more homes today, representing a 13% increase to total dwelling count.

  This, Wolf argues, would be having an impact on house price dynamics.

  Chart: Financial Times

  2021.03.22

• The rise of the second home

  

  Real estate brokerage firm Redfin recently did an analysis of “mortgage-rate lock data” taken from the analytics firm Optimal Blue. A mortgage-rate lock is an agreement between a lender and a borrower guaranteeing a particular interest rate for a particular period of time.

  What’s potentially interesting about this data is that (1) approximately 80% of mortgage-rate locks apparently result in an actual home purchase and (2) buyers must specify whether they’re applying to secure a rate for a primary home, a second home, or an investment property. So there’s a high degree of intent that goes along with these applications.

  What Redfin found when they looked at the data is that the growth in demand for second homes is exceeding that of primary homes by quite a wide margin. They argue that this is largely a result of people now working remotely.

  But this rise in demand — at least according to the above data — appears to have started in the second half of 2019. So I think a few more data points would be helpful in understanding what’s really going on. Is what we’re seeing more about acceleration than about causation? And what does this look like a year from now?

  Chart: Redfin

  2021.03.20