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.
Well this is interesting, yet not surprising: According to RBC’s annual “Home Ownership Poll”, three out of every five respondents (so nearly 60%) said that location is more important than buying a larger home. Now, there’s only so much you can glean from a single survey question, but the overarching sense is that people’s home-buying attitudes are now starting to revert back to pre-pandemic levels.
Other evidence includes how quickly urban residential rents/prices have bounced back and, in many cases, now exceed their pre-pandemic levels. Below is a chart from the WSJ showing residential net-effective median rent prices in Manhattan. The low came in November 2020 when the median rent price hit $2,743 per month. But today it is well over $3,500, which is the highest it has been in a decade.
Certain aspects of how we will continue to live and work in our cities is admittedly still evolving (see my recent post on office utilization). But part of our pandemic narrative was that location was no longer going to matter, or at least not matter nearly as much. New York City, to give just one example, had died forever. But that was obviously bullshit. And what we are seeing in the residential space is an important leading indicator. Location always matters.
We all know that inflation is a thing right now. Prices are rising. One way businesses can choose to respond to this is through something called “shrinkflation”, which the Financial Times writes about here. The idea behind shrinkflation is that, instead of just raising end prices to absorb higher costs, you instead shrink or reduce your product or service offering. Of course, you could also do a combination of both things: increase your price and shrink your offering.
This shrinking can take many forms. A few less chips in your bag. A slightly smaller chocolate bar. Smaller food portions at the restaurant. Or maybe opt-in room service for your hotel room. It can also take the form of less space. Average apartment sizes in most big cities have trended downward over the years for this exact same reason. Developers are working to maintain some kind affordability in the face of rising costs.
I think a lot of people like to scoff at these sorts of practices. Why can’t we just build bigger family-sized suites? But the reality is that it is being driven by real market constraints. Without something giving, like suite sizes, urban housing would be multiples less affordable compared to current levels. The developers I know don’t have any sort of deep-rooted philosophical aversion to selling 5,000 square foot estates in the sky. The problem is simply that most buyers and renters won’t like the sticker price.
Past performance, we are often told, is not necessarily indicative of future results. At the same time, history has a funny way of repeating itself. I recently stumbled upon this research paper by Marc Francke (University of Amsterdam) and Matthijs Korevaar (Erasmus School of Economics) looking at the impact of pandemics on housing markets. More specifically, it looks at the impacts of the bubonic plague on 17th-century Amsterdam and of cholera on 19th-century Paris. Here’s an excerpt that summarizes what they found:
Our analyses for both cities point to substantial impacts of pandemics on property prices. We find that sales prices respond negatively to outbreaks, in particular in heavily affected areas, and that responses are short-lived, with the effects on sale prices being particularly significant in the first six months of an epidemic. Evidence from aggregate house and rent price indices suggests a smaller negative impact on rent prices. Amsterdam and Paris were very resilient to these outbreaks, with population and house price growth quickly reverting to prior trends.
This paper was first published at the beginning of 2021. A lot has changed since then and, in some ways, their findings now seem obvious. There was still a great deal of uncertainty in the market 12 months ago. While it seems like eons ago, I remember our team having discussions around when would be the right time to launch sales for One Delisle. Of course, 2021 turned out to be a record-setting year for housing and that includes the core/urban housing that the media was quick to write off at the onset of COVID.
This is not to say that certain things haven’t changed or that there won’t be further changes — both positive and negative — that come out of this. To give one just example, we all continue to hear anecdotal evidence that a lot of tech talent would now prefer to be in cities like Miami over San Francisco. (I’m not tech talent, but this would be my strong preference.) Did the pandemic help fuel this? Probably. It opened a door for the people who no longer wanted to live in a city with such a supply-constrained housing market. (I’m sure there were other reasons, too.)
These things, of course, happen. Cities are powerfully resilient, but they still need to compete. The bigger point is that cities continue to be our greatest centers of opportunity. And here we have centuries of data and housing records to support the fact that opportunity is both a powerful motivator and a centralizing force for urbanization. This is true even in the face of things like pestilence.
Happy new year, everyone. I think there’s a lot to look forward to in 2022, including far less talk about pandemics and hopefully far more talk of places like Miami.
He starts off by saying that housing is a bitch, which is just him saying that urban housing is a difficult problem to solve. A truism for this audience.
He doesn’t profess to have all of the answers, but he does write a thoughtful piece that covers, among other things: the “market urbanist” (supply-side) solution to solving housing affordability, the reasons why the “housing cartel” will never approve of this, and the inherent contradiction between housing as an investment and housing as a sustainably affordable good.
He also offers up Singapore and Germany as examples of two very different housing markets. It reminded me of a tweet I retweeted this morning which shows Germany as having the 2nd lowest homeownership rate (45%) among OECD countries.
