Metro Vancouver housing supply crisis is much worse than we originally thought.
The housing supply problem is bad, it’s real, and will likely 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.
By 2020 Metro Vancouver housing stock will be short by 47,000 homes!
In context, the typical 6-storey apartment building proposed for the Cambie Corridor has 60 homes. We would need to build 780 6-storey apartment buildings simply to keep up.
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 says that we have built a surplus of homes in Metro Vancouver. 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 July 2018, we published an analysis that relied on a forecasted Metro Vancouver population growth of 30,000 to 35,000 and led to a predicted 12,000 unit housing shortage by 2020. Based on new documents from Metro Vancouver and the City of Vancouver we recognize the forecasted population growth needs to be much higher.
In our new analysis, we rely on the following key assumptions:
The Metro Vancouver population will grow by 65,000 people annually.
10% of new homes will be bought and left "empty" or occupied as short-term rentals.
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 will need to build almost 47,000 more homes in 2020. Addressing this shortfall cannot be achieved by simply rezoning because the required development would be unachievable by 2020. 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 good 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 housing crisis. Please review our numbers and let us know if you think there's a way to improve this forecast model let us know and we will publish an updated version if there is a material improvement in the forecast.
What do you mean by unmet demand?
We define unmet demand as households typically able to buy but cannot due to inadequate supply . Where are these folks 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 own a modest home.
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 very happy, 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 5 or 6.
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 wait-list.
Even if prices were lower, there would be many unhappy people because they don’t have what they feel is a permanent housing solution; not 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?
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.
Expected 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 rose 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?
Short-term rentals: Let’s not pretend that this isn’t happening. You can buy a place and rent it out on AirBnB for big bucks! That’s because: a) Vancouver is hosting a record +10 million visitors annually b) Between 2008 and 2018 the City of Vancouver saw a net loss of 1,105 hotel rooms, c) The lower mainland hosts over 100,000 international students annually.
In our analysis, consistent with the 2016 report, we assume that 10% of new homes that are sold remain empty or used for short-term rental. 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 we expect to be growing at 65,000 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 do we need to build?
Metro Vancouver projects our population will grow by 65,000 annually through to 2021, and by our calculations that would require we build 37,000 new homes annually. If you recall, we’ve been averaging 17,000 since 2003.
At Mortgage Sandbox we're concerned that Metro Vancouver tops out their population projections at only 65,000 annually. Past forecasts predicted 30,000 to 35,000 population growth and as a result we’re unprepared for the expected 65,000 new residents arriving annually. We believe the city should build in a 10% annual housing buffer to accommodate the possibility that the forecasts are wrong. The risk of underbuilding is greater than the risk of overbuilding. If we accidentally overbuild, the excess housing stock would easily be absorbed within a year or two.
If we grow at the expected rate of 65,000 people annually, we hope to achieve a rental vacancy rate of 3%, and we continue to build at our current pace, then by 2020 we will be short of nearly 47,000 homes.
Conclusion
By 2020 Metro Vancouver housing stock will be short by 47,000 homes!
That is the equivalent of 780 typical 6-storey apartment buildings.
We are amid a housing crisis and even if there is a “soft landing” for home prices there will still be a severe housing shortage in 2020. If our population is growing more quickly than the anticipated 65,000 people annually (e.g., extra tech and construction workers moving to Vancouver) then we’re headed for more despair.
Should we risk not building enough? If we found a way to build the extra 20,000 homes and accidentally overbuilt the “overbuild” would only amount to 2% of total housing stock. Our perspective is that the risk of underbuilding is greater than the risk of overbuilding.
Likely, the most effective approach is for municipalities to approve density bonuses on all developments in progress. Municipalities would have to figure out a quick way to negotiate the density, so Metro Vancouver can arrive at a win-win: municipalities would get fees, developers would get a density bonus, and people get homes.
We believe our estimates are conservative. We would love for you to investigate our numbers and provide us with your own insights. Thank you for reading!
Sources:
1. Metro Vancouver Housing Data Book, Revised April 2018
2. Teardowns and Emissions, Jens Von Bergmann, May 2018
3. More than 98% of homeowners declared by Empty Homes Tax deadline, City of Vancouver, March 2018
4. 2016 Census Bulletin, Metro Vancouver
5. Housing Vancouver Strategy, Vancouver City Council, November 2017
6. Vancouver CMA 2016 Census Profile, Statistics Canada
