Housing Prices Are “Too High?”

A common complaint of developers in Ontario is, “With a small population in a country the size of Canada, how do you create a land shortage?” Not a bad question, even if you assume 2/3 of the country is not likely to develop any time soon. The answer has many causes, and the effect is higher prices for the land that can be built upon, and ultimately for the price of houses or condominiums.

The possible reasons

Population growth has demanded housing for people within reasonable distances from centers of employment. This adds the cost of highways and public transit. Neither are inexpensive to build nor to maintain.

Aesthetics matter. It removes much of the land from the buildable inventory. The cost of creating and maintaining, parks, green space, highways, and public buildings, adds to the costs relating to these accrues to the price of housing and private commercial space.

How low density should we want. For a comparison, consider the Town of Mississauga, a suburb of Toronto. People are concerned about livability and crowding. The population is about 720,000 and the area is about 72,000 acres, so density is about 10 people per acre. Is that high or low? I live in Peterborough Ontario which has a density of 5 persons per acre. Dallas Texas is around 6 person per acre. How about ancient Rome. At it speak in about 120 AD, there were a million people living on about 4,000 acres. 250 per acre. Hong Kong is close to 30. Strangely, urban sprawl is also criticized.

City planners, their politicians, and third party experts and activists impose conditions that add cost but they are not responsible for any wasted costs. Not all good ideas are worth the investment. Think about height restrictions, unit density, parking, and landscaping restrictions. The land cost per unit can vary sharply depending on these numbers.

Toronto condominiums

While doing some research on this article, I found an interesting article published in April 2021.

How Much Does it Really Cost to Build a New Condo?

The breakdown is informative. With a final price of about $900 per square foot for high rise condominiums , we find the following.

  • Land $275
  • Construction and soft costs $350
  • Government charges $150
  • Developer profit $125

From time to time the prices of each component can change.

Construction costs are higher than most people understand. Soft costs include the price of construction financing, insurance, security and the like.

The land cost in this example was $27 million for 2.1 acres with 100,000 of saleable space. The minimum height would be at least 30 stories.

Affordable housing

A wonderful political project. I wonder how much of the need arises from other political projects.

Planning is a wonderful organizing method, however when the effects of the planning are not considered, it can become the work of dilettantes. How frequently is there are cost benefit study that considers all the costs of restrictive legislation or regulation? There are studies but they infrequently include all the costs.

How different would things be if there were fewer or perhaps no planning controls. The city of Houston has none, not even zoning. Has it become unlivable? I don’t think so other than the oppressive summer heat and I think the occupants would allow the government to regulate that if they thought they could. The median price of housing in Houston is less than $225,000. Silicon Valley has roughly the same population, while the median price of housing is five times higher than Houston. I am sure there are more factors than regulation, terrain for example, but I think we could find regulation as a significant contributor to the variance.

The takeaway

With interest rates low, people are not paying enough attention to things that affect the price of housing. That can change easily and quickly.

People should be demanding in respect to proposals. Thomas Sowell thought. “Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good.” Municipal planning is an example of these ideas.

The planning elite often have little practical experience. There are more things that work in practice than on the field. Who pays the cost of mistaken understanding.

When I was young, 30% of income for housing was the norm. In some places in California 70% is not unusual today. Be a little cautious of the ratio to income. The costs you pay are paid from after tax income. If mortgage rates rise and income rises by the amount of the increase, you will lose. In addition sales taxes use up a much larger share of after tax income than they once did.

Be vary cautious with your housing costs. Have some flexibility to ride out changes in the cost structure.

Current article on Housing.

I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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