Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 380

Jeremiah Shamess of Colliers made the claim this week that land values in some areas of the Toronto region are down 25%. He then shared a chart from Alan Leela showing how various factors have increased or decreased land values since 2020.

Broadly speaking, a revenue increase and/or more development density should increase land values; whereas something like inclusionary zoning, which is a cost to the project, should decrease land values. Indeed, this is one of the arguments in favor of inclusionary zoning: "Don't worry about the additional cost to the project because landowners will simply pay for it through reduced land prices."

In theory, all of this is correct.

Land is (or should be) the residual claimant in a development pro forma. Start with your revenue, subtract your costs, and then see what is left over for the land. (Though keep in mind that what is left over for the land could be $0 or even a negative number.)

But as I have argued before in the context of inclusionary zoning, I don't think things always play out so neatly in the market. Put differently, if the cost impact of inclusionary zoning is something like $44 psf , I don't think all landowners suddenly drop their prices accordingly -- especially in a rising market where developers are competing fiercely for land.

They don't care about your residual value model. Many or most will just hang on to their number and wait for someone to pay it.

So what I am saying with all of this is that, yeah, there are factors that put either downward or upward pressure on land values. But how it all actually plays out in the market tends to depend on the macro environment and what else is going on at the time. And right now we are at a point in the cycle where there is clearly downward pressure on land values.

Here's some data (via Jeremy Withers) explaining that a large portion -- about 61% -- of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower -- about 24%.

Now, the premise of Jeremy's tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic ).

But is non-owner occupied really such a bad thing?

First of all, non-owner occupied implies that somebody else is renting the place. I don't think that a significant chunk of these homes are being left vacant. So isn't the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?

One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.

This point cannot be overstated.

The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before .

So if it weren't for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.

Yesterday, I asked this on Twitter:

https://twitter.com/donnelly_b/status/1670963859375509505?s=20

And then I learned that Victoria-based Aryze is already doing it:

https://twitter.com/TalktoARYZE/status/1671148930187534342?s=20

I was a little surprised by some of the numbers here, namely municipal fees. But that is not the point here. The point is that this is a great idea and that, judging from the comments on Twitter, many people seem to want this.

The obvious benefit is that it allows consumers to better understand where their money is going . But I also think that by showing people all of the costs that get levied on new housing, it could benefit the overall development industry.

What do you think? Should developers in Toronto adopt a similar approach? Let me know in the comments below.