Archive for real estate

Stealth density vs high rise density

Living in walkable, urban neighbourhoods is becoming trendy.  And communities are defined as “walkable” when virtually everything you could need from groceries to clothes to plumbing supplies can be acquired on foot.

But to support those businesses, you need a dependable large supply of consumers.  Walkable places therefore tend to have higher housing density than less-walkable nodes.

Most cities and many urban residents believe that the only way to increase density in an area is to add high rise buildings.  Although perhaps a quick and efficient way to add people, high rises and even mid-rise structures often stand in stark contrast in an existing community of ground-oriented dwellings.

City planning departments and civic governments could do more to promote what I call stealth density.  That is, density that you can’t really see from the street–it flies under the radar, so to speak.   In Vancouver some older neighbourhoods evolved their stealth density quite by accident.  Big 1910 era houses in the 1970s and 1980s were converted into multi-suite houses with the garage often becoming a “coach house.”  Having a number of small units allowed more households to move in as well as created a variety of housing price-points to suit an economically diverse community.   Even as some gentrification has come, many of these homes retain multiple suites as the owners need “mortgage helpers” to cover Vancouver’s $million+ home prices.  San Francisco appears to have similar neighbourhoods of multi-household homes.

The result are communities with a high density of people supporting local businesses.  Ground-oriented neighbourhoods can have walkscores near 100 (my home is a 98).

To their credit, the city of Vancouver planning department is now encouraging multi-suite properties, particularly the installation of “Laneway housing” in some districts.  And in Seattle “Backyard Cottages” are being tried in some districts.

But, there is a lack of awareness about how much density this can actually bring.  If each city lot housed 2-3 households instead of one, you wouldn’t need to build as many high rises to achieve similar goals.  And there is something very community-oriented about having everyone having a front door near the ground (even if the suite stretches up 2-3 storeys).

Maybe a solution for the future in many communities lies in looking at spontaneous stealth density in the recent past.

Households as both renters and owners

Several friends of mine own a condominium unit but don’t live there.  Instead, they are renters when it comes to their family home (a larger condo, a townhouse, or the main floor of a small house).

Is this a uniquely Vancouver experience, or the start of a broader urban trend in North America?

Here’s how it has happened in Vancouver.  A young couple together buys a condo in the downtown area (Yaletown, Coal Harbour, etc.), maybe a 1 bedroom unit.   They love living and working in close proximity and in the walkable, amenity-rich milieu that higher density neighbourhoods can offer.

A few years later they decide to have a child or children, and quickly the 1 bedroom unit is too small.  Suburbia and long commutes offer no appeal and really nor does having that suburban house (with lawns to mow, gutters to clean and other time and money sinks).  They like being able to get to-and-from work quickly, allowing for more family time.  Plus, they have lots of friends with children downtown–this is their community.

But, if they want another, larger, downtown unit, the costs of selling the one bedroom and buying a larger condo or a townhouse is quite high (in part because of market lift since they first bought in).  By contrast, the cost of renting that larger condo or townhouse is much less, especially when offset by the rental income they can achieve from leasing their owned 1 bedroom unit.  (For example, rent out the well-located 1 bedroom for $1700 and then rent a larger place for $2200/month; by contrast buying the larger place might cost $3200/month–or more–in mortgage and condo fees; if they moved to a slightly less expensive neighbourhood still near downtown, they might be able to rent a large 2 bedroom place for the $1700).

They keep owning the 1 bedroom unit, as an investment.  The rent covers most of the mortgage and carrying costs initially, and over time as they pay down more of the principle, the rent fully–or more than–compensates for the carrying costs.

This scenario allows the family the benefits of old fashioned home ownership where they have a nest-egg at the end of 25 years, or equity should circumstances change and they wish to buy a different home.  It also allows them the flexibility of renting in terms of being able to move should employment needs change or if they need to relocate for children’s schooling.

Owning the 1 bedroom is also an investment in the city, to which they are also contributing as citizens who work and play there.

So what do you think? Is this a bizarre Vancouver anomaly? A once-in-a-market-cycle phenomenon? Or something that is happening or could happen in many other cities going forward?

(P.S. I’m now on Twitter)

Value of (old fashioned) home ownership

In his Great Reset press tour, Richard Florida has been challenging people to think hard about the role of home ownership, especially in the US but also in some struggling Canadian cities.  He is correct to point out the tragedy of the problem–people who have no equity in their homes and cannot sell them also find it hard to pack up and move to cities with more opportunity. They get stuck.

However, I’m not sure the solution is less home ownership on average than the historic norm in both countries of roughly 66% of households owning homes.  (addition: Florida himself suggests a 50% ownership rate, some of the media discussing his work have implied he suggests almost getting rid of it altogether, which is incorrect.)

The solution may be a return to the old fashioned approach to home ownership, which had the following characteristics:

  • You had to have a down payment, whether 25%, 20% or 5% (in the pricier places).  Saving up thousands of dollars required a level of personal fiscal discipline (almost like a test to pass to become a home owner)
  • You had to have an income that would support a 25 year amortization, paying down the interest and the principle every month.
  • Most home owners had a goal of paying off the mortgage as fast as possible–this represented freedom, and even upward mobility.
  • As a result, equity in houses was not a cash machine it was something to treasure and hold on to.
  • As a result, retirees had a nest-egg.  Even if property values only kept up with inflation, it was a forced savings plan.

Under this paradigm of home ownership, moving to another city was not that hard.  If you had significant positive equity in a home it meant that you could sell, move, and buy in the new place.

The recent housing over-building and subsequent price collapse destroyed this American dream.  It has destroyed the fiscal responsibility that millions of Americans displayed who did not treat their house as an ATM and responsibly paid down their mortgage every month.

Looking ahead, restoring this fiscally prudent mindset based on saving might be a path out of the current malaise.  America needs a higher savings rate.    And all it might take is tougher mortgage lending rules.

Higher fuel, living green and a new normal for home prices?

Over the past few years, many urban residents have become increasingly interested in more sustainable as well as more time efficient lifestyles.  Thousands (even millions worldwide) are choosing to live closer to work, even if it means a smaller home–whether to save money, spare the environment or save time (or all three).

Simultaneous with the above there has been a significant escalation in housing prices in the older, urban cores of Toronto and especially Vancouver (much more than in their auto-centric suburbs).  (I’m still working on finding electronic stats showing the price shifts–post some links if you have them.)

Some argue this is a bubble.  Maybe.  But at least in my neighbourhood I don’t see one sign of bubble froth–speculation.  Families are buying these houses to live in, themselves, and to raise their children.  Flippers and speculators are rare.

Prices are quite possibly at a cyclical high (different from a bubble) and will ease off as mortgage rates start to rise.  But it’s also possible that Toronto and Vancouver have become New York and San Francisco North.  These US cities are places where geographic constraint combined with strong desires by millions to live there have pushed housing prices well above the national average and outside “normal metrics” of affordability.

As a result people live in smaller homes, rent out rooms or suites in larger homes, and accept the fact that more salary goes into housing than it would elsewhere resulting in other “sacrifices” like foregoing car ownership (or 2nd car ownership), or certain material expectations.

Asia-Pacific Cities and Premium Home Prices

During the nineteenth and twentieth centuries cities in the Atlantic region flourished.  As key centers for “world trade” (or at least trade between Europe and the Americas, which to many was the world), great streets for commerce and neighbourhoods for families emerged, including highly exclusive addresses.

Many of these great Atlantic world cities still have pricey neighbourhoods whether for businesses in the form of office space costs or people.

But, if a recent Coldwell Banker survey is any indication, they are gradually being eclipsed by Asia Pacific cities.   In cities worldwide, Coldwell Banker queried the price of a 4 bedroom, 2.5 bath, 2200 sq. ft. home, the type of place that “middle management transferees” being relocated to a city might want for their families.

In North America eight of the top 10 are on the pacific coast.  Outside North America, some of the old Atlantic World, and even Mediterranean world cities remain on the list.  However two of the top five are also in the pacific world.

From the Globe and Mail:

North America’s 10 most expensive markets(in U.S. dollars)

  • La Jolla, Calif.: $2.12-million (U.S.)
  • Beverly Hills: $1.98-million
  • Greenwich, Conn: $1.52-million
  • Palo Alto, Calif.: $1.49-million
  • Santa Monica, Calif.: $1.46-million
  • San Francisco: $1.36-million
  • Boston: $1.34-million
  • Newport Beach, Calif: $1.3-million
  • Palos Verdes, Calif.: $1.24-million
  • Vancouver, B.C.: $1.17-million

Outside North America

  • Singapore: $1.89-million (U.S.)
  • Milan: $1.64-million
  • Florence: $1.61-million
  • Shanghai: $1.38-million
  • Bucharest: $1.37-million
  • Hamilton, Bermuda: $1.35-million
  • Rome: $1.26-million
  • Dublin: $1.13-million

Condo units in the downturn: vertical sprawl

Well located, condominium units in Vancouver’s uber-chic Yaletown have become as challenging to sell these days as a generic single family home in the suburbs.  As the residential real estate market has softened, it has hit some homes harder than others.

The economic principle of “scarcity” has been evident.  Where there is “geographic constraint” or a limited potential future supply, prices are holding up and sales velocity, while slower, is still measurable.  For example, quality homes (especially those with heritage qualities) on their own lots in vibrant neighbourhoods of Vancouver city have held their values reasonably well — and continue to sell.   They are not making any more single family lots in Vancouver.  By contrast with thousands of new condominium units scheduled for completion over the next 12 to 24 months, and tens of thousands already in existence, potential buyers see no reason to jump in now.

I suggested a while back that condominium towers in Vancouver were starting to look like vertical sprawl — the same exterior architecture of glass towers combined with similar cookie-cutter interiors.  In the suburbs, the homes might be detached, or low-rise townhomes, but otherwise typically share the characteristics of “sameness.”  Again, a potential buyer of a suburban home has no particular urgency at the moment.  There will always be something available.  US studies seem to show a similar phenomenon of sprawl homes declining and unique, urban core homes in vibrant cities retaining value.

This turn in the real estate market somewhat confirms my earlier thoughts that urban condominiums may have more in common with the suburban sprawl than many of their proponents would like to admit.

A lesson for condo-lovers: buy something unique.  Don’t by the generic 2 bedroom with a view of the adjacent tower.  Try to find a way to buy a unique unit, with a special feature (view, deck, whatever), and in the long run you’ll be better off as it will retain its value.

This past week MacLeans Magazine had a revealing article about the challenge of selling a generic condo unit (which inspired this post).

Home prices rising

In the majority of US cities, home prices continue to decline with some cities in California seeing declines of over 30% year on year.

However, in at least 28 US cities, median prices in Q3 2008 were up according to the National Association of Realtors.   Here are the top 10:

  • Elmira, NY -  12.5%
  • Decatur, IL  –   8.7%
  • Bloomington – Normal, IL  – 8.1%
  • Wichita, KS  – 5.5%
  • Tulsa, OK  -  5.1%
  • Amarillo, TX – 4.2%
  • Trenton, NJ- 4.2%
  • New Orleans, LA – 4.1%
  • Charleston, WV – 3.5%
  • Buffalo-Niagara Falls, NY – 3.0%

An intriguing list.  Although I’m not familiar with every city, I would suspect the common link between these cities is that they missed out on the housing boom and to some extent the economic boom from 2002-2007.   Therefore, they really had no where to fall.  But this doesn’t necessarily explain why why home prices are up in Q3 2008.

Any ideas?

Think ahead: 3 bedroom condos needed

During the last real estate cycle, condominium living became popular in many cities.  Most buyers were singles or either young couples without kids or empty-nesters.  With perhaps Manhattan and Vancouver being notable exceptions, families with young children have generally not been among the new inner urban residents.

In part, this is because few new condominiums offer more than two bedrooms.  A two bedroom works fine with one child, but can be challenging with two or more kids.

This week in the Globe and Mail, Terrence Belford laments the lack of three bedroom units in Toronto’s new condos, seeing this as very short sighted.  He quotes urbanization specialist Jane Renwick who astutely notes: “Concrete lasts 200 years, so how will this situation change the face of the city 50 or 100 years down the road?”

Looking ahead in the future of North American civilization, more families will want to live in condominiums in order to be close to work as well as urban amenities.  Fuel prices will be high again, making commuting not only a time waster but also expensive.   Additionally, real estate prices will dictate that a condominium will be the starter home for many families, while others will prefer to spend their money on vacations, educations and other experiences rather than an expensive home with white picket fence.

Belford correctly notes that developers rarely build three bedroom units because at present there is not much demand for them, and profits are higher building 1 and 2 bedroom units.

What he doesn’t mention, is a solution that has been proposed in Vancouver (although not really implemented yet).  Vancouver condo marketer Bob Rennie as well as former chief city planner Larry Beasley, have both suggested that perhaps condominiums need “secondary suites” or “mortgage helpers.”

What if a building offered two bedroom suites with an attached small studio apartment of say 350 square feet.  The studio would have its own entrance, like a back door, as well as a door connecting it to the main unit that could be locked.  A couple or small family could live in the two bedroom unit and rent out the studio for a few years until enough mortgage is paid down or household income increases.   Then, they could take back the suite and use it as a master bedroom.

These studio suites would also serve to help alliviate the rental housing shortage in many cities.

Alternatively, with the separate entrance someone could use the studio suite as a home office or home business space.

Perhaps the slowing of the real estate markets in most cities will allow urban planners and developers to rethink what they’ve been  approving and building in order to think long term.  On the 100 year horizon, cities may need more 3 bedroom+ units.  If they fail, then Belford believes:

By mid-century, the lack of family-sized condominiums in the Toronto area may prove as effective a birth control measure as China’s one-child policy.

Which cities are more recession proof?

Professionally and personally I’ve been devoting considerable time to understanding the current American economic crisis.

One interesting issue emerging from my readings — but that is being overlooked in the mainstream media and even in some of my favorite economic blogs — is that there is not really _one_ national economy.  The US economy is comprised of myriad regional economies.  Therefore, not every place may be suffering, even if the average or sum of all the local economies faces a crisis.

Cities have their own economic dynamics that can run in contrast to the national or global economy.  Although the credit crunch has become a global challenge, and commodity prices tend to emerge from global supply-demand dynamics, some cities will fare better than others just as during generally good times, there are places that still struggle as well as ones that flourish.

So, which US cities are less likely to see a prolonged economic downturn?

The housing-led recovery prediction:

Well, the economists’ concensus (no, that doesn’t seem to be an oxymoron these days) seems to be that subprime mortgages and defaults on them were a key source of the current crisis.  Sub-prime borrowing artificially increased demand for houses, supporting land development and construction.  The current result is a large oversupply of housing.

Most economists believe that the US national economy will not fully recover until the excess inventory is absorbed, which will allow home values to stop falling and start rising.  Excess supply will continue to push down prices until then.  But once prices are rising because there is no longer an inventory, then construction can happen, generating economic activity.

But, not all cities and regions had a significant amount of subprime mortgages.  Therefore, according to this logic we should expect those metro areas with fewer subprime mortgages to be places where the economy will begin growing sooner.

I found a list (several actually, some by county, some by city).

From the Federal Reserve Board, the cities with the fewest sub-prime mortgages as a percent of loans in 2005:

rank city percent of loans subprime
99 Raleigh, NC 12
100 Ann Arbor, MI 11
101 San Francisco, CA 11
102 York, PA 11
103 San Jose, CA 10
104 Santa Rosa, CA 10
105 Lancaster, PA 10
106 Durham, NC 10
107 Madison, WI 09

I haven’t found a list of total subprime loans from 2002 through 2007 divided by total loans or total stock, which might provide a more accurate assessment of the exposure.

The Case-Schiller index does offer some additional or perhaps alternative evidence of which cities might be more recession proof this time.   The cities that have seen prices fall less than 5% since June 2007  are:

  • Charlotte
  • Dallas
  • Denver
  • Boston

None of these are on the list of lowest percentages of subprime mortgages, but other than Dallas (which had 23% of mortgages subprime) were in the bottom third (between 13% and 17% subprime).

So, based on the “housing will lead recovery” theory, Charlotte, Boston and Denver are probably places to watch.  I’ll also add Raleigh Durham to the list.  This area wasn’t on the Case-Schiller index that I downloaded.  However, I found a website, Home Price Trends, apparently tracks listings and prices.  According to the website, Raleigh-Durham median sale price is the same as it was in June 2007.

Admittedly, this is a crude forecasting model.  If I had time (which I do not), I would examine additional measures including but not limited to: percentage of jobs in manufacturing and finance/banking; job growth or losses during previous recent economic challenges (2001, 1991), and the reliance on oil / gasoline.

What other indicators might we look for in determining a region that will weather the current economic storm well (or poorly)?

addendum:  The New York Times just released a map showing which US cities have growing economies and which are in or heading for recession. (Pointer: Ryan Avent, The Bellows)  Raleigh-Durham, Charlotte, Dallas, Denver and Boston are all on the growth side.

Tougher home ownership credentials: better for cities?

 Over the past few years, home ownership became easier than it had been in decades in the United States and in many countries around the world.  40 year mortgages and buying with little or no downpayment made purchasing easier.  A US practice of loaning 103% of the value of a house made it seem like a no-brainer to buy a house.

But should everyone own their home?  Is this really the path to prosperity and/or happiness?  Perhaps the tightening lending rules in the US and Canada and elsewhere in the world will be better for individuals, families and the urban economy.

When is home ownership not necessarily a good idea?

If you are young (or not) and “trying on” jobs and careers, changing employers every year or two, home ownership restricts your options and may hold back economic development in a city.

  • it limits your ability to relocate for a great opportunity.  Trying on cities — as Richard Florida suggests in his recent book — might be as important to one’s long term happiness as trying out jobs.   Also, in this era of high gas prices, owning in an eastern suburb could limit one’s ability to accept a job in a western suburb.
  • it could prevent you from taking a lower paying position that might be particularly interesting or a wonderful learning opportunity.
  • it could prevent you from returning to school, such as for an MBA, or a trade certificate or another diploma.  Without ownership, you could move to a cheaper home.
  • renting offers more cost certainty (in most cases).  Costly repairs are the owner’s responsibility.

That’s for individuals.  For cities, young people owning homes potentially creates labor imbalances.  In a national or even global economy, ideally, you want people to be able to move from places where jobs are scarce to places with workers shortages.

Cities also need new people and new ideas, as well as for previous residents to return with new ideas from their time elsewhere.

It may be that city economies need a certain number of workers, particularly younger ones, able to change jobs easily.  It’s possible that in order to best hone their talents, and excel in their careers the average person may need to change jobs a certain number of times.  If people are not free to find out what they enjoy and are best at, might that not bring down both the economy as well as the general happiness and human energy in a city?  

Cities are, of course, more than sites of transient workers.  They do need long term “community anchors” who own homes and contribute to neighborhoods and urban life.

Some people should own homes.  But, historically, home ownership happened once people had settled into a career with one employer and had settled down with their life partner.  Perhaps that should be the same way now.

If ownership typically required saving for a down payment and a solid recent employment history — as it historically has done — that might be best for cities and for the average person.

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