Sometimes discussions on the future of Vancouver, our city’s real estate prices, and urban planning are too pie in the sky. Not today! Director of Livable City Planning, Michael Mortenson, sits down with Adam & Matt for a grounded conversation on all things Vancouver real estate, breaking down pro formas, discussing city housing policy, and highlighting the various factors that make Vancouver one of North America’s priciest cities. Should the city get into building housing? Does the development community wield too much power? And can we ever expect a day in which we are not talking about our city’s housing crisis? You like numbers & facts? We got numbers & facts!
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
Tell us about yourself.
I’m an urban planner who does development and I teach at UBC and SFU. I work in the private and public sector and in the past have worked for CMHC. So I have multiple viewpoints on development in Vancouver and the region. I’m a director at Small Housing BC where we look at how we could make better use of existing land. And I look at large-scale projects like towers and mixed-use developments.
Being in both the private sector and the academic world, do you see a disconnect? Are they talking to each other?
Sometimes! Sauder will reach out to people in the industry who have their hands on actual developments. I like to call what I teach praci-demics (practical academics). But sometimes you get academics who don’t have current knowledge or real world experience, which presents a challenge.
How has covid changed the trajectory of the city?
I don’t think it’s budged the trajectory of the city, frankly. If anything it’s enhanced Vancouver’s reputation as a place to live. We’ve done quite well. I know people are hurting economically but our city has proven resilient. Even the downtown core is proving resilient. People feared this would be the end of the high rise or the office but I think those will still be powerful forces moving forward.
So all the talk of people moving to the suburbs or the city going bankrupt is overblown?
There are real economic challenges in the near term. But long term, I think some people will want to have more space in cheaper places, but I think the world will still be moving to Vancouver. The quality of the cities in our region are a draw. The exodus to the suburbs will see people learning very quickly if that works for them or not. I think there will be a boomerang effect of some people realizing the suburbs are not for them. It will work for some, but others need interaction. People want social interaction and the nuances of real conversation. I don’t think telework will ever replace that.
Covid seems to have stopped conversations about urban centres, but you seem confident about Vancouver’s place and its future. How do cities figure into the landscape moving forward?
Cities are the epicentres for new ideas. They are cultural centres of production and nothing will change that. New ways of living and new ways of working come from cities. Some people may move and there are a lot of cheap places out there – but your earnings potential will decrease. Cities will always have a magnet appeal.
There’s a feeling right now of people wanting to get back to social interactions. With vaccines on the way and people’s desire to break out of lockdown, do you see this as the beginning of the Roaring 2020s in Canada?
When it comes to real estate, we have four levels of government all trying to impact housing demand and supply with various levels of success. The cost of land and construction is high, and so are government fees. But there is pent up demand. People who have been waiting on the sidelines will move forward, especially with low interest rates. We’ve already seen a surge of activity in real estate.
People will want to get back to what they love doing – going out to restaurants, pubs, sporting events, concerts, etc. Once people get vaccinated, downtown cores will be surging. Can’t come soon enough!
Why is Vancouver so expensive?
It’s always been expensive. It’s a peninsula of land, bordered by mountains, ocean and the US border. So land is precious and that drives prices up. Construction costs continue to increase and so do federal taxes, property transfer taxes, GST, etc. All of those forces make housing expensive.
So there’s natural components and policy at play. Have there been missteps in policy along the way?
If you look at land use, we’ve done well in retrofitting the urban core but need work elsewhere. The land use plan we have today reflects the 1920’s Bartholomew plan. We have about 60% of our city locked into single-detached use which is accessible to just 3% of families based on income. You could maybe build a rental suite or a duplex on those lots, but that still doesn’t move the needle on housing affordability. With increasing housing costs, we need to get better at using our land and increasing amenities. Downtown is a fabulous success story of increasing density while also increasing amenities in the area; maybe it’s been too successful as everyone wants to live there.
So downtown was a success and then we have streetcar suburbs – like Strathcona or Kits – that have done well. If you look behind the leafy streets, there’s multi-family housing. And I think that’s the way forward. We need to be open to more multi-family housing while preserving what people love about our city like natural landscaping, amenities, nice streets, etc.
How do we get there?
We’ve seen that organic change in the downtown core and streetcar suburbs in the absence of firm zoning control has helped. We’ve experimented with things like coach houses. Carving a single-detached lot into a duplex won’t move the needle on accessibility. We need to be looking at 4-6 units in those lots to create more affordable housing. You would still need a fair amount of income to afford it but it’s more accessible than what we have.
We also need to look at other submarkets in our city on both the ownership and rental sides.
Let’s talk about the Moderate Income Rental Housing Pilot Program (MIRHPP).
I think one of the great things the city can do is partner with the development industry to work on affordable housing and purpose-built rentals. Cities don’t build affordable housing; they set the rules that allow for affordable housing to be built. The MIRHPP program is an example of that.
The city is incentivizing purpose-built affordable rental projects. On the low end we’re looking at $950/month for a studio or a one bed for $1200/month. The private sector is taking all of the risks and rents are protected. It’s a good deal for the city and for tenants, as the rents are well below market rate, especially for new units. And in exchange, the city grants the developer higher density, which I think is fantastic.
People who suggest the city should build all of our affordable housing are on thin ice. They don’t realize the costs. The construction costs are just the tip of the iceberg. Who is paying the rest of the bill? I think it’s naive to suggest the city should go it alone.
I think the city is better off to partner with higher levels of government. We’ve done that fairly successfully over the years. But I think it would break the bank for our city to have to build all of our below-market housing.
So instead of the city building affordable housing, they incentivize and partner with the development community to build purpose-built rentals, instead of condominiums for sale. The incentives are that the developers can build higher density and the city will waive the development cost levy. Correct?
Correct. And that development cost levy (DCL) is $28/squarefoot. Building purpose-built rental is an amenity to an area that has less than 1% vacancy. But the DCL waiver is maybe 4% of the capital costs of the new rental units, and it’s a one time thing, so it’s a fairly modest waiver. The developer is still responsible for the maintenance and operations of the building. So the city takes no risk.
Patrick Condon claimed that he could build 4X the number of units with the same subsidy and with deeper affordability, greater unit size and a greater surplus. And this is where you get into academics VS praci-demics. If you’re just in academics, you need to do your homework. I don’t think Patrick has done the math correctly; there’s no economics to back up what he’s saying. I challenged him on this and he couldn’t show me the answers. So I did my own analysis and found the program he suggests isn’t viable, it loses money every year and has a mortgage.
You and Patrick went into it in the Tyee article.
We did. If you’re going to give policy advice and want to lead the city, you need to have substance to back up your claims. And I’m still waiting for that from Patrick.
With 20% of those purpose-built rental units being below market value in perpetuity, the project sounds like a win. Is the challenge just getting more built?
Absolutely. These rental market projects are quite marginal – no one is running away with profits. Returns are barely over 4% per annum and that’s before tax. Developers have the choice to build condos or rental housing, so you need to incentivize rental housing. We need to do that with clear heads and clear economics, and be flexible with plans.
Why are developers wanting to build purpose-built rental with such low returns?
If you already own the land and are patient, this could be a good option for you. CMHC actually did a study showing that developers are willing to take a lower return over a longer period of time. It depends on the costs and the amount of density you can get on a site. If you already own the land and it’s a low interest rate environment, the numbers generally work. If the interest rates go up, I think we’ll see a lot less rental housing being built in Vancouver.
What else can the city do to improve affordability? How do you see that playing out on the ground?
I don’t think there’s one answer. The MIRHPP can’t be the one and only solution. It can’t cover all of our bases. We need to be informed by economics and look at multiple submarkets of rental. We need to partner with the provincial and federal governments who have money to invest. We should continue to incentivize market rentals – which will impact vacancy and asking rents. We need to look at major projects, like the one I worked on in Oakridge, to make better use of land.
I think it’s going to be a multi-family future. With city planning, we can look at broad brush changes to all neighbourhoods that get more than two units per lot. The type of development we see in Kits and Strathcona can be replicated in other neighbourhoods with great transit, shopping and nice streets. Our neighbourhoods are unique but the DNA of our streets is pretty identical. We can find multi-family options without years of rezoning.
If not, the status quo will be a two million dollar single-family house being torn down and replaced by a five million dollar single-family house. If we do nothing, it’s just going to get worse. My college thesis from 1997 still applies: We need to retrofit our city and suburbs to meet our economic, environmental and social needs moving forward.
You wrote about retrofitting our city 24 years ago and it’s still a problem we see today. Are you optimistic about the next 5-10 years? Will Vancouver get a facelift in terms of densifying areas outside of the core?
I see it happening. The city is trying to incentivize rentals on our shopping streets by increasing density. The voices in support of density are growing. My friend Gordon Price talks about limiting change to downtown and that first round of streetcar suburbs. But costs are changing that attitude. The city is looking at getting rid of minimum parking requirements, which helps tremendously with affordability.
I think we will see more change in more neighbourhoods and people making better use of land. But we need to do it carefully. We need to increase density and amenity, without gold-plating the amenities. We have to be careful about what we extract out of new developments.
There are other cities doing interesting things like this. Sacramento basically outlawed single-family zoning and minimum parking requirements. Portland is doing something similar. So we see what Vancouver could do.