VANCOUVER BUNGALOWS INCREASED IN VALUE 1,167% IN 30 YEARS
30 years after the first Skytrain was built single family home prices in Vancouver have shot up by 1,167%. Far outpacing wages, inflation in property values puts in question the ability of the middle class to ever own a home:
“I want to keep home ownership within the grasp of the middle class in British Columbia,” said British Columbia Premier Ms. Clark at a news conference in Victoria, 27 July 2016, nine months and 13 days ahead of the next provincial elections—where she was ousted.
At these prices the Canadian Dream of owning a home is ruled out not just for median income earners, but for almost everyone else. Never mind working folks who used to be able to afford paying down a mortgage on a house as their primary family investment. Three forces have shaken the property markets. All originate in areas of government oversight and regulation: the shift in urban paradigm from suburban to Towers-and-Skytrain; the Agricultural Land Reserve; and Chinese flight capital washing on-shore.
TYPICAL VANCOUVER BUNGALOW BETRAYS FEW IMPROVEMENTS IN OVER 50 YRS YET IT IS NOW FETCHING UPWARDS OF $2.25 MILLION
Update 29 July 2017: A prescription for affordability— increasing housing supply.
1| The Economics of Land
In his new book Land, Martin Adams presents four laws of real estate markets (North Atlantic Books, 2015):
1. The value of property can be divided into the value of the buildings (capital) and land.
2. Improvements made to the buildings increase the total value of the property, but generally do not affect the value of the land.
3. Land values increase with higher levels of density.
4. Capital investment in new buildings (and new infrastructure) may indirectly increase the value of surrounding land.
It is instructive to consider runaway land valuations in British Columbia and the Vancouverism in light of these four precepts in land economics.
1. VALUE OF PROPERTY = BUILDING(S) + LAND
To make a quick buck in a real estate renovate an old property and flip it.
Vancouverism has done away with all that. In recent years sellers of property in Metro Vancouver have shown little interest in increasing the value of their property by renovating the house. The agents do a ‘quick cosmetic fix’ and off to market goes the pig with lipstick on.
This observation is confirmed by the sheer quantity of bungalows on view along any residential street in Vancouver. Virtually untouched for 100 years (see photo), single family plots now fetch two and a quarter million dollars. Measured in 2016 dollars, this represents a 1,167% increase in value since 1986. It is important to note, in light of the laws of land economics, that the increase in value is all in the land not the building.
2. IMPROVEMENTS MADE TO PROPERTY GENERALLY DO NOT AFFECT THE VALUE OF LAND
Land values remain constant. Only the price of buildings rise and fall with either renovation, or depreciation.
This tenet has been turned upside down by the Vancouverism. Land values have gone through the roof: The Tower-and-Skytrain paradigm is ‘lifting’ land values rather than keeping them stable. However, it turns out that the market is being hijacked more than lifted. The decisions to build Towers-and-Skytrain were made by the provincial government, not local councils. The profits from turning the tables is flowing into the pockets of a small cadre in the population, while the market as a whole was left behind along with the vast majority of Vancouverites.
3. LAND VALUES INCREASE AS PARCELS SUPPORT HIGHER LEVELS OF DENSITY.
Land values—location, location, location—attract international capital. Building regulations command higher prices when greater amounts of density are permitted on a single plot. The effect is contagious. Towers once only permitted downtown have now leached out into the neighborhoods.
Vancoverism feeds from this tenet. In a speculative land market social values no longer shape community planning. In Vancouver, for example, the Mount Pleasant Community Plan was ‘updated’ in 2012. The exercise identified new sites for towers and for hi-rise to the exclusion of anything else.
The plan took no account of elements for supporting social functioning, such as: transportation, parks, homelessness, livable streets, walkable neighborhoods and housing affordability. The same trend is spreading throughout the city and the region one neighborhood and one regional plan at a time. Local governments are abandoning social concerns to focus laser-like on increasing revenues. Permitting hi-rise and—more preferably still—towers on land that previously supported suburban densities creates two streams of revenue. Developers pay up-front ‘development charges’ to city halls. Downstream, when the project completes, municipal tax revenues multiply in a straight line with the increase in density. Finally, as land values are lifted all over the region, city coffers bulge with a windfall in property taxes.
4. BUILDINGS CAN INDIRECTLY AFFECT SURROUNDING LAND VALUES.
The first new tower in a neighborhood acts like a ‘bunker busting bomb’ raising expectations for more rezoning completely out of character with existing local traditions.
The fourth law points directly to the ‘Expo/Olympics Effect’. The escalation in land price in Metro Vancouver has been ‘a tide that lifts all boats’ alright—raising them beyond the point where greatest part of the population can afford to buy them. Vancouverism has revolutionized the principle of ‘stable land valuations’ to such an extent that land speculation is now the preferred mechanism for generating profits in the private sector and wealth in the public sector. This is achieved by pouring bottomless amounts of capital into the market with mega projects. Developers build private mega projects—the Towers. And governments build public mega projects—the Skytrain.
Martin Adams suggests that too much capital locating in a limited footprint—the transit station area, for example—may indirectly distort land values nearby. In the Vancouverism this is the direct and deliberate intension. The first tower to go up in a neighborhood, the ‘bunker busting bomb,’ resets real estate values for the entire district. As condominium towers up-sell the market the lowest value obtained for a unit in a tower resets property value expectations in the rest of the area. Age or condition makes little difference since the real estate play is all in the land. Soon land prices become so inflated that only tower projects can yield sufficient return. The neighborhood then becomes a patchwork of old dilapidated sites that won’t redevelop and new, out of character shinny towers built at a completely different scale.
Thus, the Bosa Properties’ luxury Cardero project in Coal Harbour selling for an average of $1,700 per square foot in 2016 can be compared to $650 per square foot fetched by a 40-year-old apartment sold in a three-storey, wood frame strata building in Mount Pleasant (the condo appreciated 530% in 30 years; almost 3x the CPI increase of 185% over the same period). What owners of strata property are now contemplating is the tripling of the square-foot-value of their holdings by selling the whole strata property to a developer who will replace it with a mid-rise apartment.
* * * * *
We have already examined here the role played by local governments in escalating costs of new transportation projects in metro Vancouver. Now we see local governments generating ‘lift in land values’ by means of a three stage strategy:
- Permit tower densities;
- Re-build infrastructure to service the hot-points of demand created by the new towers; and
- Bring the Skytrain into the mix.
This is the true ‘Expo/Olympics Legacy’—the Towers-and-Skytrain urbanism. What may not have been anticipated by the government planners is the contagion in land values from tower sites to single family residential properties. Thirty years on there is a decisive knock-on effect lifting land prices in housing throughout the region. No longer within the bounds of scholarly economic theory, today housing valuations present as fact in newspaper adds, on listing websites and on the front pages metro Vancouver and international media.
VANCOUVERISM: THE TOWERS FOLLOW THE SKYTRAIN
2| Building Up Instead of Out
After the ALR took 30% of urban land off the table in Metro Vancouver in the 1970s, the provincial government made even greater ‘big moves’ in the next decade. Decisions to host Expo ’86 and build Towers-and-Skytrain followed in a decade that began in deep recession with 20% interest rates, and finished with the October 1987 market crash. Six months after Black Monday the Expo ’86 site sold to a Hong Kong developer. However, this is the forgotten part: the decision to build towers on the Expo site had baked-in by Government long before the time of the sale.
The record shows that rebuilding the Expo site as a tower district was the provincial government plan from Day One. Infrastructure upgrades and Expo site construction were all carried out as the initial stages in a plan to fill the site with towers once the fair closed. Towers-and-Skytrain were the intended Expo 86 legacy. Ultimately the fair was about changing the urban paradigm in third largest urban metropolis. The century long suburban expansion model would be flipped in favor of the tower urbanism. Having the Expo planners ‘design the city’ can be seen today as the preparatory step for non-elected regional government, transit boards holding veto power over local councils, and—yes—runaway inflation in house prices. By 1988, two years after Expo ’86 closed, all metro Vancouver governments had bought into the new paradigm:
Build Up Instead of Out.
Overnight Vancouver became the ‘most livable city’ in the world… and the most expensive.
However, this was achieved without public consultation and what now appears to have been a lack of capacity in economic planning. The regional strategies minted in the Expo era for engulfing the region in Skytrain-and-Towers made no provisions for the ill effects of land speculation. The New York media called it ‘Hongkouver’ in the 1990s mocking Vancouver and the province for aping development patterns from Hong Kong and elsewhere. While Vancouver buyers may have been naive about shadowy details in land economics, savvy offshore investors like Li Ka-shing had already made billions on land speculation.
What the Expo governments and planners failed to grasp is the corollary to the laws of land economics:
Pilling on too much capital in one property will DIRECTLY inflate the value of surrounding land.
‘Building Up Instead of Out’ set conditions in place that would deliver the housing crisis we face today. According to this economic theory pouring money into Towers-and-Skytrain unhinged property values not just at the Skytrain stops but in surrounding neighbourhoods as well. A contagion effect has spread high land valuations from tower sites to single family neighborhoods to the entire region. Changing the North American paradigm has triggered land value inflation as too large quantities of private and public capital ride the Skytrain as far as the transit will take it.
Looking back over the past 30 years, as the real estate markets in Metro Vancouver leapt from 20% interest rates in the early 1980s to runaway land valuations three decades later, the risks have not been all economic. With property values soaring beyond the point where salaries can keep pace, home ownership has been put beyond the reach of the middle class. As a result the bedrock of Canadian society finds itself in a chasm of doubt, financial insecurity, and threatened oblivion.
The change in urban paradigm in Metro Vancouver coincided with two other factors unsettling the real estate markets: the restriction of land supply in the late 1970s and the expansion of demand from Hong Kong and China.
AREAS WITH GREEN BORDERS SHOW ALR LAND RESTRICTIONS
3| Constricting Supply: The Agricultural Land Reserve (ALR)
The uncoordinated actions of two consecutive provincial governments in the 1970s resulted in a severe restriction of land supply in metro Vancouver. Identified with a dark green outline on the map above the Agricultural Land Reserve (ALR) designation froze in place 30% of metro Vancouver land or most of the undeveloped greenfield available at the time the legislation was passed. Forty years later the ALR land is under producing agriculturally, while contributing to the runaway inflation of land values by constricting supply.
By taking off the table most of the available land for urban expansion in the concentric rings emanating from downtown the ALR wrote an important page in the playbook for shifting the urban paradigm from traditional North American values to Tower-and-Skytrain urbanism.
A SHORT HISTORY OF THE ALR IN BRITISH COLUMBIA
In the mid 1970s a new provincial government set aside 5% of all lands in British Columbia in a new restrictive agricultural zoning. Then, before the decade was over, power changed hands and the new administration hardened a policy they had opposed turning it into an outright ban of urban development.
1974 to 1976 — ALR 1.0
- The Land Commission Act passed on April 18, 1973.
- Between 1974 and 1976, 4.7 million hectares or 5% of the total land area of the province were zoned Agricultural Land Reserve (ALR).
- In the 22 communities comprising metro Vancouver the agricultural set aside was much greater than 5%: The ALR locked fully one third of the land in the largest metropolitan region in Western Canada.
- Metro Vancouver’s non-elected regional government then brokered an unbalanced distribution of ALR lands among member jurisdictions.
- Measured by land area, 91% of the ALR lands were culled from half of the metro Vancouver footprint, while the other half carried just 9%.
- In terms of jurisdiction, 5 municipalities out of 22—Richmond, Surrey, Delta, Pitt Meadows and Langley—hold 91% of the ALR in metro Vancouver. Fully 86% of Pitt Meadows and 77% of the Township of Langley are zoned ALR. Yet, both places are within easy commuting distance from Canada’s third largest metropolis.
- Other ALR lands occupy strategic locations along feral rail transportation corridors in Metro Vancouver.
BILL BENNETT ELECTED BC PREMIER IN 1977
1977 — ALR 2.0
- Four years after it was made law, the government opposing the ALR was back in power stripping the so called secondary objectives from the legislation.
- Mandates for creating parks, acquiring greenbelts and land assembly for urban and industrial uses were cut from the ALR.
- The mere stroke of the pen from a new legislative majority turned the ALR into a de facto land use ban.
- Any resulting upward pressure on property values can be seen as a political concession from the new government to its backers in the real estate, development and banking sectors.
The ALR Legacy in Metro Vancouver
In metro Vancouver today only half of ALR land is under cultivation, while 48% of the reserve is held in low-yield residential uses. Farm production in the metro Vancouver is marginal at best. Berries, pasture and forage (grass or hay for horses) were reported as the major crops in Pitt Meadows (2011).
THIS PROPERTY SOLD IN 2017 AT A 400% PRICE INCREASE OVER 10 YEARS
4| Expanding Demand: Offshore Capital Flight
A third factor contributing to land value inflation in Metro Vancouver are capital flows from China:
Between 2015 and 2016, Beijing spent about $800 billion, or 20% of its foreign-exchange reserves, to stabilize the currency. Back then, banks, financial conglomerates and wealthy individuals raced to pull money out of the country, buying up luxury hotels, insurance products and any other overseas assets they could lay their hands on.
By the summer of 1980 the vice president in a Vancouver construction firm could assure me that all investment in downtown Vancouver was offshore, by which he meant Hong Kong. In the summer of 2016 I overheard a conversation in a café near Cambie and 41st between a Chinese investor and a young developer. The client kept insisting that the offers for projects were too small, he would only put his money into ‘large projects’.
Off-shore capital flight began as a steady flow of foreign money seeking safe haven in the Vancouver real estate in the late 1970s. It grew in intensity as Hong Kong was usurped into mainland China in 1997, the same year the Asian ‘tigers’ crashed. It peaked last summer just before the provincial government announced a 15% foreign buyers tax. The tax introduced in August 2016 has had the effect of pushing the irrationally exuberant levels of property sales to the Toronto real estate market.
* * * * *
Vancouver real estate inventories in February 2017 increased by 215% while prices showed mixed signs. Meanwhile, China has tightened currency controls heading into the 19th National Congress of the Communist Party of China this fall.
REAR YARDS IN 4,000 S.F. VANCOUVER LOTS: LAND INFLATED 1167% IN 30 YRS
5| Calculating the Price of Affordable Housing
Announcing the 15% foreign ownership tax in August 2016 the BC Premier appeared to express a desire to support home ownership by middle-income wage earners:
“I want to keep home ownership within the grasp of the middle class in British Columbia,” she said on 27 July 2016.
Assuming that the Premier was referring to median-income Canadians, what property price can a median-income wage earner in British Columbia afford? According to Statistics Canada the average salary in British Columbia is $47,914. A mortgage calculation for that income level returns the following values:
- Mortgage payment not higher than 33% of income = $1331 per month.
- Property price: $360,000
- Downpayment: $50,000 (14%)
- Mortgage Insurance: $7,430
- Mortgage Amt.: 317,030
- Rate: 2.49%, 5-year fixed
- Period: 25 years
- Monthly payment: $1,419
The $360,000 home is a product we will be examining in the next post in this series. It includes 40% free energy generated by a solar panel array installed on the roof; an electric vehicle in the garage ($6,000 savings per year over a conventional car); and either a fee-simple, or bare-land strata property, located walking distance to a regional tram stop. One could speculate further that free EV charging will be provided at tram stations.
MIDDLE DENSITIES MISSING FROM COMMUNITY PLAN UPDATES FOCUSED ON TOWER AND HI-RISE SITES (Landlines, July 2016)
6| Building Out Instead of Up
In the analysis presented here British Columbians must decide between two fates:
- Recapture traditional North American urban form, or
- Let the Towers-and-Skytrain paradigm change our economy and our politics.
Option (1) combines traditional urban form—the so-called “middle densities”—with new building techniques incorporating renewable materials. Yet, it was completely missing from the City of Vancouver 2012 Mt. Pleasant Neighborhood Plan with no reason or acknowledgement given. Option (2) creates a much bigger role for government as guarantor—and most likely—supplier of affordable housing. It leads to a polarized society of haves and have nots—like we see in mother England. Cities like Copenhagen and Vienna loom as more progressive examples where the middle and working classes simply do not own property. Housing is provided by the government and pro-rated on an earnings scale. Only traditional North American urbanism engages the meaning and making of place. Towers-and-Skytrain turn their back and blight the neighborhoods they occupy.
If we wish to keep real estate ownership in private hands, then the foregoing analysis points the a way out of the current housing crisis:
- Build Out Instead of Up.
- Control amounts of capital flowing to a single district or site;
- Use low and mid-densities while avoiding hi-rise; and
- Choose infrastructure wisely and replace Skytrain with modern tram and BRT.
- Correct an imbalance in trade—Canadians cannot own property in China.
Traditional west coast urbanism presents with the following quantifiable values:
- New levels of social functioning layered in urban design plans that achieve walkable neighborhoods, livable streets and affordable housing.
- Mega projects are not part of the human-scale environment.
- Low and mid-rise urbanism builds at a fraction of the cost of Tower-and-Skytrain.
- Urban districts are served by modern low-floor tram and BRT.
- Existing infrastructure and servicing is extended rather than built over again to service hyper-concentration of demand on ‘hot’ tower sites.
- Re-energizing the community spirit with communities built with human scale.
- All of it resetting land valuations to levels ‘affordable to median incomes’.
We can either return to our ‘traditional forms of urbanism’ or we can build the densities of Honk Kong, Manhattan and Tokyo without the economic engines that drive those markets.
In British Columbia we can build sustainably, we can build cheaply and we can build well. That has been the vernacular here on the west coast of Canada for over 100 years.