June 16, 2015

Big Money, Big Buildings … and why just adding supply doesn’t work

Durning chooses this from CityLab:

The Big, Big, Big, Big Money Behind Tall Buildings

How super-luxury apartments became a major global investment tool.


Glass and steel tributes to the lords of industry and finance are sprouting up fast on the south side of Central Park. The price points might be extreme. But they also illustrate a larger trend in the post-crisis housing market: while spending on residential construction in New York City grew by 73 percent in 2014, the number of new units only grew by 11 percent,according to the New York Building Congress. Here’s how NYBC PresidentRichard Anderson put it to Marketplace:Just 5 or 10 years ago, “… it was more a range of housing, more outer borough housing, more affordable housing. Now, we’re spending more money but getting less housing units.” …

“Sometimes we mistake a real good for a financial good,” says George McCarthy, an economist and president of the Lincoln Institute of Land Policy. “And unfortunately, housing is both. It’s a real and a financial good.” …

That such a large quantity of global capital is seeking real estate assets in cities like New York, San Francisco, Los Angeles, Miami Beach, Chicago, Boston,Seattle, Washington D.C., Sydney, London, Singapore, and Dubai means that the “laws” of housing supply and demand are not functioning like the simple model presented in an introductory economics textbook. According to the prevailing theory, adding more housing supply at any price point should ease the upward pressure on rents across the board, and ultimately lower prices. But the overseas demand for such housing assets, for both investors and buyers, has of late been basically insatiable. In Manhattan, Billionaire’s Row is one very shiny example. …




As long as the demand for such “safe deposit boxes in the sky” remains strong, the overriding economic incentive for developers in these cities will be to build for the global super rich. Some buy them to live in, but also as an investment asset (though many are apparently under­occupied). At a time when tight credit, tough mortgage requirements and stagnant wages have excluded many from the housing market, purchasers of New York ultra-luxury condos nearly always pay in cash, says Liebman. …

In addition, land prices in the hottest markets are high, which makes funding more affordable projects unattractive or even impossible for private developers. The concern is that super-luxury developments could make things even worse, driving land prices higher and fomenting a virtuous cycle for investors who view high-end real estate as a constantly appreciating asset—unless and until it’s a bubble that goes pop. …

… adding new capacity can no doubt release some of the upward pressure on rents. But what many of the world’s hottest global cities are currently discovering is that left to its own devices, the market is adding only a relatively small amount of supply concentrated at the very top of the market, which doesn’t do much, if anything, to help keep rents more affordable across the board. In reality, it could very well be making things worse….

… those in the housing debate who are focused solely on supply seem to miss the current contours of the market they so desperately want to unleash: the influx of massive amounts of global capital has turned certain real estate markets into a speculative asset, driving up the value of land and housing and making affordable housing less, and not more, viable.

During the pre-crash mortgage boom, the prevailing view was that easy credit and lax lending standards would help poor households achieve the American dream of owning a home. Now, the breakneck construction of housing for wealthy people is touted as the improbable solution to affordable housing for everyone else. But today’s market mostly works for those who can pay. Too many Americans are straight-up broke. Global investors are ravenous. The rent is, indeed, too damn high.

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  1. High end housing in good locations close to parks, ocean or top universities is the new gold. Better than gold actually as it can be lived in and is tough to replicate. Nothing wrong perhaps with owning it or as a city, promoting it.

    But, do we monetize it enough for the benefit of local residents living nearby ?

    Why don’t we tax it more, both the transfer, the possession and the eventual sale ?

    Why are land transfer taxes only 2% on such condos or houses in Vancouver ? Why not 7% like PST, or 12% (GST + PST) as it is consumption, or 1% per $1M up to $15M i.e. 15% like in Hongkong or London now ? Why are property taxes not higher as those folks owning it often do not pay any income taxes here, yet do consume services such as healthcare or education.

    Do we tax the gain on an eventual sale adequately, or at all ?

  2. Like any good article title, this one is both catchy and misleading. The article admits that adding only luxury units does little to increase overall supply – largely because these types of buildings don’t add nearly enough supply for the existing demand. Adding A LOT of supply and/or providing widespread rent protection (for renters) are currently the only answers there are to improving affordability. New taxes on foreign investors will add some $$ to the city coffers but it will not deter the rich from buying property.

    You could get draconian and limit property purchases to Canadian residents or citizens, who must then sign binding clauses guaranteeing they are not acting on behalf of a third party and that they agree to actually reside in the property they purchase. That might slow things a bit. But if you don’t add a lot of new units, you’ll just be shaking your fist at a cloud; wishing things were different and looking for scapegoats.

    1. Why should you deter the rich from buying property ? Why not monetize it better, FAR BETTER, for ordinary Canadians, for example through higher property, land transfer and capital gains taxation ?

      Much tax leakage here in Canada. Let’s not stop immigration nor investment by the very affluent here – just MONETIZE IT BETTER.

      Vancouver sells its scenic beauty, clean air, ocean front location, glorious sandy beaches, decent weather, good schools, good enough healthcare system, mountains, safe streets and world wide accessibility far FAR too cheap !

      1. Fully agree … if anything, its becoming more expensive will make it more exclusive, which will make it more desirable to some, which will make it more expensive yet …

        Housing (shelter) is a public good. Luxury is not.

        Priced accordingly, we wouldn’t have to squabble about transit costs, or spending $150k on yoga, because it wouldn’t be a race to the bottom dollar anymore – the city could be funded generously.

  3. This is, frankly, entirely incorrect. It’s written by someone who is massively ignorant of land use policies in most of the cities mentioned.

    The notion that the market is “left to its own devices” in New York, San Francisco, LA, or Seattle is laughable. San Francisco and Seattle both reserve about 2/3 of their land for single-family residential use, no apartments allowed. Greg Morrow’s UCLA dissertation covers the downzoning of LA since 1960 in excruciating detail. Ed Glaeser’s paper “Why Is Manhattan So Expensive?” covers the painfully binding restrictions on new construction in Manhattan.

    Claiming that overseas demand is insatiable in the face of policies which obviously prevent satiation boggles the mind.

  4. Interesting, I always thought you were a fan of Bloombergization, Gordon. Unfortunately when you sand off the gritty edges of a place you often end up with a sterile resort community for the 1 Percenters (sound familiar?)

    1. I don’t buy the whole “Condo are cheaper” aspect of the debate about affordability. Condo prices are a lagging indicator in the Vancouver market and although they have been stable for awhile, in my opinion are about to become out of reach as well. Look around the 2nd St/Olympic Village corridor, all the condo projects are sold out. I cycled through the Condo’s built in the 80’s near Granville Island lastnight and all the for sale signs have SOLD on them. Rents and displacement are on the rise too:



        1. An acquaintance just purchased a 2 bed move-in condition condo in the low 200’s. Not in the uber-trendy and uber-carbon neutral Village but 7km south. Close to the Canada Line.

          The only way Vancouver can meet those prices is to re-zone vast tracts for multi-family and townhouses.

      1. For the moment at least “condos are cheaper” is a very real and tangible aspect of affordability for people looking to purchase a home. The narrative out there is that luxury condos are all that is being built because overseas investors like to park their cash in these “safe deposit boxes in the sky” and watch it appreciate. I am all for gathering more data and am open to the possibility that we need to address some demand side issues in our market – but as the major narrative for what is taking place in our condo market the narrative doesn’t hold up because:

        1) Condo prices have been reasonably level while the prices of detached homes have increased dramatically, so for speculative investors from overseas it would make more sense to purchase a detached home. Particularly since we can’t add many more of them.

        2) Even in Downtown Vancouver there are many condos being built that are affordable for average people. Here are the starting prices for the current listings:

        $296,900 Addition
        $309,900 One Pacific
        $329,900 Tate Downtown
        $345,900 999 Seymour Condos
        $462,900 Modern Condos
        $549,800 Vancouver House
        $747,900 Trump International Hotel & Tower Vancouver
        $945,000 The Private Residences at Hotel Georgia

        Since 1980 enough people have moved to the region each year to occupy about 50 – 50 story residential towers, which is likely to continue. The supply of unoccupied land in the region is largely constrained, and we are considered a highly desirable region. These factors lead to a high and rapidly increasing land values. The high cost of land explains why detached homes have become unaffordable and yet condos have remained relatively affordable. For a developer, the cost to supply a housing will be the cost of the land, the cost of construction, and the soft costs associated with the project. Even when the price of land is high if you can divide that between enough units it can still be affordable (for instance if you can put 100 units on a $5 million land assembly than each unit only has to cover $50,000 in land costs).

        As Reilly mentioned, Ed Glaeser demonstrated that in markets with constrained supply housing sells well above its construction costs, while in flexible markets it sells much closer to its construction costs. While people seem concerned that allowing more units will add to our speculative condo boom and create higher prices, the reality is that prices have been relatively stable and my concern is that constraining our supply is what would lead to the escalating condo prices that you suggest are on the way. Keep in mind those 50 – 50 story towers worth of people who move here each year.

        1. Good Points. Just keep in mind wages are stagnant and in my opinion job opportunities outside of Real estate and construction are not that plentiful, so a downturn in the economy is really going to hit first time condo buyers if you lose your job. Again If condos keep taking out new highs we could have issues. Also just because those prices are listed doesn’t just mean you can walk up and grab it at that price, there are people competing and bidding on these units.

          1. Perhaps a more pro-business council in various cities would help, such as lower commercial taxes and a pro-business attitude as opposed to this constant opposition to industrial expansion. Vancouver is actively being re-build as a RESORT TOWN for the rich, as a green urban elitist city, to live in, to relax in, to study in, to work FROM.

            Vancouver is attractive to live in and work FROM. Where the business is matters less. Could be a mine in Peru, an import-export business in Richmond, a manufacturing plant in mainland China, an oil firm in Alberta or a distributorship of European energy products.

            If you want a real well paying job, go to AB, SK or up north in BC. Then, come back and open your own business, living in Vancouver.

            Some decent high-tech, accounting, financing or legal jobs remain downtown. All require expertise and are usually connected to firms outside of Vancouver. That is why resource extraction, processing or shipping thereof is so very vital to Vancouver !!

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