Vancouver and the So-Called Real Estate Bubble

One of the fascinating aspects of the run-up in real estate prices in Vancouver is watching the highly emotional reaction in the comments sections of websites that post news stories on the subject. For instance, the Real Estate Board of Vancouver regularly publishes monthly data that tracks prices, and these are often the subject of articles in the Vancouver Sun or Province. Take for example the most recent such article from the Sun, "Vancouver's lofty house prices fall slightly in August."

The comments following these articles immediately turn into a flame war, with one side arguing that the data is rigged, housing is in a huge bubble, and prices are about to collapse. For example, from an anonymous poster: "This article is a great spinning of the facts by our realtor friends at the VCR real estate board." Keep in mind that the web commenters are arguing about data, not opinion.

As someone who lived in London and New York during the start of the boom in the late 1990s, I find the reaction of Vancouverites to their real estate prices a little odd. Yes, the prices are high. However, they are nowhere near the levels reached during the bubble by desirable cities in other countries. I've had trouble making this argument, though, because I didn't have the data. Not many of the worthwhile media in the US or UK bother to compare their real estate with Canada.

The Globe and Mail recently helped me out by publishing an interactive article entitled "Why the housing market may be heading for correction." The graphic article intended to argue that Canadian real estate is in a bubble condition and about to burst. However one of the graphs provided by the article inadvertently argues exactly the opposite.

Here is the first chart, which does make Canadian real estate look like a bubble. Prices are in inflation-adjusted 1980 dollars:

Looking at this graph, the real estate prices in Vancouver jump out. From around $75,000 in 1980, prices are now at almost $250,000 in Vancouver. Since it is adjusted for inflation, that means houses are more than 333% more expensive now than they were 30 years ago. This does indeed look like a bubble.

Flip to the next chart, however, and those Canadian prices are plotted against US prices in the same time period:

Suddenly the Canadian bubble doesn't look so bad (unless you live in Calgary). That big bulge in US prices - now that's a bubble. Vancouver prices, by comparison, appear to have missed that bubble entirely, and then rejoined the US price graph in the recession. This, in short, is what my experience abroad told me.

Okay, but what about that 333% increase in prices, after inflation, since 1980? The issue here is interest rates. In the late 1970s and early 1980s, the North American economy was suffering from stagflation, i.e. a stagnant economy coupled with high inflation. As a result, interest rates approached 20% during the period. Today, you can get a mortage for 4-5%, give or take. In other words, debt in 1980 was four to five times more expensive than it is today.

As an example, compare the cost of fully financing that $75,000 house in 1980 versus financing a $250,000 house in 2010. The 1980 house would cost $1,211 per month to finance. The 2010 house would cost $1,315 per month. (This is in 1980 dollars, 25 year mortgage, monthly payments). The cost of owning a home has barely changed.

The key, then, is what will happen to interest rates. If they go up significantly, people holding large mortgages could be in trouble. If they are stable or go down, there won't be a problem.

Reputable economists like Paul Krugman of The New York Times are talking about the possibility of a long period of deflation, similar to Japan's lost decade. In a deflationary period, interest rates go down and stay down. Interest rates in Japan have been at or near zero for many years.

The likely scenario, then, is that interest rates will stay low for the foreseeable future. This means that Vancouver real estate prices, regardless of what the anonymous web commentators say, are not in a bubble.

Vancouver Laneway Housing: An Unfinished Project

The City of Vancouver recently approved its Ecodensity initiative, which includes a provision for laneway housing in single-family zones. This is a welcome and progressive move by the Council, since it adds density, and all its benefits, to the least-dense parts of the City. Metro Vancouver is expected to double in population before the middle of this century, and all those new people need to live somewhere. The general view is that laneway housing adds density without disrupting the granular building pattern that makes these neighbourhoods so desirable. The fact that the City was able to increase density in areas that have traditionally been reluctant to allow it is a sign of how appealing laneway housing is.

What Vancouver failed to do, however, is apply the obvious appeal of laneway housing to other appropriate parts of the City, in particular two-family zones. The thinking seems to be that two-family zones in the City already allow laneway houses in the form of infill housing, so including these zones in the Ecodensity initiative was unnecessary:

Current City regulations already allow one type of laneway housing. These are zones in which lane houses are placed over garages, in order to provide the required parking. They are generally on larger lots (50 ft or more) in areas zoned to have duplexes, conversions, and other similar development in addition to laneway housing. Although the main house is often retained, both the main house and the laneway house are part of a site redevelopment by small scale developers, with units in both buildings sold through strata titling. This zoning is very suitable for, and successful in, some parts of the city and could possibly be expanded to other locations. Ecodensity Initial Actions (p 18)

The reality however is that infill laneway houses are nearly impossible to build in these two-family zones because of an overly-restrictive set of design guidelines. In Vancouver, many parts of the City have both a set of zoning and development bylaws, which are legal documents passed by Council that determine what can be built where, as well as policies and guidelines, which are less rigorously written and enforced, but which have significant influence on the outcome of development proposals in the City.

In most two-family zones in Vancouver, there is an infill design guideline on the books that limits what can be built. The stated objective of infill is "to retain existing buildings by allowing the construction of a second residential building on appropriate sites" (p 11). The restrictions provided in the design guideline however make laneway infill nearly impossible. These restrictions include:

1. Separation between existing and infill building of 4.9m (16 ft)
   
2. A rear yard area of 195 m2 (2100 sq ft)
3. Infill building maximum height of 7.7m (25 ft)
4. Rear yard site coverage of less than 35%
   
5. For mid-block infill, a side yard adjacent to the existing building of 4.9m (16 ft)
   

This is what that looks like:


The first four restrictions make laneway infill doable on many lots, provided the existing house is relatively small and forward in the lot. However the last provision, the side yard setback, effectively kills laneway infill as a popular option. The reason is that most Vancouver lots are either 33 feet or 50 feet wide, while houses are rarely less than 25 feet wide, and are usually placed near the centre line of the lot. For a 33 foot lot, that typically leaves 8 feet of side yard, divided between two sides, while a 50 foot lot has 25 feet of remaining side yard. So 50 foot lots are a rare possibility, provided the original owner built a narrow building and located it off to one side, but 33 foot lots are out of the question.

In other words, the objective of the infill design guideline is supposed to encourage the retention of existing buildings, but the guideline's own side yard setback makes this nearly impossible. In practice, this means that the vast majority of developers of these lots demolish the existing building and construct a new duplex. (Many of these new duplexes look like character buildings, but in fact are built slab-on-grade, i.e. without basements, and without attics, much like the cheap Vancouver Specials that preceded them). This is the first irony.



The second irony is that many of the two-family zones in the City are meant to be heritage-friendly zones, which promote the preservation of character and heritage houses. Since it is largely impossible to build infill, and very costly to renovate or expand an older building, most developers will demolish the existing house, and then design the new duplex in a faux heritage style in order to get a density bonus that allows for greater floorspace. Result: character is being replaced with faux character.

The final irony is that these new duplexes are then required to have a two-car garage on the lane, a parking requirement that is meant to reduce crowding on the street. (Never mind that many duplex owners park on the street anyway, and use their garage for storage.) This required garage ends up being about the same size as the infill laneway house that the design guidelines originally prevented.

The question, then, is what is the point of these design guidelines that prevent infill laneway houses in two-family zones?

Perhaps it's because the municipal infrastructure cannot support the added density? Not true: the allowed duplexes add the same load to the infrastructure as the disallowed infill. And anyway, the numbers for family sizes and residents per building have been falling in Vancouver for decades.

Perhaps it's a matter of safety, i.e. the 16 foot side yard setback is the distance required to get emergency fire and medical services to the infill unit to the back of the lot? Again, not true: the BC Building Code only requires 3 feet for emergency access, which is the setback required for laneway housing in the new ecodensity initiative, and anyway, the lot can also be accessed from the lane.

No, the reason for the 16 foot side yard setback is that whoever wrote the guideline decided that it looked nice. To make that clear, they included this picture in the guideline:



At the time of writing, the City felt that all of the dwellings should be visible from the street. Notice, too, that the laneway house matches the main house to a large extent in terms of style. There is an idea here about the character of the streetscape and the granularity of building pattern relative to open spaces. A couple of questions come up immediately, however.

The first question is: why does this idea of streetscape trump all of the benefits of sustainable urban growth identified in Ecodensity? Laneway housing has proven to be the most visible and popular aspect of the Ecodensity initiative, with very little concern shown for the fact that these small new laneway houses will be hidden behind the existing homes. The answer must be that when the guidelines were written, the sustainable nature of laneway housing was not well-recognized; in other words, the design guideline is obsolete in today's thinking.

The second, and to my view larger and more interesting question, is: why are the City's planners trying to design houses? This is not their job. There is a point where design guidelines cross the line from being general regulations concerning safety and massing of buildings, and into the territory of individual building design. The former is a fair matter of concern for City planners, but the latter is a matter for architects, house designers, developers, owners and their neighbours.

Here and elsewhere, the City of Vancouver has attempted to quantify certain characteristics of older homes in the City, and has developed a set of incentives to encourage developers to build new buildings similar to those old forms. This is a large topic and worthy of a blog post of its own, but for now I will say that I am not alone in feeling that this encouragement of faux heritage new construction is turning the low-density parts of Vancouver into a theme park of kitsch architecture.

It is especially confounding when a kitsch design idea such as the side yard setback for laneway infill ends up encouraging the demolition of the very character homes that the new kitsch houses are meant to emulate. Yet this is what is happening throughout two-family zones.

The City Council showed admirable insight and gumption when it recently passed the Ecodensity initiative. That initiative effectively fast-tracked a slow and tedious neighbourhood-by-neighbourhood revision of zoning bylaws in order to allow small laneway houses in single family homes. Some zones, including Cedar Cottage, have already jettisoned the restrictive design guidelines that prevented laneway infill housing, while other two-family zones, such as Mount Pleasant, are attempting to do it one by one, as part of the regular neighbourhood rewriting process. The City should now show the same pluck and fast-track laneway infill housing for two-family zones.