New build homes near impossible to make affordable if land prices are high

There is a lot of discussion today in the media around how unaffordable housing is in Vancouver, Toronto and other major cities. As anyone who deals with real estate knows, it costs about the same amount to build a home in most communities and the difference in the cost of a house in Vancouver versus any other community is in the cost of the land.

Municipal fees and delayed approvals also play a role – both in real costs and in paying interest to hold your project for sometimes years while a city grinds through the approval process, however the biggest cost is in the land.

If a building lot in Nanaimo costs $200,000 and the equivalent lot in Vancouver costs $800,000, then the cost of the final home will have at least a $600,000 difference.  If Vancouver’s approval system takes 1 year to get the home approved and Nanaimo takes 4 months, then there is also an 8 month interest cost differential for holding the land, as well as the difference in municipal fees (DCCs, CACs, etc…)

From this point of view, the possibility of any government actually lowering the costs of new build housing to be remotely “affordable” for most wage earners in these expensive cities is essentially impossible.

Outright massive subsidies from government for fully managed social housing is pretty much the only way because the cost of land has to be written down significantly.   Cutting all municipal fees and driving developers to move profit from one group of homes onto the others  in order to bring a few “affordable homes” into a new build project will only lower the cost of the “affordable homes” by maybe 10-20%.  For a town where a basic 3-bedroom townhouse starts at $600,000 or more, that means it will still cost $500,000 to just buy a basic starter family townhouse.  I don’t think many people think a half million dollars for a small home and a tiny yard is “affordable.”

Ironically, by trying to create a few more affordable homes, the developer will then have move the extra costs from those onto the market units and drive their prices up – which will have an impact on the prices all around the larger neighbourhood as well, due to how land values are calculated through BC Assessments and the real estate market.

Academic economists have spun a tail to municipalities that there is a cap on what the market will pay and that therefore, municipal charges and costly delays just come out of the land, but there is no statistical evidence to support this reality – and lot to challenge of it.  Land owners do not lower the price of their land if municipalities increase their fees. Market forces as proposed by these economists only apply when a seller “has to sell”.  Most land owners do not have to sell and they will sit on their land for years in some cases hoping to get top dollar.   In order to make a new build project financeable, the developer must then simply raise the  price.

How many times have we all said that Vancouver housing prices have to have peaked – and then last year they went up over 25% again.  The housing prices will change the demographic make  up of “who can afford to pay the new price” but if the city offers enough amenities and jobs, people will pay whatever it costs to live there.  It may mean they cannot own but they will rent – and investors will buy the units.

All this being said, new build homes are essential to creating affordable housing because they increase the total supply.  However, with serious constraints on land availability, we can only bring so many new homes on within a dense city.

If some neighbourhoods get priced out of the range of many buyers, then its wiser for a community to invest in rapid transit to connect  edge city areas with much cheaper land – as this way we can actually access a lot of new land and bring on supply to equal demand and thereby actually work with market realities to address housing costs.  This approach can be done in a transit-supportive manner and doesn’t have to entail the negative chimera of “sprawl.”  Interestingly, more complete compact communities only become so when there is significant demand for multifamily homes – which usually happens when single fmaily land is used up and getting more expensive.  So using transit to increase pressure to grow on edge cities can cause them to become more complete and sustainable over time.

Affordable housing programs should therefore be focused not on subsidizing the “purchase” of new homes for a few lucky individuals who get into the program, but rather on subsidizing the rents of individuals who live in existing homes in existing neighbourhoods, under specific criteria that addresses the values of our society. Social diversity in new neighbourhoods then needs to be addressed by bringing on housing diversity so the housing stock supports social diversity over its entire life.

Any healthy neighbourhood needs a broad diversity of individuals living there from all stages of life – for both social health and economic health, as we need individuals to work in a broad range of jobs, from unskilled to highly skilled.  Where one draws the “boundary” of a project or neighbourhood is also a key consideration, but it can be quite large and it actually matters less so long as people from all subgroups are interacting daily in the public realm in that community.

With respect to the serious opportunity that the federal Liberals are working on today for housing affordability in Vancouver, they should interestingly focus more in transit infrastructure than housing itself – and support massive investments in transit to Surrey, Coquitlam, Langley and beyond. The City itself should also support the densest housing it can in every neighbourhood to ensure that the core housing stock continues to support social diversity whether people own or rent.

If its too expensive to own and the financial plan of a family includes owning their own home, then we’re ready to welcome these fine urbanites to Nanaimo, Kelowna, Kamloops, Chilliwack or other towns in BC – to bring their talents, ideas, businesses and energy to our towns.  Vancouver is not the center of the universe!  (I used to be a City of Vancouver planner and I now live in Nanaimo!)

Here is an interesting blog post related to this topic from Discovery’s Mythbusters.  http://cityobservatory.org/urban-myth-busting-new-rental-housing-and-median-income-households/