Image: Daily Hive
Frances Bula in the Globe and Mail reports that the City of Vancouver will be requiring developers to ensure that roughly 25 per cent of units in new projects are “rented at rates affordable to those earning $30,000 to $80,000”. The City has faced some criticism for their eight year old “Rental 100” program that offered incentives for developers to build rentals, but also resulted in gaspingly high ‘low’ rents, including $1,360 for an east side studio. Developers will be offered an increased density bonus in exchange for the creation of affordable rental units.
Developers will be allowed to build this fall in an experiment to evaluate the effectiveness of 20 to 25 per cent of units being custom-built for affordable rental housing. Rents could range from $750 for people earning $30,000 to $2,000 a month for people earning $80,000.
Without the legal controls to reduce rents as in the United States, the Province has no regulation to give building owners a property tax break. Head planner Gill Kelley will experiment with increased density, lower parking requirements, and lower development fees to ensure a pro forma supportive of creating a building with 25 per cent affordable rental stock. Inclusionary zoning could also be contemplated, where developers are told outright that a percentage of the apartments in a building are for affordable rental in return for a density increase.
“Asked why his party did not move sooner on a policy like the one to be announced on Sunday, Mr. Robertson said Vision set precedents in the country with its previous incentives, which have boosted rental construction by hundreds of units a year, and with a rental-only zone in the Downtown Eastside.”
Is this too little too late? Frances Bula reports that the Mayor wrote the Urban Development Institute stating that new requirements were coming, and that they
“should avoid over-paying for land in the current out-of-control market…We are writing to express concerns about the amount of speculative behaviour in the real estate market,” the mayor wrote to the Urban Development Institute on July 20. “The purchase prices we are seeing reflect a housing market that is disconnected from local economics, and will lead to proposals that will be challenged to meet the City’s requirements for affordability.”
Affordable rental policy will require another level of bureaucracy to ensure that the units are rented out correctly to those income scales, and the incomes monitored to ensure the rents are correctly adjusted-as well as managing what could be a very very long waiting list.
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Reblogged this on Sandy James Planner.
I think this is an excellent and necessary policy as it will create more rentals.
HOWEVER, it will make the other 75% even more expensive as the 25% have to be sold at well below market pricing, possibly at a loss. With current new buildings coming in well above $1000/sq ft I expect this will increase prices by about 20%.
The math: 75% of properties but maybe 85% of floorspace means that 15% of floor space’ 12-15% unavailable profit margin will be distributed to the 85% resulting in 20%+ higher prices for these 75% of market units.
If new units go up 20% then existing units follow by a similar margin.
A far better affordable housing policy for buyers is more rapid transit as prices in NewWest, Surrey or Burnaby are far lower.
Renters gain, but buyers will pay even more !
Construction cost of about $300 sq ft No cost for bonus density . How much will the rent restricted condo need to sell for to be worth the developers effort.?
Bonus density helps. How much is it ? 10% ? 25% ? 50% ?
Besides hard cost to build there are all the soft costs for land assembly, permits, delays, design, engineering, interest costs, marketing (5% of sales) & sales (another 5% or so). With land prices now $500/sq ft downtown you can see that $1000 is about break even at best .. rest profit if any to account for risk, time and money tied up.
So using a $1.2M market condo of 1000 sq ft as an example, what would it sell for if rent is forced to stay at say $1650, and not $2500-$3500 market rent ?
I arrive at a value of at best $500,000, closer to $300,000. of course parents might buy it for their kids and rent it to them at the prescribed rate. So they might pay $750,000 for it.
The math (abbreviated) when we buy condos in bulk or apartment buildings to arrive at a CAP rate (capitalization rate):
Condo fees say $350/month (35 cents per sq ft)
Property taxes (say 0.2% millrate of $500,000) $80/month
Mgmt fee of 8% = $120/month
R&M = $100/month (repair and maintenance for new carpets, paint, etc)
So expenses = $650/month
Thus NOI (net operating income) is $1650 – $650 = $1000/month or $12,000/year. On a $500,000 condo that is not even a 3% CAP rate which is horrible. A 4% CAP rate implies a $300,000 value. A pension fund might pay that as some rent increases are a given. So developers will have to make this substantial loss up in the market condos.
Vancouver council just forced price of new condos up by AT LEAST 20%, possibly more.. Existing units follow, of course.
Renters gain, but buyers will pay even more !
What will also happen is the renter may use VRBO or AirBnB to fill a room. or people sign 3 year lease at $1650 but ask renter to buy the existing furniture for $75,000 i.e. the usual cheating like we see now with vacancy tax enforcement.
If the developer buys land at a cost that reflects the F S R for market housing & gets the extra density needed for the rent restricted units free the tipping point is $330 a sq ft comprising of a construction cost of $300 sq ft plus !0 % soft costs. This is a 3.6% cap rate on $12,000 net income. If there is no parking required the cost per unit can be reduced by 40 or 50 K and move the cap rate to over 4%
You may be right in principle. IF. Soft costs far higher than 10% though due to time delays, permitting, engineering, interest costs & sales & marketing costs. Higher buildings with higher FSR also are more expensive per sq ft than lower buildings. But you are right maybe they can deliver them for $500/sq ft. We shall see.
What might happen is that every 3rd or 4th market condo comes attached with a “must be rented” condo, i.e. one strata unit is two physical units. I live in such a building at UBC where out of 75 condos there is about 15 rental units and thus, 15 condos are actually 2 physical units. These 15 units are small usually, studios or small 1BRs on lower floors, for students by and large, but the concept could work.
Time for the Vienna model methinks.