Metro Vancouver housing supply crisis is likely getting much worse.

Metro Vancouver housing supply crisis is likely getting much worse.

The housing supply problem is bad, it’s real, and will likely get worse.

We’ve all heard people in Vancouver who blame lack of supply for housing unaffordability. Many will have heard the opposing “Supply Myth” argument. We believe that the supply problem is real and could be worse than any of us imagined.

By 2021 Metro Vancouver housing stock will be short by 52,000 homes!

In context, the typical 6-storey apartment building proposed for the Cambie Corridor has 60 homes. We would need to build 880 6-storey apartment buildings simply to keep up.

We need to settle this once and for all so that government can act quickly to solve our housing crisis.

There are two key controversies in the housing supply dialogue.

  1. Are we building enough homes to accommodate future population growth?

  2. Is there enough housing supply for our existing residents?

Population Growth

Recently there’s been a lot of controversy about the regional population forecasts. Depending on your source, the answer is between 30,000 and 65,000 people moving to Metro Vancouver annually. I reached out to the City of Vancouver to confirm the 65,000 population growth figure. They said, “The City has since revised this projection in the Housing Vancouver Strategy to defer to the Metro Vancouver forecast that population will expand by 18% from 2,356,000 in 2011 to 2,788,000 by 2021, which is approximately 43,200 people/year.” Based on that information their original position is unchanged. They simply re-framed the growth timeframe to spread the population growth over 10 years instead of 5 years. The 2021 total population expectations are the same.

Metro Vancouver’s Regional Growth Strategy, last updated in July 2017, projected that the population of Metro Vancouver would reach 2,788,000 by 2021. Metro Vancouver population would need to grow by 2.5% for it to reach 2.7 million people by 2021. It’s been decades since Metro Vancouver reached a 2.5% growth rate.

metro vancouver population growth.png

Given the range of population forecasts, I’ve updated the Mortgage Sandbox housing supply calculations to consider a high growth scenario, a low growth scenario, and the growth scenario forecasted in Metro Vancouver’s Regional Growth Strategy. I’ll leave it to readers to assess which scenario the City should use to plan the resolution of the housing crisis. Below are the scenarios explored for the growth between 2017 and 2021.

A. Low Growth Rate 1.44%
  B. High Growth Rate 2.15%
  C. Regional Strategy Growth Rate 2.51%

Is Supply a Problem today?

In past analyses, we’ve looked at both supply and demand, as well as the role of the real estate industry in the Vancouver housing crisis. A common frustration for some is the persistent claims of a “Supply Myth” despite rental vacancies consistently being below 1%. In the report, “The Housing Supply Myth”, Dr. John Rose says that we have built a surplus of homes in Metro Vancouver. While his analysis is thorough and, if you accept that his assumptions may be correct, we’ve run our own analysis. Jens Von Bergmann a member of Abundant Housing, an advocacy group, critiqued John Rose’s analysis and, as you’d expect, he falls into the “more supply, please” camp.

In our new analysis, we rely on the following key assumptions:

  • That 10% of new homes will be bought and left empty or occupied as short-term rentals.

  • A 3% rental vacancy rate is necessary for a healthy real estate market.

This article will focus on the ramifications of our Unmet Housing Demand chart below. If nothing goes wrong, by 2021 there will be a housing surplus of 4,500. If there is strong growth, the region may be on track to be short by almost 52,000 homes in 2021. Addressing this shortfall cannot be achieved by simply rezoning because the required development would be unachievable in such a short timeline. Instead, we propose that municipalities would need to work with developers to add units to projects already in progress. A key benefit of this approach is that it shouldn’t fuel speculative demand for new developable land, and it would likely create development fee revenues for the cities.

Show me your numbers!

Hey, we’re the first to admit that any forecast is only as good as its assumptions. We didn't do this analysis to prove how smart we are; we did it because we're passionate about solving the Metro Vancouver housing crisis. Please review our numbers and let us know if you think there's a way to improve this forecast model. Let us know and we will publish an updated version if there is a material improvement in the forecast.

What do you mean by unmet demand?

We define unmet demand as households typically able to buy but cannot due to inadequate supply. Where are these folks living now?

  1. On the streets: 3,600 people in Metro Vancouver are homeless. We're not pretending that these people are waiting to buy a detached home, but the lack of housing supply keeps other people renting who would normally be buying. As a result, these rentals are not available for people with lower incomes.

  2. Illegal rentals: Most people know of a friend-of-a-friend with an illegal rental suite. Generally, these rentals remain illegal because they have one type of deficiency or another that prevents them from being registered. So technically, you could say that people living in illegal rentals have housing, but officially this is not adequate housing. They do not meet municipal rental requirements and their tenants are not protected by the BC Residential Tenancy Act. For the purposes of our analysis, we assume people living in illegal rentals are not doing so by choice. They would much rather be in a legal rental or own a modest home.

  3. Alternate Arrangements: People are resilient in finding housing and creative solutions are often found, such as the growing number of RVs in Home Depot parking lots. Lately, we have heard about the rising popularity of multi-generational households and co-ownership. Again, people in these situations may be very happy, but they may be equally happy to be living in their own home. There are risks to adding more financial partners to your housing arrangements. It's difficult enough for two adults to get along in the long run, never-mind five or six.

People in these situations are victims of unmet demand. If there were enough homes built for them to buy one, they would. The issue today is that we do not build nearly enough homes for people to buy, so the wealthiest citizens snap up everything that comes on the market. These wealthy purchasers keep prices higher than if there was enough supply to satisfy them and those on the housing waitlist.

But we're building so much!

You're right, we are. Looking back to 2003, on average we've built 17,000 homes a year. But how do we know this is enough?

Replacing demolished homes.

Well, the first 14.3% of new homes are simply replacing a home that was demolished, so subtract 2,400 homes from the 17,000 and you are left with 14,600.

Expected empty (and non-resident occupied) homes

Next, it is known that there are empty homes and, even though there are taxes discouraging it, we can expect there always will be. They are owned by:

  • Speculators - People who believe that supply in Metro Vancouver will never keep up. They believe they have found a safe investment that consistently pays a 100% annual return.  Whoa 100%!? Yes. Even though house values were going up 20% a year, these investors only had to contribute a 20% down payment, and the rest was financed with a mortgage. So, they contributed $100,000 toward buying a $500,000 condo and the next year it rose in value to $600,000. They now have $200,000 in equity. No wonder people (local and non-resident) are tripping over themselves to take advantage of this opportunity. A 2016 report showed that 1 in 10 homes for sale had never been lived in.

  • Snowbirds - Retirees who spend part of the year in Vancouver, but when the sun disappears for 6 to 8 months of the year they follow it to places like Palm Springs, Mexico, and Hawaii. Can you blame them?

  • Short-term rentals - Let’s not pretend that this isn’t happening. You can buy a place and rent it out on AirBnB for big bucks! That’s because: a) Vancouver is hosting a record +10 million visitors annually  b) Between 2008 and 2018 the City of Vancouver saw a net loss of 1,105 hotel rooms, c) The lower mainland hosts over 100,000 international students annually.

Consistent with the 2016 report, we assume that 10% of new homes that are sold remain empty. We need to be realistic about the nature of the Metro Vancouver housing market and understand that we will never eliminate speculation and that some homes in our beautiful city will be considered recreational properties.

12,900 net new Metro Vancouver homes remain after replacing demolished homes and accounting for some empties. Assuming a household averages 2.5 occupants that would mean the region is building enough homes to support an annual population growth of 32,000…but the forecast arrival numbers are expected to be between 36,000 and 65,000 annually until 2021!

What about renters?

Metro Vancouver had 348,700 rental homes in 2016 with a vacancy rate below 1%. To achieve a 3% vacancy rate by 2021, we would need an additional 14,000 housing units ASAP.

Why 3%? According to the Ryerson City Building Institute, a healthy vacancy rate is generally classified as one hovering around 3%. As the linked article explains, this figure allows for adequate choice, and helps keep landlords accountable.

Cut to the chase. How many do we need?

If the region grows to the 2,788,000 people expected by the government and we hope to achieve a rental vacancy rate of 3% then by 2021 the region will be short by 52,000 homes.

We believe the region should build extra homes as a buffer to accommodate the possibility that the forecasts are incorrect. The risk of underbuilding at this time is greater than the risk of overbuilding. If the region accidentally overbuilds, the excess housing stock would easily be absorbed within a year or two. If there is excess supply the risk lies with the developers who would struggle to find buyers for their homes.

Conclusion

By 2021 Metro Vancouver housing stock will be short by 52,000 homes!

In context, the typical 6-storey apartment building proposed for the Cambie Corridor has 60 homes. We would need to build 880 more 6-storey apartment buildings simply to keep up.

We are amid a housing crisis! Even if there is a “soft landing” for home prices, there will most likely be a severe housing shortage in 2021.

If our population is growing more quickly than anticipated (e.g., extra tech and construction workers moving to Vancouver), then we’re headed for more despair.

Should we risk not building enough? If we accidentally overbuilt by an extra 20,000 homes the “overbuild” would only amount to 2% of total housing stock. Our perspective is that the risk of underbuilding is greater than the risk of overbuilding.

Likely, the most effective approach is for municipalities to approve density bonuses on all developments in progress. Municipalities would have to figure out a quick way to negotiate the density, so that Metro Vancouver can arrive at a win-win. Municipalities get amenity fees, developers get a density bonus, and people get homes.

We believe our estimates are conservative. We would love you to investigate our numbers and provide us your own insights. Thank you for reading!


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Sources:

1.     Metro Vancouver Housing Data Book, Revised April 2018

2.     Teardowns and Emissions, Jens Von Bergmann, May 2018

3.     More than 98% of homeowners declared by Empty Homes Tax deadline, City of Vancouver, March 2018

4.     2016 Census Bulletin, Metro Vancouver

5.     Housing Vancouver Strategy, Vancouver City Council, November 2017

6.     Vancouver CMA 2016 Census Profile, Statistics Canada

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