Month: November 2021

Video: supply skepticism

A short video by @OhTheUrbanity on supply skepticism, with references to research. Why is housing in Vancouver (and Toronto) so expensive? Short answer: because it's hard to build more housing.

High home prices drive new construction, not vice versa

Where home prices are high, people want to build more, and you get more new construction. Where home prices are low, you get less new construction. There's a lot more new construction in Vancouver than in Saskatoon. 

In Vancouver, quite a few people think it's the other way around, that new construction causes high prices.

A recent exchange on Reddit:

Lazy-Contribution-50: My thesis is that rezoning in Vancouver in this way will drive prices of housing up and not down. Feel free to disagree, but given how things have gone here the past decade I don’t think that’s an unreasonable assumption.

russilwvong: Sorry, you've got cause and effect 100% backwards. There's so much rezoning and new construction in Vancouver because prices are high, not the other way around.

Lazy-Contribution-50: So why haven’t prices dropped? Every new build condo building sells their units for more and more each time.

russilwvong: Home prices reflect rents (basically the value of the future stream of rents you can either collect or not have to pay), plus there's speculation on top of that.

Rents are high because vacancy rates in Vancouver are low, despite the current pace of new construction.

Vacancy rates are low because there's a mismatch between jobs and housing: we're adding jobs faster than we're adding housing.

Streamlining Rental decision postponed to December 14

Council's decision on the Streamlining Rental Plan was on the agenda for today's council meeting, as unfinished business, but the agenda was too full to get through it today, and the next council meeting also has a full agenda. So the decision has been rescheduled for December 14.

Streamlining Rental public hearing: round three

The Streamlining Rental public hearing continued for a third night, with council extending the session until midnight to hear from all the remaining speakers on the list (#50 to #115).

Council will take up the debate and vote as unfinished business at their next meeting, on Tuesday November 16. (There was some contention about this at the end of the meeting - previously the next session had been scheduled for December 14.)

Supporters talked about how brutal the rental market is, the sub-standard housing conditions that people are living in, and how many younger people are being pushed out. Opponents talked about neighbourhood impacts (status quo bias).

One particularly interesting aspect of the public hearing: opponents asked how building new market-rate housing would help with affordability. There's three answers:

  • From the MacPhail Report: new housing frees up old housing. It's like musical chairs. Whenever a new building opens, every higher-income renter who moves in creates a vacancy in an older, cheaper rental, and the increasing vacancies push down rents.
  • Renting, even at market rents (e.g. $2000/month for a 1 BR on the east side), is far more affordable than owning. $2000/month is affordable for a household income of $80,000. A $1.5 million half-duplex requires a household income of $335,000 to be affordable - who on earth can afford that?
  • The Streamlining Rental Plan, particularly the C-2 rezoning, makes non-profit rental projects easier and faster as well, since they can build more rental homes on the same land.

List of speakers (may be incomplete, and not all spellings may be correct):

  • 5:50 Peter Waldkirch (support)
  • 11:23 Aaron Wilson (support)
  • 13:20 Serena Jackson (support)
  • 15:30 Nathan Edelson
  • 20:35 Julius Csotonyi
  • 26:05 Maureen Charron (oppose)
  • 31:25 Cameron Thorn, Strand (support)
  • 51:05 Gayle Gavin (oppose)
  • 58:35 Nathan Hawkens (support)
  • 1:10:20 Michael Wiebe, no relation (support)
  • 1:13:00 Mary Davison (oppose)
  • 1:19:00 Jenny McClean (oppose)
  • 1:22:19 Mary Downe (oppose)
  • 1:27:32 Evan Allegretto, Intercorp (support)
  • 1:44:55 Naomi Steinberg
  • 1:50:22 Carol Volkart (oppose)
  • 2:09:00 Neil Robertson, Stuart Howard Architects (support)
  • 2:21:11 Larry Benge, West Kitsilano Residents Association (oppose)
  • 2:32:43 Scott de Lange Boom (support)
  • 2:38:17 Albert Huang, Terra Housing (support)
  • 3:01:19 Peter Gajecki (oppose)
  • 3:05:29 Maximillian Lepur (support)
  • 3:08:10 Arsalan Shayan (support)
  • 3:11:19 Sina Mohebiany (support)
  • 3:14:53 Colin McGrath (oppose)
  • 3:24:40 Elliot Hoyt (support)
  • 3:27:15 Clara Prager (support)
  • 3:31:55 Surabhi Shakkarwar (support)
  • 3:35:00 Taizo Yamamoto, architect (support)
  • 3:53:07 Erica Weiss (oppose)
  • 3:58:25 Sandra Hayden (oppose)
  • 4:00:25 Philippe Le Billon (oppose)
  • 4:06:21 Richard Campbell (support)
  • 4:10:13 Alex Boston (support)
  • 4:15:35 Ben Wells (support)
  • 4:18:03 Karen Bakker (oppose)
  • 4:23:38 Jamie Vaughan (support)
  • 4:28:11 Penny Noble (oppose)
  • 4:33:38 Jan Alexander (oppose)
  • 4:39:24 Barbara May (support)
  • 4:42:54 Michael Butler (support)
  • 4:45:54 Victor Rizov (support)
  • 4:51:16 Max Kittner (support)
  • 4:52:05 Leopold Wambersie (support)
  • 4:55:00 Elizabeth Murphy (oppose)
  • 5:05:32 Kit Sauder (support)
  • 5:11:53 Owen Brady (support)
  • 5:18:05 John Guremel (support)
  • 5:20:10 Ethan Whiting (support)
  • 5:22:08 Tuba Sonmez (support)
  • 5:23:09 Devon Hussack (support)
  • 5:27:39 Richard Nantel (oppose)

Summary of opposition arguments

To summarize the two major arguments against building more rental housing:

1. Vancouver is over-crowded already. High housing costs are just the price of living in Vancouver, and it's actually a good thing because it keeps newcomers out. (Example: Colleen Hardwick.) This is the "we're full" argument.

The counter-argument is that high housing costs make us all poorer, pushing out younger and lower-income people especially. Renters have to deal with low vacancies, high rents, and insecurity - if they lose their housing, they're going to have to pay 20% more overnight, or move further out. First-time homebuyers are having to borrow enormous amounts of money. Even for long-time homeowners it's not great: they have massive gains on paper, but they don't benefit from them at all unless they sell and move. They feel like they're getting pushed out as well. Eventually all their neighbours will be replaced with rich people.

We can have a city with lots of housing and a range of people of different ages and incomes; or we can have a city with scarce, expensive housing where only rich people can really afford to live here, even they have to pay a high price, and everyone else finds it increasingly difficult to hang on.

2. A completely different argument: building more market rental housing isn't going to help with the affordability problem. What we need to do is build more rentals that are affordable for lower-income renters. (Example: Jean Swanson.)

The counter-argument is that blocking more market rental housing doesn't help to provide any more affordable rental housing, and makes the problem worse. We have lots of job openings in Vancouver, and as newcomers arrive to fill high-paid jobs, if there isn't any market rental housing available, they'll end up in the older, cheaper rentals, pushing lower-income renters out.

(There's plenty of recent studies showing that building more market rentals does in fact help with affordability, through "vacancy chains," but they tend to get dismissed as "vacancy trickle-down theory.")

In addition, the current Streamlining Rental policy being considered by council makes affordable rental projects easier and faster (not just market rental projects): in C-2 zones, they can build more rentals on the same amount of land, without having to go through the 12-18 month process of rezoning.

The Economic Implications of Housing Supply (Glaeser and Gyourko, 2018)

How house prices are determined - especially in Vancouver - is something of a mystery to me, so I took the time to read through this US paper. Some particularly interesting points:

  • In a city like Atlanta, where housing supply is pretty responsive, you see housing starts vary a lot (sometimes up, sometimes down), while house prices are stable. In a city like San Francisco, where housing supply is inelastic, what you see is that housing starts are stuck at a low level, while house prices can rise (and fall) rapidly. See Figure 2 above.

  • In a city like Atlanta, house prices reflect the "minimum profitable production cost": land is about 20% of the cost, construction cost (which doesn't vary that much from one location to the next) is about 80%, and there's a 17% gross margin. "This suggests that an efficient housing market should be able to supply economy-quality single-family housing with 2,000 sq ft of living space for around US$200,000 in low construction cost markets and for little more than US$265,000 in the highest construction cost markets." (p. 10)

  • As of 2013, 16% of metro areas in the US had median price-to-cost ratios of over 1.25. So in most metro areas, prices were reasonable. But the high-cost areas include some of the most productive labour markets (like New York, San Francisco, and San Jose), so they have an outsize impact on the economy. (p. 14)

  • "This gap between price and cost seems to reflect the influence of regulation, not the scarcity value arising from a purely physical or geographic limitation on the supply of land. For example, in Glaeser, Gyourko, and Saks (2005), we show that the cost of Manhattan apartments are far higher than marginal construction costs, and more apartments could readily be delivered by building up without using more land. This and other research we have done (Glaeser and Gyourko 2003) also finds that land is worth far more when it sits under a new home than when it extends the lot of an existing home, which is also most compatible with a view that the limitation is related to permits, not acreage per se." (p. 14)

San Francisco (p. 16):

"San Francisco represents the third type of housing market in which the price of housing is considerably above the minimum profitable production cost. In this situation, strict regulation of housing construction means developers in this type of market cannot bring on new supply even though it looks as if they could earn super-normal profits if they did. Unlike the graph in Figure 1, the supply schedule beyond the kink is upward sloping" - in other words supply isn't very elastic, and as demand increases, prices rise faster than the quantity of housing.

"As Figure 2C shows, the median house price in this market has been well above the minimum profitable production cost for the past three decades and reached dramatic heights at the peak of the last housing boom in 2005. However, permitting activity did not increase at all over the eight-year span from 1997 to 2005, even though the median price-to-cost ratio increased from below 2 to over 5." High prices didn't result in much more building.

"San Francisco is a relatively high physical construction cost market, but that is not what makes its homes cost so much. The median housing unit in this market contained 1900 square feet, and the physical construction costs for this unit based on RSMeans data were $192,938, so the per square foot cost of the (presumed modest quality) structure was just over $100 per square foot, which is one of the most expensive construction cost markets in the United States. Our earlier assumption that land is 20 percent of the physical-cost-plus-land total provides an estimated land price of $48,235. Stated differently, that is what we think the underlying land would cost in a relatively unregulated residential development market. Add the builder’s 17 percent gross margin, and the minimum profitable production cost for this house is $281,690. This compares with an actual price of the median house of $800,000 (and thus a price-to-cost ratio of 2.84). Clearly, San Francisco housing developers cannot actually earn super-normal profits on the margin. Instead, what makes San Francisco housing so expensive is the bidding up of land values. Our formula suggests that the land underlying this particular modest-quality home cost about $490,000 — roughly 10 times the amount presumed for our underlying calculations of the minimum profitable production cost."

Why homeowners don't feel rich (p. 20):

"... housing wealth is different from other forms of wealth because rising prices both increase the financial value of an asset and the cost of living. An infinitely lived homeowner who has no intention of moving and is not credit-constrained would be no better off if her home doubled in value and no worse off if her home value declined. The asset value increase exactly offsets the rising cost of living (Sinai and Souleles 2005). This logic explains why home-rich New Yorkers or Parisians may not feel privileged: if they want to continue living in their homes, sky-high housing values do them little good."

Resistance to change (p. 27):

"If the welfare and output gains from reducing regulation of housing construction are large, then why don’t we see more policy interventions to permit more building in markets such as San Francisco? The great challenge facing attempts to loosen local housing restrictions is that existing homeowners do not want more affordable homes: they want the value of their asset to cost more, not less. They also may not like the idea that new housing will bring in more people."

In general, people dislike change. In Vancouver, most homeowners like their neighbourhood the way it is - that's why they live there! But if you ask everyone, support for rental apartment buildings is surprisingly high. When Burnaby ran a workshop with randomly selected residents, 70% supported four- and six-story apartment buildings in residential neighbourhoods. A poll in Vancouver found similar results. So I'm hopeful that in the medium to long term we'll be able to build enough housing (especially rental housing) to bring down housing costs.

Streamlining Rental public hearing: round two

The Streamlining Rental public hearing continued tonight, with another four hours of presentations from members of the public (#11 to #49 on the speaker list). There's now 89 registered speakers, so it'll probably take another two evenings to get to a vote.

I was speaker #11. My presentation:

Hi, my name is Russil Wvong. I'm a resident and homeowner in Vancouver, and I strongly support the Streamlining Rental proposal. I don't work in development or real estate, and I'm not calling on behalf of anyone who does. 

The Streamlining Rental proposal is consistent with council's goal of building more rentals, not just condos. In particular, making six-storey rentals legal in the C-2 zones, not just four-storey condos, should make it easier and faster to build rentals. For the last three years, whenever there's been a rezoning for an individual rental project, I think council has always voted yes in the end, it just takes a long time. No matter how small the project is, both supporters and opponents are afraid of being outnumbered, so they organize more and more people to speak. If you approve the C-2 rezoning, you'll be approving 2700 future rental units at once, instead of having to approve each project one at a time.

Fundamentally, lack of housing is making us poorer. Prices reflect scarcity; when we don't have enough housing, rents are high. After you pay for housing in Vancouver, you have much less left over. I can't count the number of times I've heard someone say that they have a six-figure income, but in Vancouver they still feel poor. Everyone feels stretched to the limit, like there's no way they can pay for a parking permit, or higher property taxes.

Right now we've got a severe mismatch between jobs and housing. It's not actually the weather that draws people to Vancouver, it's jobs. Unless we add housing faster than we're adding jobs, the situation will get worse and worse. Councillor Fry mentioned that Amazon alone has openings right now for 500 tech jobs in Vancouver. All of those people will need a place to live. They can't afford to buy a place, but they can afford market rents. If there's no available new rentals, they'll end up in the older, cheaper rentals, and a corresponding number of lower-income renters will get pushed out, or worse, into poverty and homelessness. It's like musical chairs, with not enough chairs.

I know a lot of people are skeptical that adding more housing will actually bring down rents. So let me put it this way: delaying more housing, while we continue to add more jobs, is making the situation worse.

Even long-time homeowners feel like they're getting pushed out. They have massive gains on paper, but they only benefit if they sell and move somewhere else. That's a huge cost, since most people like where they live - that's why they live there! So the current housing shortage isn't actually that great for homeowners, either.

There's other costs for long-time homeowners as well. Even if they're okay, they worry about where their kids are going to live, and if they're going to see their grandchildren. It's bad for the health-care system when hospitals can't hire nurses, because they can't afford to live close to work.

So I would describe the current situation as bad all around. For renters, they face high rents and insecurity. They're terrified of losing their housing and getting forced out. For first-time homebuyers, they face huge barriers to owning. Employers have a hard time finding workers. Even for long-time homeowners, it's a bad situation. Lack of housing is making pretty much everyone worse off.

I understand why some councillors are hesitating to make this decision. You can't make everyone happy. Lack of housing in Vancouver is a huge problem, and to fix it, we need to build more, especially rentals. But at the same time, you can see from the correspondence that a significant number of people are unhappy about the impact of building more housing. Of course it's impossible to build more and not build more at the same time. In the end, council has to make a decision.

As you heard from Helen Lui, these changes would benefit affordable housing projects as well as market rental projects. There's been a real cost to the delays, with affordable housing lost.

I don't know if this helps you or not, but majority public opinion is solidly on the side of more housing. A 2019 poll of Vancouver residents found that 70% wanted more housing, and only 20% were opposed to six-storey buildings in their own neighbourhoods.

Thank you for your time.

List of speakers (spellings may be incorrect):

Streamlining Rental public hearing: round one

The public hearing for the Streamlining Rental policy ran from 6 pm to 10 pm tonight, with the staff presentation, questions from council, and the first 10 speakers (out of 77). The next round will be Thursday evening at 6 pm; in four hours, it should be possible to get through 20-30 speakers. I'm speaker #11.

A couple highlights:

  • Helen Lui (speaker #2) - works in affordable housing, feasibility of two projects already badly affected by delays
  • Michael Mortensen (speaker #3) - talked about the need for rentals and the economics on rental projects; mentioned that he studied with Walter Hardwick, a developer

List of speakers:

  • 17:50 Staff presentation by Edna Cho
  • 41:00 Questions from council to staff
  • 2:15:09 Marc White, co-chair of Seniors' Advisory Committee (wants more sweeping changes)
  • 2:39:25 David Sander, Hollyburn Properties (support)
  • 2:46:09 Helen Lui, affordable housing development (support)
  • 3:00:00 Michael Mortensen, Liveable City Planning (support)
  • 3:24:20 Michael Brown, developer (support)
  • 3:28:30 Megan Pohanka, Catalyst Community Development (support)
  • 3:34:55 Craig Jorgensen (recommend changes)
  • 3:37:37 Roberta Olenick (oppose)
  • 3:42:55 Jeremy Stone (wants more sweeping changes)
  • 3:47:40 Melissa Lem, Canadian Association of Physicians for the Environment (support)
  • 3:57:50 Tyman Stewart (oppose)