Property Values Decline, but not in Vancouver
Tags: commercial real estate, infill, lane housing, property value, real estate, Vancouver
3D Overview by Lanefab.com
During this “Great Recession,” property values and employment rates have been declining across North America, with my hometown having one of the worst unemployment rates in the US.
Nevertheless, Wall Street Journal reported that Vancouver’s property market is remarkably robust.
“[Vancouver's] office market has logged seven building transactions this year capped off by Germany-based Deka Immobilien’s recent $263 million purchase of Bentall V, a 33-story tower in the heart of the city’s district. Just as impressive, prices have held up well. By contrast, only five office properties valued at $5 million or more have sold in Manhattan in the first two quarters of this year, and average prices paid are off 32%, according to Real Capital Analytics, a New York-based real-estate research firm.”
Vancouverites might have mixed feelings about this in terms of residential property values. Although declining property values have caused people to lose equity in their homes, or even lose their homes as mortgages rates reset, the declining property market is a boon for future homeowners in overinflated markets, with people waiting until the market bottoms out. In places like Vancouver where average home prices are, say, half a million dollars (Canadian Real Estate Association 2008), many people cannot afford to own homes. Unaffordable homes are often a topic in Vancouver’s local news (and international news!).
This may explain why Vancouver has so much lane housing, especially to people in the Southeast of North America, where lanes are few, if nonexistent. Lane housing, basement suites, and other kinds of secondary suites on a property allow homeowners to rent out part of their home, which helps pay for these expensive houses. Luckily, Vancouver’s land use regulation allows secondary suites.
Good Magazine has an article about lane housing and how pre-fabricated buildings can help homeowners install secondary suites. About 70,000 or more lots in Vancouver are eligible for lane housing. It is interesting to note, however, that the pre-fab homes described in Good Magazine could cost about $130,000. This means homeowners would need at least 13 years to break even at typical rental rates. So, although lane housing can improve walkability, density, and other New Urbanist/ Smart Growth ideals, it might not help make housing more affordable.
PC said:
Aug 23, 09 at 11:45 amIt should be pointed out that the WSJ is referring in the above note to commercial real estate, which does not move in synch with residential real estate (residential RE being the intended point of this blog post). In the US, commercial real estate began its decline two full years after residential real estate:
http://www.calculatedriskblog.com/2009/07/real-estate-commercial-and-residential.html
If we take the argument that Vancouver residential RE peaked in May 2008 (according to both Stats Canada and Teranet: http://www.housepriceindex.ca/Default.aspx), then we would have to wait until the summer of 2010 to see any real change in commercial RE.
Another aspect to keep in mind is that Vancouver’s planners made a concerted effort to favour residential RE at the expense of commercial RE over the past decade (through things such as different tax rates for different types of RE development).
To conclude: 1) it’s important to keep commercial and residential RE separate in this sort of discussion, and 2) Vancouver’s residential property prices are indeed declining.
PS. I would also argue that any zoning changes that add to residential supply (such as laneway housing) should help with easing Vancouver’s ridiculous property prices.
Daniella said:
Aug 24, 09 at 12:17 pmThanks for this thoughtful comment! You’re totally right that the WSJ is referring to commercial real estate. Thank you for the clarification about how much commercial and residential real estate differ.
The housepriceindex.ca looks like a very useful website! Thank you for the link.
I think that increased laneway housing has a complicated effect on the supply of rental housing. If a homeowner has to spend, say, $100,000 to build or renovate a building as permitted in the new legislation, the homeowner has another hefty loan to pay back. To recoup costs, homeowners probably aren’t going to rent out this new property for much less than the current rates. On the other hand, the addition of thousands more rental properties to the market would be great for renters. Increasing the supply of rental properties gives renters more choice. Furthermore if there is an over supply of rental properties, property owners will be more likely to reduce rental rates than leave the property vacant.
But if rents come down, homeowners won’t see much benefit in creating new secondary suites and won’t build them. Homeowners may not invest in laneway housing if they are losing equity in their home, credit is tight, or if they do not think their benefits will overcome the costs of adding value to their property. Of course, this is overly simplified and there are lags and information imbalances. Although I agree that allowing secondary suites will increase the housing supply, I’m not convinced that laneway housing is going to make a significant impact.
Clayton said:
Sep 11, 09 at 7:11 pmYou may forget that vacancy rates in Vancouver hover somewhere near .5%. It’s even tighter in the desirable areas of Vancouver west (kits, point grey), where it is effectively 0. I guess you haven’t visited too many cities where it cost $1500 a month to rent a crappy 600 sq foot 2 bedroom basement suite with poor finishes and warn out carpet. But hey, its a desirable neighborhood close enough to the cool bars, so you can drink away all your sorrows, lol.
Daniella said:
Sep 12, 09 at 9:41 pmYou’re right about rents being ridiculous in Vancouver. Sure, 70,000 new suites would definitely ease vacancy rates. But considering how much it costs to develop secondary suites, I don’t really think they’ll bring down rent that much. I would love for someone to make a good case for how laneway housing and other secondary suites could bring down rents, considering how much building them costs!