Economics of Land Redevelopment

I’ve been house hunting for a while, seeing if I can mind a bigger place at an affordable price. As part of that, I’ve been thinking a little about urban renewal and redevelopment and their effect on house pricing. The long and the short of it is that I don’t see how they can bring down house prices (directly).

We’ve also previously looked into real estate investing (i.e. buying a rental house), and so I’ve been to perhaps more than my fair share of open houses. In the neighbourhoods I’ve most been interested in (both for rentals and for my own house), they were originally developed in the 1950’s and 1960’s. It’s an age where the homes were mostly built on the same basic principals as current construction (i.e. 2x4 wood frame construction on poured concrete foundations), but the houses are old enough to see their original owners start to move into old folks homes. Together, it means that the houses are typically livable as is (although sometimes dated inside) but some of them are in really rough shape, or are very small (~800 sq ft) by modern standards, and so become attractive to be demolished and the lots redeveloped.

But when you buy a house, it’s actually a combined price of the land its sitting on plus the standing house itself. It can be hard to tease the two apart, but in general, it seems that these “houses” are priced based on 75% lot value and 25% structure. To put numbers on it, houses will go for $325,000 to $450,000 (baring exceptional houses, and those at the high end being recently renovated/updated), while lots (sometimes with a house in poor shape that will need to be removed, sometimes already prepped for re-development) will go for $250,000 to $275,000. This would imply that the existing house structure is worth $50,000 to $200,000. These houses are around 1,100 to 1,250 sq ft in size, and based on building costs of ~$200/sq ft, that gives these houses a rebuilding cost of $220,000 to $250,000, plus an additional $40,000 for a double garage (which is common on many of these existing houses). The numbers aren’t actually all that important, but the point is it costs more to buy a lot and build a new house on it than it is to just buy a standing house, sometimes by a considerable margin. And thus, you can’t just build houses to lower housing costs in these neighbourhoods.

One not-uncommon development technique is for a developer to buy a lot, split it in two (the City now permits houses on 25 ft wide lots, and many of the old lots were around 50 ft wide), and build a house on each side. These new houses are two stories tall to try and get more usable space, but even so, they seem to max out around 1,600 sq ft (so 800 sq ft per level). But the pricing can be high: $550,000 to $800,000 each!

So if your goal is to bring down housing costs, other options are needed. One option would seem to be putting more units on the same land, but we just saw how splitting the lot in two didn’t seem to work. Row housing may work, but doesn’t actually provide much of a density increase over houses on 25 foot lots. Going to apartment-style housing might work, but high rises are actually more expensive to build to “regular” housing on a square foot basis, in part because now you have to build underground parking for everyone. Wood frame low-rises (up to about 4 stories) might hit the sweet spot where in makes a difference.

We actually considered apartment-style living for a little bit, however most everything we could find was either too small or way more expensive that a “regular” house (or both!). Apartment-style units seemed to max out a 3 bedrooms as well. To be fair, houses with more than 3 bedrooms are not common either, but a house (at least here) would typically have a basement that could be developed into additional bedrooms. I have yet to see an apartment-style unit with 1,000 sq ft of undeveloped space that you, the owner, can build out at a later time. And for us, with the kids and working from home (which started well before Covid), 3 bedrooms simply isn’t enough long term.

So this is a rather long way of saying that redevelopment doesn’t seem to lower housing prices, and until apartment-style buildings offer 4, 5, and 6 bedroom unit at prices lower that single family housing, apartment-style isn’t going to be a serious alternative for family housing either.

I wish I could offer a better solution.