Housing Bubble II: The Quest To Build Enough Homes Where People Actually Need Them

[suburbanite]

Originally Posted by Innsertnamehere

Excellent video breaking down how housing costs have increased over the last 20 years.

It basically breaks down to 4 items:

1. Land
2. Regulation
3. Construction Costs
4. Taxes

1. Land costs are up about 1000% from 2004. The podcast gives an example of suburban development land in London, ON in 2004 - it cost $100,000 an acre. Today it is $1,000,000. This is mostly attributable to tightening land use regulations, particularly anti-sprawl measures. So on a detached home on a standard 100'x36' lot, that's about $105,000 in additional costs once you account for net development area losses in a typical subdivision (usually about 70% from what I recall).

2. Regulation - as alluded to in the land cost input, regulation is a huge cost driver. limited zoning permissions drive land costs sky high, and delays in permitting cause interest to rack up on development loans, leading to higher costs for end buyers. Most of this cost comes out in land cost, but also in extra interest payments. A permit process of 3 years (aggressive for new subdivisions) with an initial $100k in land and $100k in soft costs (engineering, etc.), carried on a 7% construction loan means about $40,000 in additional costs to a home buyer vs. "instant" approval. In 2004 approvals were a bit quicker, maybe 2 years - but lower land costs meant the impact was smaller - perhaps $10,000. So a net increase of $30,000.

3. Construction costs are up around 125% since 2004, instead of 50% for inflation. This is partially attributable to higher development standards discussed on this board related to better energy efficiency, etc., but also base labour and material costs. While this component has experienced the slowest increases in costs on a percentage basis, it is the single largest line item for a developer so can have an outsized impact. Finding ways to increase productivity in the construction sector is important to try to break this pattern. A 125% increase in housing construction cost vs. an inflation-adjusted 50% increase would account for about $230,000 in additional costs for a 2,000sf detached home compared to if construction costs had increased at inflation (~$175/ft construction cost in 2004 vs. ~$300/ft construction cost today for base-level suburban housing).

4. Taxes. Development Charges are also up around 1000% since 2004. In 2004, the DC for a detached home in London was $5,000. Today it is $47,000. This number is apparently approaching $200,000 in some parts of York Region. Not only that, but developers pay interest for several years on this cost and then end buyers pay HST and Land Transfer Tax on it as well, meaning that for every $50,000 DC London gets, the end buyer can be paying as much as $75,000 for it in their end sale price. End price impact from a DC charge for a detached home in London over 2004 is about $50,000.

There is also increased land transfer taxes from 2004, as well as GST rebates which have not increased with inflation. New homes purchased for less than $450,000 get a GST rebate, but almost no new homes are sold for that price any longer which means it's effectively a tax increase. Land Transfer and HST on a new home in London today is about $100,000 - about $85,000 more than paid in 2004.

They briefly discuss developer profits in this as well, identifying that profit margins remain largely the same as 20 years ago, albeit on a larger base cost. They identify that there is not much room to reduce developer profit as banks will deem projects too risky and not provide loans and that investors will direct capital to other investments if a minimum return cannot be earned.

These costs break down roughly as:

1. $105,000 in additional land costs
2. $30,000 in additional regulation costs
3. $230,000 in additional construction costs
4. $135,000 in additional tax costs

Total: $500,000 in additional costs. Which is why a $200,000 detached home sold in London in 2004 sells for $700,000 today.

Really interesting and I think shows a way forward on many items:

1. liberalize zoning and entitlements to reduce land costs. IMO, this also means walking back many "anti-sprawl" measures. The Ford government has walked many of these back now with the deletion of the Growth Plan at the provincial level, but many municipalities seem deadset on continuing to enforce very strict urban boundary regulations which heavily hurt housing affordability. Zoning liberalization within cities will also be helpful.

2. Reduce regulations and permitting time. Streamline approvals processes - progress is already being made on this front but there is much more work to do to liberalize zoning and simplifying site plan approval timelines.

3. Finding ways to increase development productivity is critical. Modular housing is suggested as one option to be explored. I'm not sure how much room there is to increase productivity in housing production to be honest though, I wonder if we would be better off at strategic reviews of building codes to reduce construction costs.

4. Reduce DCs and other taxes. The introduction of HST exemptions on rental housing is identified as a great policy - exempting new homes in general from HST as well would be a massive help as would shifting DCs to be payable at occupancy to reduce interest charges without impacting capital flows to municipalities for infrastructure.

Good summary. "Development land" is a very broad definition, and no one typically sells serviced lots on a per acre basis except for individual private sellers which aren't really indicative of the costs to deliver housing on a large scale. This would lead me to believe that the land comps they are looking at still need to account for the cost of servicing and developer profit before you can infer the actual impact in price to a homebuyer. A smaller market like London has experienced a smaller gross increase attributable to the cost of land since it started at a significantly lower level. The effect in the GTA is so significant that the increases attributable to land far outweigh the increases in hard construction costs.

For example, if we look at actual lot sales that account for all of the costs to deliver a shovel ready lot for a detached home, the increases are insane.

This community was largely built on 158 lots that were purchased in 2003 for $24 million, about $150,000 per lot. Mostly 40-50 footers by the looks of it.

https://www.google.com/maps/@43.9109...oASAFQAw%3D%3D

Less than 5km away, we hold a portion of the debt on large development site which is proceeding with servicing. The project is underwritten at $1,550,000 in revenue per 50 foot lot. That's at an internally agreed upon transfer price between an integrated developer/builder. Fair market value could be higher. Obviously total lot costs have the DCs baked in to them, as the developer pays a portion of levies upon subdivision registration, and typically gives a rebate to the builder for the portion due upon building permits. Total DCs for the project are about $130,000 per lot. Even if you strip that entire amount out, that's an increase of $1,270,000 in the cost of a comparable detached lot between 2004 and 2024. For a 3,500 SF home, the increase in cost attributable to hard construction costs would be something like $425,000.

I suspect we will only see this gap widen as material costs stabilize but land use policy continues to deter greenfield construction.

[Innsertnamehere]

yes, exactly. London is outside of the Greenbelt and Growth Plan area so anti-sprawl policies have been a lot less restrictive, coming only through municipal policies. I'm far from an expert on London's Official Plan, but I imagine there are policies requiring higher greenfield densities at a minimum over 2004. Ultimately we are talking about a $700,000sf detached - you can barely get a condo for that price in the GTA. Your example seems to be indicating a final sale price for those development lots around, what, $2,500,000? That was probably a $3-400,000 house for those 2004 examples at the time.

Land cost impacts in the GTA for low rise housing are by far the largest drivers of costs for new housing. The problem is that until about 5-7 years ago, cost impacts were primarily on low-rise housing and condos remained relatively affordable. Land costs are starting to creep into even intensification projects now though through a lack of soft sites in prime areas (all the parking lots downtown are developed now!), as are DCs and tax burdens.. so everything is becoming unaffordable.

The detached home in the GTA is effectively dead at this point. They represent only about 8% of housing starts in the GTA compared to nearly 45% in 2003.

[MolsonExport]

Originally Posted by Innsertnamehere

• Video Link

Excellent video breaking down how housing costs have increased over the last 20 years.

It basically breaks down to 4 items:

1. Land
2. Regulation
3. Construction Costs
4. Taxes

1. Land costs are up about 1000% from 2004. The podcast gives an example of suburban development land in London, ON in 2004 - it cost $100,000 an acre. Today it is $1,000,000. This is mostly attributable to tightening land use regulations, particularly anti-sprawl measures. So on a detached home on a standard 100'x36' lot, that's about $105,000 in additional costs once you account for net development area losses in a typical subdivision (usually about 70% from what I recall).

2. Regulation - as alluded to in the land cost input, regulation is a huge cost driver. limited zoning permissions drive land costs sky high, and delays in permitting cause interest to rack up on development loans, leading to higher costs for end buyers. Most of this cost comes out in land cost, but also in extra interest payments. A permit process of 3 years (aggressive for new subdivisions) with an initial $100k in land and $100k in soft costs (engineering, etc.), carried on a 7% construction loan means about $40,000 in additional costs to a home buyer vs. "instant" approval. In 2004 approvals were a bit quicker, maybe 2 years - but lower land costs meant the impact was smaller - perhaps $10,000. So a net increase of $30,000.

3. Construction costs are up around 125% since 2004, instead of 50% for inflation. This is partially attributable to higher development standards discussed on this board related to better energy efficiency, etc., but also base labour and material costs. While this component has experienced the slowest increases in costs on a percentage basis, it is the single largest line item for a developer so can have an outsized impact. Finding ways to increase productivity in the construction sector is important to try to break this pattern. A 125% increase in housing construction cost vs. an inflation-adjusted 50% increase would account for about $230,000 in additional costs for a 2,000sf detached home compared to if construction costs had increased at inflation (~$175/ft construction cost in 2004 vs. ~$300/ft construction cost today for base-level suburban housing).

4. Taxes. Development Charges are also up around 1000% since 2004. In 2004, the DC for a detached home in London was $5,000. Today it is $47,000. This number is apparently approaching $200,000 in some parts of York Region. Not only that, but developers pay interest for several years on this cost and then end buyers pay HST and Land Transfer Tax on it as well, meaning that for every $50,000 DC London gets, the end buyer can be paying as much as $75,000 for it in their end sale price. End price impact from a DC charge for a detached home in London over 2004 is about $50,000.

There is also increased land transfer taxes from 2004, as well as GST rebates which have not increased with inflation. New homes purchased for less than $450,000 get a GST rebate, but almost no new homes are sold for that price any longer which means it's effectively a tax increase. Land Transfer and HST on a new home in London today is about $100,000 - about $85,000 more than paid in 2004.

They briefly discuss developer profits in this as well, identifying that profit margins remain largely the same as 20 years ago, albeit on a larger base cost. They identify that there is not much room to reduce developer profit as banks will deem projects too risky and not provide loans and that investors will direct capital to other investments if a minimum return cannot be earned.

These costs break down roughly as:

1. $105,000 in additional land costs
2. $30,000 in additional regulation costs
3. $230,000 in additional construction costs
4. $135,000 in additional tax costs

Total: $500,000 in additional costs. Which is why a $200,000 detached home sold in London in 2004 sells for $700,000 today.

Really interesting and I think shows a way forward on many items:

1. liberalize zoning and entitlements to reduce land costs. IMO, this also means walking back many "anti-sprawl" measures. The Ford government has walked many of these back now with the deletion of the Growth Plan at the provincial level, but many municipalities seem deadset on continuing to enforce very strict urban boundary regulations which heavily hurt housing affordability. Zoning liberalization within cities will also be helpful.

2. Reduce regulations and permitting time. Streamline approvals processes - progress is already being made on this front but there is much more work to do to liberalize zoning and simplifying site plan approval timelines.

3. Finding ways to increase development productivity is critical. Modular housing is suggested as one option to be explored. I'm not sure how much room there is to increase productivity in housing production to be honest though, I wonder if we would be better off at strategic reviews of building codes to reduce construction costs.

4. Reduce DCs and other taxes. The introduction of HST exemptions on rental housing is identified as a great policy - exempting new homes in general from HST as well would be a massive help as would shifting DCs to be payable at occupancy to reduce interest charges without impacting capital flows to municipalities for infrastructure.

Great post and succinct summary.

[suburbanite]

Originally Posted by Innsertnamehere

yes, exactly. London is outside of the Greenbelt and Growth Plan area so anti-sprawl policies have been a lot less restrictive, coming only through municipal policies. I'm far from an expert on London's Official Plan, but I imagine there are policies requiring higher greenfield densities at a minimum over 2004. Ultimately we are talking about a $700,000sf detached - you can barely get a condo for that price in the GTA. Your example seems to be indicating a final sale price for those development lots around, what, $2,500,000? That was probably a $3-400,000 house for those 2004 examples at the time.

Land cost impacts in the GTA for low rise housing are by far the largest drivers of costs for new housing. The problem is that until about 5-7 years ago, cost impacts were primarily on low-rise housing and condos remained relatively affordable. Land costs are starting to creep into even intensification projects now though through a lack of soft sites in prime areas (all the parking lots downtown are developed now!), as are DCs and tax burdens.. so everything is becoming unaffordable.

The detached home in the GTA is effectively dead at this point. They represent only about 8% of housing starts in the GTA compared to nearly 45% in 2003.

Ya the 50 foot homes will probably start with a 3. New home sales in the area are slow though, so I wouldn't be surprised if they leak out the townhomes and 36 footers first. That being said, the lot transfer prices on the 20 foot townhome lots are like $980,000...

Prior to the interest rate hikes townhomes in the area were easily selling for $1.6 million. Just insane.

[ssiguy]

While it's true London doesn't have an official greenbelt [which I have never agreed with}, it does have an urban growth boundary and a official plan that encourages density. I think greenbelts have proven themselves to be complete failures and have made housing vastly more expensive than they need be.

I agree with certain areas being off bounds for development but not these huge swaths that have little to do with saving our agricultural land nor inhibiting sprawl. All they do is send sprawl leapfrogging over the boundaries greatly increasing travel times, makes transit less viable, and add to GHG emissions in the process.

This has happened in Vancouver where you have huge commuting distances due to the ALR while the agricultural land it is suppose to protect is shockingly unproductive.

[Build.It]

Excellent posts innsertnamehere. Thank you.

[MonkeyRonin]

Yes, great (and informative) discussion. The demoralizing part of it is that the more you peel back the layers of our housing crisis onion, the more it becomes clear that every layer is rotten: we're in the crisis we're in because we've made nearly every wrong decision on the housing front at every level of government by every party for several decades.

It's the culmination of many overlapping & competing layers of bad policy, which makes it much harder to fix than if were just about dealing with one or two big-ticket items. On their own, changing zoning rules or DCs or immigration policy or building codes or permitting won't solve the problem; and I'm not sure that there's the political will (or even ability at this point) to address all of the issues.

[P'tit Renard]

Originally Posted by MonkeyRonin

Yes, great (and informative) discussion. The demoralizing part of it is that the more you peel back the layers of our housing crisis onion, the more it becomes clear that every layer is rotten: we're in the crisis we're in because we've made nearly every wrong decision on the housing front at every level of government by every party for several decades.

It's the culmination of many overlapping & competing layers of bad policy, which makes it much harder to fix than if were just about dealing with one or two big-ticket items. On their own, changing zoning rules or DCs or immigration policy or building codes or permitting won't solve the problem; and I'm not sure that there's the political will (or even ability at this point) to address all of the issues.

At this point what's really needed is a hard reset of housing prices, a crash caused by external factors, that will force Canadians to reevaluate whether real estate should be treated as a financialized investment vehicle. Only then would there be more of an appetite to pass transformational housing reforms.

[niwell]

Yes there's always the overarching factor that no matter how much we tinker with policy around the edges the current financialization of the real estate sector remains a huge barrier to affordability. This applies on almost every front and has exacerbated all of the factors mentioned in the discussions above - if, for instance, massive amounts of land were opened up overnight prices may drop, but certainly not to the levels some are hoping. Of course this comes with the double-edged sword that a LOT of people will be underwater if any major upset to the cart happens.

[WarrenC12]

Cutting immigration would do it. We can't seem to solve the supply side, but when demand falls off the free market will work its magic.

[P'tit Renard]

Unfortunately, idiotic moves by Trudeau & Freeland like increasing the insured mortgage price cap to $1.5M (guaranteed by the federal government) has created perverse long term incentives that will encourage future governments to try again and again to run the immigration ponzi schemes to keep the music going. Anyone who cheers on this $1.5M increase basically wants the status quo to stay intact to protect their housing values.

[1overcosc]

Originally Posted by WarrenC12

Cutting immigration would do it. We can't seem to solve the supply side, but when demand falls off the free market will work its magic.

That will stave off a lot of the pain, and if we're limited to only doing one thing at one level of government, cutting immigration is probably the biggest one, I'd agree. But that alone won't make housing affordable. As Innsertnamehere pointed out in the video he linked, things like development fees, zoning restrictions, anti-sprawl rules, building codes, etc. add up to a world where no matter how low demand falls, you simply can't build a house for less than $600,000. Slashes immigration would reduce prices to that point pretty quickly but then the homebuilding industry would stall and stop building to prevent prices from falling below that level.

On the flip side of the equation, niwell is right that a big set of reforms intended to reduce supply costs will probably just get eaten up by increased demand without any reforms on the demand side.

All ends of the system need to be addressed:

1) Immigration needs to be cut back dramatically, in the short term perhaps even entirely;
2) Banking reforms made to limit excessive financialization;
3) Restrictions on speculative purchasing through tax policy;
4) Opening up of zoning rules and relaxation of sprawl limits to open up more area for development and allow as-of-right construction;
5) Reviews of building codes and energy rules to cut construction costs;
6) Eliminating DCs to cut construction costs;
7) Investment in training to create more construction workers to address labour supply.

Part of the problem is most people are only interested in the items from that list that match their preferred ideology. So old school leftists are going to grab at items 2, 3, and 7, and likely ignore the rest; mainstream conservatives are going to grab at items 5 and 6; cultural conservatives are going to grab at item 1 and maybe item 7, and so on. And it's cross-government as well; some of that list is municipal, some provincial, some federal.

If all 7 of these items were seriously addressed, there's also the fact that prices would actually crash. Which is good - that's what we want - but there's a lot of people who bought in recent years that would be very badly underwater. Some sort of carefully calibrated and limited bailout scheme is probably necessary. Maybe some sort of scheme where if you are underwater on your mortgage, you can sell your house to the CMHC for its current market value and the CMHC will write off the underwater portion, leaving you free to start again in the newly affordable market. Obviously there would have to be a rule ensuring that only the actual primary loan is eligible - folks underwater because they used their house as an ATM through HELOCs should not get this sort of bailout.

[YOWetal]

Originally Posted by P'tit Renard

Unfortunately, idiotic moves by Trudeau & Freeland like increasing the insured mortgage price cap to $1.5M (guaranteed by the federal government) has created perverse long term incentives that will encourage future governments to try again and again to run the immigration ponzi schemes to keep the music going. Anyone who cheers on this $1.5M increase basically wants the status quo to stay intact to protect their housing values.

This seems like an over-statement. The cap was clearly out of date. $1.5 Million is not a luxury house not worthy of insurance anymore. It will have very little effect in the gran scheme of things.

If the Conservatives panic when housing prices fall and juice the market with immigration that is on them. I think you are right that is it possible even probable but hope they have the fortitude to cut spending cut immigration and ride out the recession that would almost certainly trigger to get to a better place on the other side. Even if it means we throw them out of office.

[P'tit Renard]

Originally Posted by YOWetal

This seems like an over-statement. The cap was clearly out of date. $1.5 Million is not a luxury house not worthy of insurance anymore. It will have very little effect in the gran scheme of things.

It's only out of date because the current federal government let housing prices run up unabated and ran an immigration ponzi scheme just to keep prices high.

If mortgage insurance wasn't guaranteed by the government, and was entirely left to the private players then that's a different story. But if the government decides to deepen its entanglement in the mortgage market, then it's the government's explicit endorsement and commitment to the continued financialization of residential real estate, and the government has no intention to change its course.

If the Conservatives panic when housing prices fall and juice the market with immigration that is on them. I think you are right that is it possible even probable but hope they have the fortitude to cut spending cut immigration and ride out the recession that would almost certainly trigger to get to a better place on the other side. Even if it means we throw them out of office.

This juice up to $1.5M is a poisoned chalice to the next government, a cynical play that continues to wreak havoc on the long term financial stability of this country. People act like the guarantee is risk free and the government will "never be on the hook for default payouts", but if it is truly risk free, why would we need the government to guarantee it?

[theman23]

It's a bit of a circular argument. If housing prices run up to $3 million because of the increased liquidity and (perhaps more importantly) the implicit signal of housing being too big to fail by the federal government, will we need to double the cap again?

[Innsertnamehere]

Originally Posted by P'tit Renard

Unfortunately, idiotic moves by Trudeau & Freeland like increasing the insured mortgage price cap to $1.5M (guaranteed by the federal government) has created perverse long term incentives that will encourage future governments to try again and again to run the immigration ponzi schemes to keep the music going. Anyone who cheers on this $1.5M increase basically wants the status quo to stay intact to protect their housing values.

The 30 year insured and 1.5 million purchase price changes were overdue, IMO.

30-year mortgages are standard globally and forcing buyers to finance for 25 years was only hurting affordability.

The $1 million insured price has been static for years and has not been adjusted for inflation. $1.5 million is a reasonable increase that puts the real value closer to what it was originally intended to be. They should be indexing it to inflation though, not just ad-hoc increases like this.

[1overcosc]

Originally Posted by Innsertnamehere

The 30 year insured and 1.5 million purchase price changes were overdue, IMO.

30-year mortgages are standard globally and forcing buyers to finance for 25 years was only hurting affordability.

The $1 million insured price has been static for years and has not been adjusted for inflation. $1.5 million is a reasonable increase that puts the real value closer to what it was originally intended to be. They should be indexing it to inflation though, not just ad-hoc increases like this.

$1.5 million is not a reasonable price for a home, though. Steps like this - 30 year mortgages, 1.5 million caps - are basically just accepting that $1.5 million is a "normal price" for a home, when it is not.

[WarrenC12]

Originally Posted by Innsertnamehere

The 30 year insured and 1.5 million purchase price changes were overdue, IMO.

30-year mortgages are standard globally and forcing buyers to finance for 25 years was only hurting affordability.

The $1 million insured price has been static for years and has not been adjusted for inflation. $1.5 million is a reasonable increase that puts the real value closer to what it was originally intended to be. They should be indexing it to inflation though, not just ad-hoc increases like this.

Yep the inflation indexing would make the most sense. It's probably lower (inflation adjusted) than the original date of the $1M limit.

As for 30 year amort, I'd be ok with 25 but 30 isn't the end of the world. Even longer was too much (Harper!)

[Innsertnamehere]

Originally Posted by 1overcosc

$1.5 million is not a reasonable price for a home, though. Steps like this - 30 year mortgages, 1.5 million caps - are basically just accepting that $1.5 million is a "normal price" for a home, when it is not.

the original intend of the $1 million limit was to cover most buyers other than those buying absolute mansions.

Increasing to $1.5 million doesn't mean spending $1.3 million on a "first home" is reasonable - it just acknowledges that $1 million now excludes a decent chunk of first time buyers on the upper range of the market.

The median first time home purchase is still well below $1 million. It's just that now a decent chunk of first time buyers cannot buy insured while when the $1 million limit was introduced the vast majority could.

[YOWetal]

Originally Posted by 1overcosc

$1.5 million is not a reasonable price for a home, though. Steps like this - 30 year mortgages, 1.5 million caps - are basically just accepting that $1.5 million is a "normal price" for a home, when it is not.

With 2% mortgage rates it absolutely is a normal price for a home. Most couples can afford that with a downpayment from profits on their condos they bought in their 20s rather than travelling the world and ordering every night on uber eats.

Now with current rates the math doesn't work. That means either housing prices are coming down or we return to ultra low rates.