Proof the Metro Vancouver housing supply problem is REAL and could get worse.
The housing supply problem is real and could get worse.
We’ve all heard people in Vancouver who blame lack of supply for housing unaffordability. Many will have heard the opposing “Supply Myth” argument. We believe that the supply problem is real and could be worse than any of us imagined.
We need to settle this once and for all, so that government can act quickly to solve our housing crisis.
In past analyses, we’ve looked at both supply and demand, as well as the role of the real estate industry in the Vancouver housing crisis. A common frustration for some is the persistent claims of a “Supply Myth” despite rental vacancies consistently being below 1%. In the report, “The Housing Supply Myth”, Dr. John Rose's analysis suggests that we have built a surplus of homes in Metro Vancouver. We disagree with Dr. Rose's assumptions and have run our own analysis. Slight tweaking of a few assumptions leads to forecasts ranging from a small surplus to a dramatic shortfall in housing supply. Jens Von Bergmann a member of Abundant Housing, an advocacy group, critiqued John Rose’s analysis and as you’d expect he falls in the “more supply, please” camp.
In our new analysis, we rely on the following key assumptions:
The population will grow between 35,000 and 39,000 people per year.
10% of new homes will be bought and left vacant.
A 3% rental vacancy rate is necessary for a healthy real estate market.
This article will focus on the ramifications of our Unmet Housing Demand chart below (for which we have provided the data to be downloaded and cross-examined). If we want a healthy housing market, we may be on track to be short by almost 12,000 homes in 2020. Addressing this shortfall cannot be achieved by simply rezoning because the required development would be unachievable in such a short timeline. Instead, we propose that the City negotiates with developers to add units to projects already in progress. A key benefit of this approach is that it shouldn’t fuel speculative demand for new developable land.
Show me your numbers!
Hey, we’re the first to admit that any forecast is only as useful as its assumptions. We didn't do this analysis to prove how smart we are, we did it because we're passionate about solving the Metro Vancouver unaffordable housing crisis. Please review our numbers and let us know if you think there's a way to improve this forecast model. We will gladly publish an updated version #2 if there is a material improvement in the forecast.
What do you mean by unmet demand?
We define unmet demand as homes that have not been built as the Metro Vancouver population has grown. Where are these newcomers living now?
On the streets: 3,600 people in Metro Vancouver are homeless. We're not pretending that these people are waiting to buy a detached home, but the lack of housing supply keeps other people renting who would normally be buying. As a result, these rentals are not available for people with lower incomes.
Illegal rentals: Most people know of a friend-of-a-friend with an illegal rental suite. Generally, these rentals remain illegal because they have one type of deficiency or another that prevents them from being registered. So technically you could say that people living in illegal rentals have housing, but officially this is not adequate housing. They do not meet municipal rental requirements and their tenants are not protected by the BC Residential Tenancy Act. For the purposes of our analysis, we assume people living in illegal rentals are not doing so by choice. They would much rather be in a legal rental or living in a modest home that they own.
Alternate Arrangements: People are resilient in finding housing and creative solutions are often found, such as the growing number of RVs in Home Depot parking lots. Lately we have heard about the rising popularity of multi-generational households and co-ownership. Again, people in these situations may be content, but they may be equally happy to be living in their own home. There are risks to adding more financial partners to your housing arrangements. It's difficult enough for two adults to get along in the long run, never-mind four or six.
The people in these situations constitute unmet demand. The issue today is that we do not build nearly enough homes for people to buy, so the wealthiest citizens snap up everything that comes on the market. These wealthy purchasers keep prices higher than if there was enough supply to satisfy them and those on the housing waitlist.
Even if prices were lower, there would be many dissatisfied people because they won’t be able to get what they view as a permanent housing solution. That's because we will not have built enough homes to accommodate everyone.
But we're building so much!
You're right, we are. Looking back to 2003, on average we've built 17,000 homes a year. But how do we know this is enough?
14% of new home are replacing demolished homes.
Well first 14.3% of new homes are simply replacing a home that was demolished, so subtract 2,400 homes and you are left with 14,600.
Expect 10% of new homes will be empty homes
Next, we know that there are empty homes and, even though there are taxes discouraging it, we can expect there always will be. They are owned by:
Speculators: People who believe that supply in Metro Vancouver will never catch up. They believe they have found a safe investment that consistently pays a 100% annual return. Whoa 100%!? Yes. even though house values were going up 20% a year, these investors only had to contribute a 20% down payment and the rest was financed with a mortgage. So, they contributed $100,000 toward buying a $500,000 condo and the next year it appreciated in value to $600,000. They now have $200,000 in equity. No wonder people (local and non-resident) are tripping over themselves to take advantage of this opportunity! A 2016 report showed that 1 in 10 homes for sale had never been lived in.
Snowbirds: Retirees who spend part of the year in Vancouver, but when the sun disappears for 6 to 8 months of the year they follow it to places like Palm Springs, Mexico, and Hawaii. Can you blame them?
In our analysis, consistent with the 2016 report, we assume that 10% of new homes that are sold remain empty. We need to be realistic about the nature of the Metro Vancouver housing market and understand that we will never eliminate speculation and that some homes in our beautiful city will be considered recreational properties.
Our assumption is 1,700 empty homes represent 10% of the average 17,000 home completions. After replacing demolished homes and accounting for some empties we have an annual average 12,900 net new Metro Vancouver homes. Assuming a household averages 2.5 occupants that would mean we are building enough to support annual population growth of 32,000…but, based on our analysis, we may be growing at 35,000 to 39,000 annually!
What about renters?
Metro Vancouver had 330,000 rental homes in 2016 with a vacancy rate below 1%. To achieve a 3% vacancy rate, we would need an additional 10,000 housing units ASAP.
Why 3%? According to the Ryerson City Building Institute, a healthy vacancy rate is generally classified as one hovering around 3%. As the linked article explains, this figure allows for adequate choice, and helps keep landlords accountable.
Cut to the chase. How many homes do we need?
Metro Vancouver analysis projects our population will grow by 30,000 to 35,000 annually through to 2041. By our calculations that would require 16,000 to 19,000 new homes annually. If you recall, we’ve been averaging 17,000 since 2003.
At Mortgage Sandbox we're concerned that Metro Vancouver population projections are only 35,000 annually. We looked at census data and from 2005 to 2010, and Metro Vancouver grew at over 39,000 people annually during that time. We would need to consistently build 21,000 homes to support an annual population growth rate of 39,000.
If we grow at a rate of 39,000 and we hope to achieve a rental vacancy rate of 3% then by 2020 we will be short of nearly 12,000 homes.
Conclusion
We are amid a housing crisis and even if there is a “soft landing” for home prices there will most likely still be a housing shortage in 2020.
If our population is growing more quickly than anticipated (e.g., extra tech and construction workers moving to Vancouver), and more closely mirrors our growth from 2005 to 2010, then we will be short 11,400 homes. That’s close to the peak unmet demand of 12,300 in 2012.
Should we risk not building enough? If we found a way to build the extra 11,000 homes and accidentally built too many homes, the “overbuild” would only amount to 1% of total housing stock.
From our perspective, the risk of underbuilding is greater than the risk of overbuilding.
We estimate that close to 50,000 homes are schedule for completion in 2019 and 2020 and that Metro Vancouver should build an extra 13,000 homes as insurance against a supply shortage in 2020. We believe the most effective approach to build the 63,000 homes is for municipalities to approve 25% density bonuses on all developments in progress. Normally, municipality negotiations with developers can easily take a year of negotiation and sometimes don’t arrive at an agreement but we don’t have that kind of time. Municipalities need to figure out a quick way to negotiate the density before these projects are too far underway. If we act quickly, Metro Vancouver can achieve a win-win for its residents and developers.
We believe our estimates are conservative. If you believe it is more likely that more than 10% of new construction sits empty then even more homes would need to be built. We would love for our readers to investigate our numbers and provide us with your own insights.
Thank you for reading!
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