Metro Vancouver is not only the city with the most expensive housing market in Canada, it’s also the most expensive place in which to build a new single-detached home.
The region could be made more affordable by addressing this issue, says national think-tank C.D. Howe, who released its new report, “Through the Roof: The High Cost Barriers to Building New Housing in Canadian Municipalities”, published on Tuesday.
Written by Ben Dachis and Vincent Thivierge, the report outlines the costs involved to build a detached home in metropolitan regions across the country.
The cost of building in Metro Vancouver comes out looking more expensive than any other region in Canada, just like the region’s home prices.
Two main metrics were evaluated in the report, the market price of housing, and the “Minimum Profitable Production Cost” (MPPC), in order to estimate the cost of barriers to home construction.
The MPPC was arrived at by taking construction costs, which were based on the value of building permits and the number of new single-detached units in different Census Metropolitan Areas (CMAs), as reported by Statistics Canada.
The cost of buying land was then factored in, and together multiplied by the margins developers earn as profit to produce the MPPC. Then, that metric was subtracted from the market price of housing.
The report found that the cost difference between the building construction cost per square foot and market price per square foot is close to zero, which is to be expected in a normally functioning municipal housing market.
In certain areas such as Abbotsford, B.C. and Vancouver, prices for single-detached houses exceeded the construction cost of new units by $150 per square foot or more. In Vancouver, the cost gap is $300 per square foot.
Bluntly put, the cost barrier to build a single-detached home in Vancouver is more than double what it is in any other region.
The report calculates an increase in cost-per-new-house of CAD$644,000 in Vancouver. That was double the costs in the next-closest metropolitan region: Abbotsford-Mission, where it was CAD$311,000.
Dachis said the report focused on single-detached homes, a form of housing that is already well out of reach for many living in Metro Vancouver — because calculations were trickier for townhomes and condos.
Regardless, the report provides a snapshot of how much it costs to build across the region. For instance, in Abbotsford, the cost to build is one of the lowest in the country, he noted. Even so, it still comes out with one of the highest costs to build in this study. There is lots of land available around Abbotsford, but it’s harder for developers to get access to it than it otherwise should be, said Dachis.
Dachis identified a few factors leading to land constraints that could be helping to drive up values.
One is development charges, known in B.C. as development cost charges (DCCs) — tools that allows regional districts and municipalities to collect money from developers that can offset costs related to increased demands on infrastructure.
The report urges local governments to reduce such charges, introduce user fees and let new residents pay for services through property taxes, such as area-specific ones.
Agricultural land is another factor, with the report noting that there are numerous municipalities with a high share of land previously zoned for agriculture that have higher housing costs.
For example, B.C.’s Agricultural Land Reserve (ALR) is a tool for protecting agricultural land — comprised of an area of 4.6 million hectares of land suitable for farming across the province.
Development is severely restricted on these lands, and in certain municipalities, like Richmond, there are concerns about the size of the homes being built on them and taking away the ability to farm some of the property.
Abbotsford comes with an abundance of agricultural land all around – so there is plenty of land available for development. Dachis feels that there has been much more focus on stifling demand than on creating more supply.
There are, however, still questions about how much adding new supply will help with affordability.
Non-resident owners, who are known to own property that’s valued higher than that possessed by residents, owned as much as 19 per cent of condos built between 2016 and 2017 in Vancouver, according to data from Stats Canada.
When asked how adding more supply can help with non-residents taking a higher and higher share of new condo units, Dachis said that as long as there is development potential, it does not matter what the demand is.
How much supply would be needed to adequately meet the demand? And what if units are being purchased and left empty?
At the end of the day, developers are in the business to make money, he says. If foreign buyers are willing to purchase homes as vehicles for investment, developers should be able to see the business opportunity that is there and continue to build.