October 20, 2015

Item from Ian: Housing Crisis in London

An interesting addendum to the cost of housing elsewhere:

According to an insight study performed by the think tank New London Architecture, the dimensions of the London housing crisis are spectacularly bad: 80 percent of all new homes are only affordable to 20 percent of residents, while a near majority of all renting households are living in poverty. The study predicts that the city will add 70,000 residents per year, resulting in a total population of 11 million by 2050 (an increase of 2.4 million from this year’s population of 8.6 million).

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London
 

Billionaire investors aren’t helping the housing shortage: 61 percent of all new homes are bought as investments, without any intention of being occupied by the owners. However, not all is lost: London’s relatively low urban density makes it an ideal place for increased housing development, provided that the housing can actually be afforded by the people who intend to live in it.

I wonder what the numbers would be here?

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  1. London has systemic issues in its housing industry that go far beyond the impact and distortion of global wealth. Some 140,000 people moved to Greater London last year and the industry here struggles to build even as many units annually as we do in Greater Vancouver.
    Where to start?
    * Land Assembly:
    Purchasing land and due diligence is more complicated. You have to search title back to the Norman Domesday Book of 1066. The Purchase and Sale transaction is much longer; in the time it takes you to get into a binding contract, you are exposed to “Gazumping” (someone else offering more for the land and collapsing your deal). The real binding part of the contract pretty much happens at the end when you “exchange contracts”. Brownfield sites have the usual contamination issues dating back to the industrial revolution; once in a while an “Unexploded Ordinance Survey” reveals large powerful bombs buried during Luftwaffe Air Raids; and archaeology can sometimes get interesting and time consuming – King Richard III was found buried last year under a parking lot.
    * Design:
    UK design culture is focused on skinny buildings with “dual aspect” design, typically 6 storeys of less. It is difficult to develop the compact buildings we are familiar with in Vancouver (i.e. those with a central core and double loaded units off a central hallway). As a result, buildings in the UK are generally less space efficient on a Net:Gross basis.
    * Planning:
    Planning generally takes longer and Community Amenity demands are more demanding, led by requirements for affordable housing ranging from 25% to 50% (ie. Tower Hamlets). Some jurisdictions want non-market units pepper potted with market units. Heritage is an issue in some places. In most jurisdictions in the UK you also have to deal with Rights of Light (a civil law issue) which limit how much of your neighbours’ light you can impede with new development.
    * Construction:
    Construction costs are high in London and outside the region there are fewer contractors who do a complete turn-key “core-shell-and-residential” fit-out. They build cores first, then the floors and in general my perception is that new builds take longer.
    * Marketing:
    There is not the same culture of pre-sales which de-risks the development of larger projects. Vancouver developers and purchasers do well with a legal system of “Specific Performance”, the Real Estate and Development Marketing Act” which supports a fair pre-sale system. In Vancouver, a developer can begin construction with the certainty that 50% to 60% of their units are already sold; not so in the UK. Developers in the UK tend to build and sell in small chunks to limit their exposure to market risk.
    That a quick high level review. I am sure there are other Lessons from London so I’ll prepare a longer post later.
    Cheers
    Michael Mortensen

  2. The caveat on this otherwise good statement strikes me as somewhat ignorant: “London’s relatively low urban density makes it an ideal place for increased housing development, provided that the housing can actually be afforded by the people who intend to live in it”
    What’s important is the effect on all housing prices, not the price of the new housing. Each additional housing unit means a household is no longer bidding up the price of *other* housing units, which is beneficial even if the new housing costs megabucks.
    It’s really unlikely that the new housing units will be affordable shortly after they’re constructed, for the following reasons:
    1) New housing is usually going to be more expensive than average, for the simple reason that it’s newer than average.
    2) The profit margin is generally higher for luxury housing, so until that market is sated (it’s definitely not in London)
    developers are likely to target it.

    1. @Reilly, Good points!
      I’ve always wondered how it could be possible to build, so called, affordable housing in Vancouver unless the interiors were unfinished. The only possibility for a finished unit is a very small space in a very tall building.

      1. The unfinished affordable housing thing has actually been done successfully … here’s a visible example: http://en.wikiarquitectura.com/index.php/Nemausus_Housing
        Additionally though, there’s nothing tremendously different about construction in Vancouver vs construction elsewhere, but I’m amazed how much more it costs to build anything here – the fact that a laneway house easily costs $300k here to construct when you can build 2x ‘real’ houses for that amount easily elsewhere in the country. Labor costs are higher here, yes, but certainly not 2-3x more (architect salaries certainly aren’t!) … which goes to say that it is possible to build affordably here if the price of land is disentangled from the cost of the house (ie. the leasehold land near granville island, land trusts, etc …)

  3. WRT NYC:

    October 21, 2015
    $5B sale in NYC keeps 5,000 units affordable
    ◾Stuyvesant Town and Peter Cooper Village will be sold to Blackstone and Ivanhoe Cambridge, a subsidiary of Canadian pension fund manager CDPQ.
    By JONATHAN LEMIRE
    Associated Press

    Officials said that about 4,500 apartments will be reserved for middle-income families for at least 20 years. Another 500 will be kept for lower-income families.
    “The deal brings affordability and stability back to our community,” said Susan Steinberg, head of the complex’s tenant association. “Considering today’s real estate forces, this is a solid outcome.”

    Just over half of the units have already been converted to market-rate. Under terms of the new deal, 90 percent of any vacancies in the remaining apartments will be set aside for families making around $130,000 a year, the average income for a family in the complex now. The other 10 percent will be for families making as little as $60,000.

    http://www.djc.com/news/re/12082805.html

  4. $5 billion for 5,000 units = $1,000,000 average per unit. For a 1940s era megadevelopment.
    NY’s housing prices are truly “world class”.

  5. There are over 11,000 units in total – so “only” half a mill each!:

    Manhattan’s largest apartment complex will be sold for $5.3 billion in a deal that will preserve nearly half its 11,232 units for middle-class families, New York City officials said Tuesday.

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