The Lag Effect: Long approvals processes impacts market

We’ve all seen the headlines – high demand for Vancouver real estate and low supply has resulted in exorbitant home prices and a call for more affordable housing types, particularly multi-family developments.

Metro Vancouver home sales in October were 15 per cent above the 10-year October sales average, according to the Real Estate Board of Greater Vancouver (REBGV). The majority of sales were concentrated in the single-family attached and condominium sectors.

“Conditions continue to vary significantly based on property type. The detached home market is well supplied with homes for sale, which is relieving pressure on prices,” says Jill Oudil, REBGV president. “It remains a much different story in the townhouse and apartment markets. Buyers of these properties continue to have limited supply to choose from and are seeing upward pressure on prices.”

According to a recent report by the British Columbia Real Estate Association (BCREA), Metro Vancouver is seeing a record number of housing starts. With starts expected to increase by 50 per cent in 2018, the new inventory should help ease the housing market in the region. But here’s the catch – the projects need to be completed before they can have any real impact.

While developers are eager to bring more projects to the marketplace, they are finding it difficult to meet the demand in a timely fashion. Due to the emphasis on higher-density housing and prolonged approvals processes, bringing a project from concept to completion can take years. This extended period between concept and completion has been deemed the “lag effect,” which according to BCREA, has “exacerbated short-term market imbalances.”

What’s happening behind the home building scene that’s causing this delay? The issue is multi-faceted, and the complicated approvals process is one of the many hurdles builders face.

According to Jason Turcotte, vice-president of Cressey Development Group, “Timelines for projects, from start to finish, vary drastically depending upon the complexity of the approvals process, the form of construction such as townhouse versus highrise, and the general scale of the project. However, regardless of the form, all timelines are being stretched due to increasingly complicated approvals processes, public opposition, generally larger scale developments and a drastic shortage of skilled labour.”

According to the Canada Mortgage and Housing Corp. (CMHC), it takes more than 20 months for an apartment project to proceed from start to completion in Metro Vancouver. The number of months varies in the region from 12.5 months in Surrey to an extensive 35.7 months in Vancouver. Ironically, the most competitive housing market has the most drawn-out approvals process.

“Vancouver has some of the most complicated and time-consuming approvals processes anywhere. Not to mention, the projects in Vancouver tend to be more of the large-scale, highrise variety which simply take longer to build,” says Turcotte. “I suspect Vancouver’s proportion of highrise developments relative to wood-frame, in contrast to Surrey, accounts for a large part of the differences in average timelines. But Vancouver is a city where almost all new development is taking place in previously developed residential areas, so the public process – and opposition – is much more intense.”

Public opposition? No surprise here. High-density housing has a reputation for sparking resistance, where NIMBYs unite to oppose new developments they feel will negatively impact their neighbourhood.

However, the lag effect has far greater implications than simply a delayed housing development. The lag effect creates a disparity between supply and demand, and its ripple effect trickles down to prospective buyers and the overall housing market.

Turcotte puts it simply: “Time is money,” he says. “The longer it takes to approve a project, the more expensive the housing units become. Especially in this rapidly escalating marketplace, where we have seen our projected rents on proposed new rental projects increase substantially due to long drawn-out approvals processes, which becomes necessary simply to keep pace with the rabidly escalating cost of new construction. All these costs are eventually passed on to the consumer.”

While many of the developments on the horizon for 2018 have already been pre-sold, multi-family completions can add to the overall housing supply through several other channels, according to BCREA:

• Households in Metro Vancouver transferring from the rental market into homeownership will free up rental supply
• Households in Metro Vancouver moving from existing ownership bolster supply when they put their homes up for sale
• Investors intending to earn rental income create additional rental supply
  

To help reduce the amount of time to complete much-needed housing projects in Metro Vancouver, Turcotte suggests to “avoid doing neighbourhood plans that designate land uses, but require each new project to proceed through a rezoning individually. This essentially doubles up the public process, which leads to longer approvals timelines. New neighbourhood plans should ‘pre-zone’ development lands.

“Also, Cities could, and should, rely more heavily on the registered professionals to guarantee that development plans meet the appropriate regulatory instruments, whether that be compliance to zoning or Building Codes, as the case may be.”