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The economic reasons for the shortages of residential rental accommodation in greater Vancouver Levine, Robert Calderwood 1974

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THE ECONOMIC REASONS FOR THE SHORTAGES OF RESIDENTIAL • RENTAL ACCOMMODATION IN GREATER VANCOUVER by ROBERT CALDERWOOD LEVINE B.Sc,  University of B r i t i s h Columbia, 1971  A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN BUSINESS ADMINISTRATION i n the Faculty of Commerce and Business Administration  We accept t h i s thesis as conforming to the required  standard  THE UNIVERSITY OF BRITISH COLUMBIA March, 1974  In p r e s e n t i n g t h i s t h e s i s  in p a r t i a l  f u l f i l m e n t o f the requirements  an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree the L i b r a r y  s h a l l make i t  freely  available for  I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e  for  that  r e f e r e n c e and s t u d y . copying o f t h i s  thesis  f o r s c h o l a r l y purposes may be granted by the Head of my Department o r by h i s r e p r e s e n t a t i v e s .  It  i s understood that copying or  publication  of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d without my written  permission.  The U n i v e r s i t y o f B r i t i s h Columbia Vancouver 8, Canada  Date  i Abstract In the l a s t three or four years a shortage of r e s i d e n t i a l r e n t a l accommodation has been developing i n Metropolitan Vancouver.  This shortage has been brought about by a continuing  decrease i n the annual number of apartment completions since 1969. To determine the cause of t h i s shortage, concentrated  t h i s thesis  on defining the reasons f o r the continuing  de-  creases i n the annual number of apartment completions since 1969. Information  on apartment land costs, construction costs,  financing costs and operating costs were c o l l e c t e d f o r the period commencing i n 1964  and ending i n 1972.  Annual per-  centage increases f o r each of these costs were calculated and compared with annual percentage increases i n apartment rents over the time period. I t was  found that the c a p i t a l costs of producing  apart-  ment buildings (construction and land costs) have been i n creasing at a f a s t e r rate than rents i n most areas of Metrop o l i t a n Vancouver between 1964  and 1972.  More rapid increases  i n c a p i t a l costs than i n rents reduce the y i e l d that i s a v a i l able from apartment investment and thus reduce incentive to produce new  developers*  apartment r e n t a l u n i t s .  An analysis of apartment operating costs indicated that they have been increasing at the same rate as rents f o r buildings of s i m i l a r ages operating between 1964  and  1972.  Thus, operating costs have not been responsible f o r the recent reduction i n construction of apartment r e n t a l u n i t s . Investigations were also c a r r i e d out to determine what e f f e c t s the amendments to the Income Tax Act have had on the continuing production of apartment r e n t a l u n i t s .  I t was  found that the amendments destroyed many of the advantages that apartment investment had over other forms of investment. They have reduced the p r o f i t a b i l i t y of apartment investment and have discouraged  the i n d i v i d u a l investor, who  was l a r g e l y  responsible f o r the tremendous growth i n apartment construct i o n during the 1960*8, from investing i n new  apartment  buildings. An examination of the procedures, costs and the  lengths  of time required to obtain municipal approval of apartment development applications was c a r r i e d out f o r the C i t i e s of North Vancouver and Vancouver and the D i s t r i c t of Surrey. I t was  found that municipal regulations often s u b s t a n t i a l l y  increased the costs of apartment development and delayed  the  i n i t i a t i o n of apartment construction f o r lengthy periods of time.  This was  found to be e s p e c i a l l y true where land use  contracts were used. An analysis of the expected future demand f o r multifamily accommodation to the year 1991 was  conducted.  I t was  discovered that approximately 10,000 a d d i t i o n a l units per year w i l l have to be provided i n Metropolitan Vancouver u n t i l 1991.  With the present rate of apartment completions,  demand w i l l not be  met.  this  iii Only i f rents r i s e high enough to make apartment investment a t t r a c t i v e r e l a t i v e to other forms of investment w i l l t h i s demand be met.  Increasing rents could cause governments  to implement some form of rent c o n t r o l .  A study of rent con-  t r o l systems i n the United Kingdom and New  York C i t y indicated  that they do l i t t l e to solve housing problems and aggravate the shortages that e x i s t .  iv Contents I  Introduction . .  II  Demand Forecasts For Multi-Family Rental Accommodation . . . . . . Population Analysis Residential Demand Analysis Analysis of Future Apartment Shortages Summary and Conclusions  III  Rent Levels, Construction, Land and Financing Costs . . . . . . . Rent Increases, 1964-1972 Land Costs Construction Costs Financing Costs Capital Costs, Financing Costs, Rents and Y i e l d s Summary and Conclusions  IV  The Impact Of The New Federal Income Tax Act On The Residential Rental Market The New Tax Regulations As They Affect Real Estate Transactions The impact Of The Income Tax Act On Investment In Residential Rental Property Summary and Conclusions  V  The Processing Of Apartment Development Permits By Municipal Authorities North Vancouver—Outright Use Land Use Contracts North Vancouver—Land Use Contracts C i t y of Vancouver D i s t r i c t of Surrey Summary and Conclusions  VI  Operating Costs Operating Costs as Presented i n Real Estate Trends Operating Costs Presented i n the Dale-Johnson Dissertation Summary and Conclusions  1 1^ 1^ 19 25 27 . . 28 29 33 4-1 ^7 ^9 55 56 56 66 72 73 7^ 79 81 83 86 90 92 9^ 96 102  VII  Rent Controli Is I t A Solution Or Aggravation Of P r i c i n g P o l i c i e s In The Housing Market? . . . . 103 The United Kingdom Experience The New York Experience The Case Against Rent Control Summary and Conclusions  VIII  A Study Of The P r o f i t a b i l i t y Of Some Greater Vancouver Apartment Buildings Method of Analysis Limitations of the Sample The Results of the Apartment Investment Analysis Summary and Conclusions  IX  Findings And Conclusions . Rents and Construction, Land and Financing Costs The Income Tax Act Municipal Approval f o r Apartment Developments Operating Expenses Future Demand f o r Apartment Units Rent Control A Comparison of the P r o f i t a b i l i t i e s of Some Vancouver Apartment Buildings The Future of the Apartment Rental Market i n Greater Vancouver  Footnotes Bibliography  104 108 110 114 115 115 117 118 130 . 133 133 138 l4l 148 149 150 153 155 157 2.6k  Tables 1. 2.  3.  4. 5.  Multiple Family Completions In Selected Areas Of Metropolitan Vancouver, 1966-1972  3  Multiple Family Dwellings Registered As Strata Lots In Selected Areas of Metrop o l i t a n Vancouver, 1968-1972  4  Overall Vacancy Rates In Multiple Family Rental Accommodation In Metropolitan Vancouver, 1963-1972  6  Population Growth Trends, Metropolitan Vancouver And Selected Areas, 1966-1991 . . . . . .  15  Projected Population By Age Groups, Lower Mainland, 1971-1991  17  6.  Average Household Size, 1951-1991  18  7.  Income D i s t r i b u t i o n By Households, Metropolitan Vancouver Estimated Single-Family And Multi-Family Units Required For Growth And Replacement By Sub-Area, 1965-1991  23  9.  Multi-Family Units Demanded As A Percentage Of Additional T o t a l Housing Required, 1965-1991. . . .  24  10.  Average Percentage Rent Increases i n Metrop o l i t a n Vancouver By Suite Type, 1964-1972. . . . .  30  11.  Average Annual Percentage Increase In Rents For Selected Areas Of Metropolitan Vancouver By Suite Type, 1964-1972  32  Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972  35  Percentage Changes In Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972  38  Apartment Completions As A Percentage Of T o t a l Stock In Selected Areas Of Metropolitan Vancouver, 1966-1972  40  Residential Construction Price Indexes. . . . . . .  45  8.  12. 13.  14.  15.  20  vii;J 16. 17.  Interest Rates On Conventional Loans In Canada, 1964-1972  Mortgage 48  Average Annual Increases In Construction Costs, Financing Costs, Land Costs And Rents In Selected Areas of Metropolitan Vancouver, 1964-1972  51  Average Annual Increases In C a p i t a l Costs, Financing Costs And Rents In Selected Areas Of Metropolitan Vancouver, 1964-1972  52  Total Operating Costs As A Percentage Of Gross Income For Frame And Concrete Apartment Blocks In Metropolitan Vancouver, 1966-1972 . . . .  95  Location Of Frame Apartment Blocks In The Sample  98  21.  Size Of Frame Apartment Blocks In The Sample. . . .  98  22.  Operating Costs As A Percentage Of Gross Income For Frame Apartment Buildings Operating In Metropolitan Vancouver Defined By Building Age  18.  19.  20.  23.  A Comparison Of The P r o f i t a b i l i t i e s Displayed By Two Groups of Greater Vancouver Apartment Buildings  100  . . . . .  119  riii  Figures  1. 2.  Apartment Site Values For Selected Areas In Metropolitan Vancouver, 1964-1972  37  Residential Construction Price Indexes . . . . . . .  44  Acknowledgements  This thesis could never have been written without the aid I received from many members of the r e a l estate industry i n obtaining the information and formulating the ideas that are contained i n the t h e s i s .  Among them, I wish to espe-  c i a l l y thank the Greater Vancouver Real Estate Board and o f f i c i a l s of the City of Vancouver, the City of North Vancouver and the D i s t r i c t of Surrey.  I would also l i k e to  thank Professor Stanley W. Hamilton f o r his suggestions and advice, much of which have been followed i n the preparation of the manuscript; and my parents whose concern and support ensured the conclusion of the t h e s i s .  1 CHAPTER I Introduction Between the years i 9 6 0 and 1972 there was a rapid expansion i n the number of multiple family housing i n Metropolitan Vancouver.  During t h i s period  starts  approximately  65 per cent of the current t o t a l multiple dwelling stock was constructed.  This rapid expansion was brought about by i n -  creased demand f o r r e n t a l accommodation on the one hand, and by the large increase of funds flowing from professionals into apartment investment on the other. The strong demand was created p a r t l y by the migration of other Canadians and foreigners to B.C., and the Lower Mainland i n particular} p a r t l y by the r i s i n g costs of land, construction and financing i n the home ownership sector which squeezed some p o t e n t i a l home buyers into the apartment marketj and p a r t l y by the increasing affluence of the population which allowed young  t  single people to enter the  apartment market and s i g n i f i c a n t l y increase  non-family  household formation. The supply of apartment units was greatly aided by the entrance  of the professional with a very high income and  high marginal tax rate who was more concerned with h i s personal after-tax cash p o s i t i o n than with the before-tax p r o f i t a b i l i t y of an investment.  Apartment investment u n t i l  recently allowed him to trade o f f a reduction i n the return  2 on h i s investment f o r a large tax saving.  The professional  "brought about an expansion of the market because he  was  w i l l i n g to accept a lower return and lower rents which r e sulted i n a misallocation of resources towards apartment investment and away from other types of housing."'* Table 1 shows that the peak of apartment investment reached i n 1969 when 12,525 units were constructed.  was  Since  then the number of apartment completions have f a l l e n o f f dramatically.  The extent of the reduction i n apartment i n -  vestment since 1969 i s minimized i n Table 1.  Since  1966,  when the Strata T i t l e s Act was passed by the Legislature allowing ownership of i n d i v i d u a l units i n multi-family dwellings among other things, the number of apartment units constructed f o r outright sale have increased dramatically. Table 1 does not d i f f e r e n t i a t e between units constructed f o r ownership and units constructed f o r r e n t a l .  I t i s therefore  necessary to r e f e r to Table 2 which presents the number of units designed f o r ownership between 1968 and 1972.  Sub-  t r a c t i n g the t o t a l units constructed per year i n Table 2 from the corresponding t o t a l s i n Table 1 demonstrates that the drop-off i n the supply of r e n t a l accommodation i s more s i g n i f i c a n t than appears from Table 1 alone.  Assuming that  a l l those units i n Table 2 are new multi-family construction,  then the t o t a l amount of apartment units constructed  f o r the r e n t a l market are 7.697 i n 1970, 5,512  i n 1972.  7»969 i n 1971  and  3 Table 1 Multiple Family Completions* In Selected Areas Of Metropolitan Vancouver, 1966 to 1972  Location Vancouver C i t y  1966  Number of Dwelling Units Completed 1967 1968 1969 1970 1971 1972  2359  3649  4626  6106  1290  2716  1936  600  1310  1628  1320  2116  2124  1119  Coquitlam  94  241  503  837  516  482  555  Delta  45  6  104  131  549  337  96  New Westminster  587  914  1106  673  344  133  149  North Vancouver  412  713  1270  1449  884  868  943  4  59  130  231  140  426  64  158  134  370  75  69  696  1424  845  996  Burnaby  Port Coquitlam Port Moody  —  102  Richmond  154  —  Surrey  —  91  10  379  596  469  1575  1420  West Vancouver  327  21?  133  I63  340  197  183  White Rock  —  72  26  189  15?  95  347  7293  10032  12525  8601  9873  7808  Total  4673  * Includes both apartment and row housing.  Source:  Central Mortgage and Housing Corporation s t a f f .  Table 2 Multiple Family Dwellings Registered as Strata Lots In Selected Areas Of Metropolitan Vancouver, 1968 to 1972  Number of Dwelling Units Registered 1968 1969 1970 1971 1972 Vancouver City  —  Burnaby and Richmond Coquitlam,  Port  102  —  38  222  793  181  301  920  755  44  162  44  4  295  211  Coquitlam and Port Moody Delta, Surrey and White Rock  —  New Westminster North Vancouver  —  —  78  West Vancouver Total  Source*  —  182  451 —  172  598  904  Mr. Ron Roberts (U.B.C.) unpublished  62 399 $0  10 102  233  1904  2296  information.  5 That the lack of investment i n rental accommodation i n recent years i s severely a f f e c t i n g the r e n t a l market i s i l l u s t r a t e d by Table 3 which presents the vacancy rates f o r Metropolitan Vancouver between 1963  a  n  d  1972.  Since 1970,  except f o r a b r i e f period i n the summer of 1971» the vacancy rate has been f a l l i n g s t e a d i l y to the record low of 0 . 6 per cent i n December, 1972.  For a l l p r a c t i c a l purposes s i x  empty apartment units per thousand surveyed i s a zero vacancy factor.  A l l indications are that the Metropolitan area w i l l  experience a c r i t i c a l shortage of r e n t a l accommodation i n the next few years. One  of the goals of t h i s d i s s e r t a t i o n i s to examine  those factors responsible f o r the large decline i n the construction of rental accommodation since 1 9 6 9 .  Greater  land,  construction and financing costs helped to c u r t a i l the market since rents were dragging behind these increases.  The i n -  creased costs reduced net return on investment so that many investors were unwise to continue i n further construction. Supplementing the effects of increased costs was the passage of the new income tax law which destroyed  the tax  shelter that i n i t i a l l y attracted many professionals into the market.  The tax shelter feature was more important to many  apartment purchasers than the actual y i e l d on investment. Many purchasers were prepared to pay high prices f o r frame apartment buildings and many of them were b u i l t because they were p r o f i t a b l e f o r builders.  With the loss of the tax  6  Table 3 Overall Vacancy Rates In Multiple Family Rental Accommodation In Metropolitan Vancouver, 1963 to 1972  Metro Vancouver June Dec.  SourceJ  1963  4.2  1964  4.8  —  1965  4.0  —  1966  1.5  —  1967  1.0  —  1968  1.3  --  1969  1.2  0.8  1970  2.7  2.1  1971  4.1  2.8  1972  2.4  0.6  Central Mortgage and Housing Corporation. Apartment Vacancy Survey. Metropolitan Vancouver, December 1972.  shelter, apartments have to s e l l s t r i c t l y on the basis of t h e i r y i e l d as investments.  With the present l e v e l of rents  i t i s no longer a t t r a c t i v e to b u i l d such apartments i f they have to be sold on a y i e l d basis. Obstacles placed before the apartment developer by munic i p a l authorities and tenant organizations have also c o n t r i buted to the decline i n the number of r e n t a l s t a r t s .  The  "red tape", delays and high municipal processing and other, charges involved i n obtaining municipal approval f o r apartment projects have further soured the investment climate. New  landlord and tenant legislation'has made i t increasingly  d i f f i c u l t f o r the landlord to reduce h i s bad debts, evict problem tenants, and recover the cost of damages done to suites.  Tenant activism has also re-introduced the possi-  b i l i t y of l e g i s l a t i o n aimed at c o n t r o l l i n g rent l e v e l s . A l l of the above factors have contributed to the reduced a c t i v i t y i n the construction of rental accommodation i n recent years.  The flow of funds i s being diverted into other  forms of r e a l property.  The passage of the Strata T i t l e s  Act has aided the diversion of funds away from r e n t a l accomodation.  As Table 2 shows, the importance of condominiums  i n the market i s increasing s t e a d i l y .  Condominiums are more  a t t r a c t i v e to developers because they can be sold at higher prices per unit since the purchasers are buying l i v i n g accomodation not investments.  Commercial and i n d u s t r i a l properties,  although faced with many of the same cost increases as i n the  8 r e s i d e n t i a l s e c t o r , are more a t t r a c t i v e investments. is l i t t l e  There  tenant a c t i v i s m , i n c r e a s e d c o s t s are more r e a d i l y  passed on, and g e n e r a l l y the r e l a t i o n s h i p between l a n d l o r d and tenant i s on a more b u s i n e s s - l i k e f o o t i n g . Besides the examination o f f a c t o r s r e s p o n s i b l e  for re-  duced apartment c o n s t r u c t i o n , the paper concentrates other areas a s s o c i a t e d with the o p e r a t i o n  on two  o f the r e n t a l  market• F i r s t l y , demand f o r e c a s t s f o r r e n t a l accommodation t o the y e a r 1991 a r e p r e s e n t e d i n order t o g i v e some dimensions t o any shortage o f r e n t a l accommodation t h a t may be exper i e n c e d i n the f u t u r e .  Secondly, an a n a l y s i s of o p e r a t i n g  c o s t s and y i e l d s o f 48 apartment p r o p e r t i e s , researched  originally  by R. Dale-Johnson,^ was c a r r i e d out w i t h the  i n t e n t i o n o f i s o l a t i n g the reasons why some b l o c k s were p r o f i t a b l e w h i l e others were n o t . Throughout t h i s study the author was c o n t i n u a l l y hampered by h i s i n a b i l i t y t o o b t a i n c o r r e c t and s u f f i c i e n t data on apartment c o n s t r u c t i o n , o p e r a t i o n and p r o f i t a b i l i t y . The  major reasons f o r t h i s appeared t o be t h a t those deve-  l o p e r s , b u i l d e r s and l e n d e r s contacted l a r g e r operators  (the m a j o r i t y  i n Vancouver) c o n s i d e r e d  o f the  the i n f o r m a t i o n  requested t o be c o n f i d e n t i a l and t h e r e f o r e n o t s u i t a b l e f o r p u b l i c a t i o n ; unknown; or t o o d i f f i c u l t and time consuming t o discover.  Consequently, the o b s e r v a t i o n s  and c o n c l u s i o n s  drawn from the study are not s t a t i s t i c a l l y v a l i d , but i t i s  9 the b e l i e f of the author that they do indicate the general d i r e c t i o n i n which the apartment market i s heading.  In some  aspects of the study the lack of suitable data was so great that i t was necessary to f a l l back on indexes and averages at the national and regional l e v e l s , published, most notably, by Central Mortgage and Housing Corporation, S t a t i s t i c s Canada, and the Greater Vancouver Real Estate Board.  The  following paragraphs give a b r i e f outline of the topics covered i n each chapter and the sources of data used. Chapter II presents demand forecasts f o r multiple family housing i n Greater Vancouver.  The forecasts are  based on material published by S t a t i s t i c s Canada;  an un-  published consulting report prepared f o r a leading Vancouver developer by Acres Western Limited?-' and a report prepared by the Planning Department of the D i s t r i c t of North Vancouver.  The purpose of presenting t h i s data i s to give  some dimensions to the expected future shortages i n r e n t a l accommodation. Chapter I I I , the f i r s t chapter to examine factors r e sponsible f o r reducedepartment construction, i n i t i a l l y i n vestigates the average annual percentage increases i n rents for bachelor, studio, one- and two-bedroom suites i n selected areas of Greater Vancouver during the period 1964 to 1972. The data were obtained from Real Estate Trends published by the Greater Vancouver Real Estate Board''' and from S t a t i s t i c s Q Canada.  10 Similar average annual percentage increases i n construction, land and financing costs were calculated f o r the period 1964 i t was  to 1972.  When researching these trends i n costs,  o r i g i n a l l y planned to present a compilation of data  obtained f o r s p e c i f i c apartment projects constructed the time period i n Metropolitan Vancouver.  I t was  during  found,  however, that not enough, s u f f i c i e n t l y accurate data could be obtained to present informative r e s u l t s .  Consequently, a  S t a t i s t i c s Canada price index was used to convey the  extent  Q  of increasing construction costs.  Increases i n land prices  f o r apartment blocks were obtained from Real Estate Trends"*  -0  but were not s t r i c t l y comparable with the construction cost index.  The construction cost index i s a national index,  while land price increases were obtained from l o c a l data. Trends f o r changes i n financing costs were established by using information drawn from quarterly reports of the Finan11 12 c i a l Post and from Canadian Housing S t a t i s t i c s . Increases i n rents were compared with increases i n construction, land and financing costs between 1964 The purpose of t h i s exercise was  and  1972.  to demonstrate that one  of  the reasons f o r the recent slow down i n the construction of rental accommodation was  due to the f a c t that f a s t e r increases  i n c a p i t a l costs (construction and land costs) and financing costs than i n rents were reducing the returns on investment available from renting and thus decreasing the attractiveness of apartment investment.  As c a p i t a l and financing costs  increased, a greater amount of equity had to be supplied by the investor.  Since rents were not increasing as fast as  equity requirements,  the net return on investment f e l l .  Chapter IV examines the most important Income Tax Act, which became law i n 1972, estate transactions.  P r i o r to 1972,  amendments to the  as they a f f e c t r e a l  i t was advantageous f o r  professionals with high marginal tax rates to invest i n r e s i d e n t i a l r e n t a l property because paper losses created by the use of c a p i t a l cost allowances could be applied against other income to reduce taxes.  This advantage increased the flow of  funds into apartment properties.  With the changing of the  Tax Act, the d e s i r a b i l i t y of apartment investment f o r professionals has greatly diminished. Chapter V investigates a t h i r d group of important  fac-  tors which have been p a r t l y responsible f o r the reduction i n the number of apartment s t a r t s since 1969.  These are the  obstacles placed before the apartment developer by municipal authorities.  The "red tape", delays and high processing and  impost charges involved i n obtaining municipal approval f o r apartment projects have had the e f f e c t of discouraging and/or increasing the cost to the investor of apartment investment. The chapter examines the procedures used i n the C i t i e s of North Vancouver and Vancouver and the D i s t r i c t of Surrey f o r processing development applications i n order to determine the extent of the bureaucracy involved and the time required to complete processing.  Suggestions are made as to how  this  12 bureaucratic process can be speeded up and thus aid i n reducing costs to the developer.  Charges l e v i e d d i r e c t l y  against developers by the three municipal governments are itemized to indicate the costs that a developer incurs at the municipal  level.  Chapter VI examines the effects that costs of operating apartment buildings have had on the p r o f i t a b i l i t y of apartment investment i n the l a s t few years i n Metropolitan Vancouver,  Average operating costs as a percentage of gross  income that were presented i n Real Estate Trends between 1964 and 1972  were analyzed to determine i f the r a t i o of  operating costs to gross income had increased, remained constant, or decreased with time. -^ 1  To further understand the trends that operating costs of Vancouver apartment blocks have been taking, data o r i g i n a l l y collected by Dale-Johnson f o r his thesis were examined.  1  This data consisted of operating statements f o r 48 apartment buildings c o l l e c t e d f o r several years of operation.  They  too were analyzed to determine i f the p r o f i t a b i l i t y of apartment investment has been affected by these costs. The dramatic 1969  decreases i n apartment construction since  i n Metropolitan Vancouver have led to a shortage  r e n t a l accommodation as v e r i f i e d by Table 3«  of  I t i s expected  that rents w i l l r i s e p a r t l y because of the shortage  and  p a r t l y because of the low returns that are now available from apartment investment.  Already, some rent increases and  13 the current shortage of r e n t a l dwellings are beginning to stimulate tenant unrest and pressure i s being applied on l o c a l and P r o v i n c i a l governments to consider some form of rent control l e g i s l a t i o n . Chapter VII i s a study of rent control p o l i c i e s i n New York C i t y and the United Kingdom where controls have been i n existence f o r many years.  The purpose of the study i s to  review the adverse effects that such p o l i c i e s have had on the r e n t a l housing market i n the hope that the lessons learned w i l l discourage any form of rent control i n B.C. Chapter VIII i s a study of the y i e l d s obtained by a sample of 48 apartment blocks located i n various municip a l i t i e s of Metropolitan Vancouver.  The sample was  obtained  and the y i e l d s calculated by Dale-Johnson and the results were presented i n h i s t h e s i s . ^ The sample of apartment buildings was broken up into two groups—those  having an average rate of return of less  than 1 0 . 0 per cent and those having an average rate of return of more than 1 0 . 0 per cent excluding c a p i t a l gains or losses.  Various physical, f i n a n c i a l and operating  c h a r a c t e r i s t i c s of the two groups were then calculated and analyzed to determine the fundamental reasons f o r the d i f f e r ences i n p r o f i t a b i l i t y of the two groups of buildings. Chapter IX presents the conclusions drawn from the study that have a bearing on the continued supply of new accommodation i n Metropolitan Vancouver.  rental  14 CHAPTER II Demand Forecasts For Multi-Family Rental Accommodation Population Analysis As was shown i n Table 1 i n the l a s t chapter, the number of multiple family housing units being constructed i n Metrop o l i t a n Vancouver has been declining since the peak of 1969. This i s leading to a serious shortage of rental accommodation, as evidenced by the declining vacancy rates presented i n Table 3«  To determine i f these shortages w i l l increase,  remain the same or decrease i n future years, i t i s h e l p f u l to p r e d i c t the future demand f o r rental accommodation. Table 4 summarizes the population projections f o r selected areas of Metropolitan Vancouver.  I t i s conservatively  estimated that the population of the Vancouver Metropolitan Area w i l l increase from 1 , 0 3 2 , 0 0 0 to 1 , 7 6 1 , 0 0 0 during the 1971 to 1991 time period.  This projection i s based on an  annual growth rate of 2.7 per cent per annum.  A less con-  servative projection using h i s t o r i c a l rates of migration and survival indicates the population of the Vancouver Metropolitan Area w i l l increase to 2 , 1 2 6 , 0 0 0 by 1 9 9 1 . ^ Based on the conservative rates of growth, the combined population of Surrey, Delta, Richmond and White Rock (South Shore) w i l l increase 2.5 times from 213,500 to 5 2 5 , 6 0 0 . population of Coquitlam, Port Coquitlam, and Port Moody (Northern Burrard Peninsula) w i l l increase by nearly two times from 82,500 to 150,800.  The  Table 4 Population Growth Trends Metropolitan Vancouver and Selected Areas 1966-1991 1966  1971  1976  1981  1986  1991  V.M.A.  892,384  1,032,000  1,176,000  1,335,000  1,524,000  1,761,000  Vancouver  410,375  444,000  467,000  488,000  510,000  533,000  South Shore  160,958  213,500  267,500  339,800  423,500  525,600  Richmond  50,460  65,000  84,200  108,400  134,000  166,000  Delta  20,664  39,000  55,000  75,000  100,000  130,000  Surrey  81,826  100,000  118,000  145,000  177,000  216,000  7,787  9,500  10,300  11,400  12,500  13,600  50,058  82,500  99,500  116,000  133,300  150,800  Coquitlam  40,916  53,300  63,300  73.300  83,300  93,300  Port Coquitlam  11,121  17,800  21,800  25,300  28,600  32,100  7,021  11,400  14,400  17,400  21,400  25,400  White Rock Northern Burrard Pen.  Port Moody  Source«  S t a t i s t i c s Canada, Census of Canada, 1966, V o l . 1 and Acres Western Ltd., Residential Market Opportunity Study, unpublished, 1971, pp. 6-7,  16 An attempt has been made to i d e n t i f y the c h a r a c t e r i s t i c s of the anticipated future population. I t i s on the basis of such considerations as age, households and income composition that the requirements f o r the various housing types can be determined. The future age composition of the Lower Mainland populat i o n i s presented i n Table 5. which reveals the population i n relevant age groups f o r the period 19.71 to 1991. There w i l l be a major increase i n the population between the ages 25 and 44 and decreases i n the population between the ages 20 and 24 and over 65 by 1991. Despite decreasing family s i z e , the larger number of families w i l l r e s u l t i n an increase i n the 0 t o 14 group. Average household sizes are expected to decline during the  1971 to 1991 period.  Projected household sizes f o r  Metropolitan Vancouver and various sub-areas are i l l u s t r a t e d i n Table 6.  Although a l l major areas of "Metro" are expected  to r e f l e c t the trend towards smaller f a m i l i e s , not a l l w i l l experience t h i s trend to the same extent.  The average number  of persons per household i n Vancouver C i t y w i l l decline from 2.8 i n 1966 to 2.6 i n 1991. while family size i n the South Shore municipalities w i l l be expected to decline from 3.6 to 3.2 persons during the same period.  The Northern Burrard  Peninsula region, which experienced an increase i n average household size between 1951 and 1966, i s also expected to decline from 3.9 to J>A persons by 1991. These changes can  Table 5 Projected Population By Age Groups Lower Mainland, 1971-1991 Age 0-4  ^J %  6  1981  1986  $  8.3  9.2  10.1  10.5  10.2  5-14  17.9  15.1  14.6  15.7  16.7  15-19  8.8  9.1  7.4  6.3  6.6  20-24  8.5  9.2  9.3  7.9  6.7  25-34  13.8  16.3  I8.3  19.1  18.2  35-44  12.6  12.3  13.1  14.8  16.6  45-65  20.7  20.1  18.7  17.6  17.2  9.4  8.7  8.5  8.1  7.8  65-  Source1  S t a t i s t i c s Canada, op. c i t . and Acres Western, op. c i t . ,  D .  8.  Table 6 Average Household Size 1951-1991  1951  I96I  1966  1971  1976  198I  1986  1991  M.V.A.  3.3  3.3  3.2  3.2  3.2  3.1  3.1  3.0  Vancouver  3.3  3.1  2.8  2.8  2.8  2.7  2.7  2.6  South Shore  3.6  3.6  3.6  3.6  3.5  3.*  3.3  3.2  Northern Burrard Peninsula  3.5  3.8  3.9  3.8  3.7  3.6  3.5  3.4  Source 1  S t a t i s t i c s Canada, op. c i t . and Acres Western, op. c i t . , p. 10.  I—  1  00  19 be compared to the o v e r a l l decline i n Metro from 3.2 to persons during the 1971  to 1991  3,0  period.  The future income d i s t r i b u t i o n pattern i s shown i n Table 7.  The Economic Council of Canada reports i n i t s 17  Sixth Annual Review ' that the r e a l growth rate was cent per annum f o r the years 1950  to 19^7.  2.7  per  To reduce the  p o s s i b i l i t y of over-estimating, Acres Western used an average annual increase i n r e a l income of 2.5  per cent.  growth rate w i l l also be used i n t h i s report.  This On t h i s basis,  5 7 . 0 per cent of the Metropolitan Vancouver population w i l l have incomes i n the $ 1 0 , 0 0 0 to $14,999 group by  1991.  Residential Demand Analysis During the 1951  "to 1966  time period, the t o t a l number  of single-family dwellings increased from 114,510 to 182,575 units i n Metropolitan Vancouver, an increase of almost 60 per cent.  During the same time period multi-family dwellings  increased from 32,320 to 88,602 units, an increase of 19 per cent.  175  7  Examination of these h i s t o r i c a l housing s t a t i s t i c s shows the rapid growth of single-family accommodation i n suburban areas and the s h i f t from single-family to multi-family housing that i s occurring i n Vancouver C i t y . Based on previously mentioned population projections, the projected decline i n average household s i z e , and allowing f o r some replacement of e x i s t i n g housing, estimates  of future  housing requirements have been made f o r Metropolitan Vancouver  Table 7 Income D i s t r i b u t i o n By Households* Metropolitan Vancouver 1951  1961  Less than $ 3 , 0 0 0  51.7  17.4)  $3,000-$5,999  45.3  42.9)  )  1971  1976  1981  1986  1991  40.5  30.6  20.7  10.8  0.9  $6,000-$6,999  3.0**  12.3  8.9  7.2  5.5  3.8  2.0  $7,000-$9,999  —  17.9  19.1  19.7  20.3  20.9  21.6  6.4  23.2  31.6  40.0  48.4  57.0  3.1  8.3  10.9  13.5  16.1  18.5  $10,000-$l4,999 $15,000+  — —  * Real household income projected at 2.5 per cent per annum. ** Above $ 6 , 0 0 0 i n annual income  Sources  S t a t i s t i c s Canada, op. c i t . and Acres Western, op. c i t . , p. 11.  O  21 and various m u n i c i p a l i t i e s .  I t i s estimated  that the t o t a l  housing stock i n Metro w i l l have to increase by approximately 310100° units during the next 20 years. To translate expected future population s i z e , age d i s t r i b u t i o n , average household size and income into generalized housing requirements, i t i s necessary to r e l y somewhat heavily on h i s t o r i c a l trends. approach.  This i s an obvious weakness to the  In addition, i t i s d i f f i c u l t to assess accurately  future changes i n taste, and to ascertain the e f f e c t s of changes i n b u i l d i n g costs, land costs and financing costs. As presented i n Table 5».the percentage of people i n the 25 to 44 year age groups are expected to increase f i c a n t l y over the next 20 years.  signi-  Since i t i s from these  groups that the main demand f o r single-family housing occurs, i t would be expected that the predominance of t h i s type of housing would increase.  Correspondingly,  the percentage of  those i n the 20 to 24 age group and the over 45 groups are expected to decrease considerably s i g n a l l i n g a decrease i n demand f o r multi-family housing. However, the reasoning i s not as simple as t h i s would suggest.  Increasing b u i l d i n g costs, land costs and financing  costs are placing greater pressure  on the need f o r more e f f i -  cient land use, that i s , multi-family housing instead of single-family.  I t i s therefore expected that the t o t a l  housing stock w i l l more than ever i n the future be made up of multi-family housing.  22 Table 8 presents estimates of future single-family and multi-family housing units required f o r growth and ment.  replace-  The d i v i s i o n of t o t a l housing requirements into single-  and multi-family housing needs i s based on h i s t o r i c a l and the expectations  trends  that s c a r c i t y of land, increased con-  struction costs and higher financing charges w i l l persuade more families to switch to cheaper multi-family housing. It also assumes that h i s t o r i c rates of development w i l l continue unaffected by future municipal development p o l i c y , . . 20 decisions. Table 9 shows that the multi-family units required w i l l be expected to increase over time as a percentage of t o t a l housing units required. The South Shore municipalities (Richmond, Surrey, Delta, and White Rock) w i l l increase t h e i r share of t o t a l housing s t a r t s from 21.4  per cent during the 1971  period to 37.0 per cent by the 1986  to 1991  housing i n the 1971  per cent i n the 1986  to 1991  to 1976  period.  Multi-  per cent of  period to  i n the 1971  to 1976  per cent i n the 1986  52.6  The North Burrard Pen-  insula w i l l be c a l l e d upon to supply at l e a s t 23,000 units over the next 20 years, 39.7  1976  to  period.  family housing units w i l l increase from 27.1 additional new  new  new  per cent of those supplied  period being multi-family, r i s i n g to to 1991  period.  w i l l require 80,000 to 100,000 new  63.6  The C i t y of Vancouver  units and the majority of  these w i l l be multi-family dwellings.  In terms of  new  Table 8 Estimated Single-Family* and Multi-Family Units Required For Growth** and Replacement By Sub-Area+ 1965-1991 1965-70++ S.F. M.F.  1971-76 S.F. M.F.  1976-81 S.F. M.F.  1981-86*. S.F. M.F.'  1986-91 S.F. M.F.  3.398 22,009  1.900 17,000  1,600 17,400  1,400 18,800  1,100 20,400  Peninsula  5.143  2,359  3.200  2,100  3,000  2,600  2,600  2,400  South Shore  12,268  2,841  12,900  4,800  16,000  8,300  16,800 12,400  17,700 19,600  Metro Vancouver  27,596 4 2 , 8 3 0  26,100 41,700  27,900 53,000  30,200 70,500  Vancouver C i t y North Burrard  23,400 36,800  3,400  4,200  * Includes only single detached dwellings. ** Assumes an o v e r a l l Metro. Vancouver population of l , ? 6 l , 0 0 0 by 1991. + Replacement rates J  Vancouver C i t y - % \ Metro. Vancouver - Jfo\ a l l other areas - 1%,  ++ Covers 5£ year period (January, 1965 - June, 1 9 7 0 ) .  Sourcei  Acres Western, op. c i t . . p. 1 5 .  Table 9 Multi-Family Units Demanded As A Percentage Of Additional Total Housing Required 1965-1991 1965-70  1971-76  1976-81  1981-86  1986-91  fo  Jo  %  %  %  86.7  90.0  91.6  93.1  94.9  Peninsula  31.4  39.7  46.5  56.7  63.6  South Shore  18.8  27.1  34.2  42.5  52.6  Metro. Vancouver  61.9  61.6  61.6  65.6  65.9  Vancouver C i t y North Burrard  ro  25 housing starts single-family detached dwellings i n Vancouver w i l l decline from 1 0 . 0 per cent between 1971 per cent by  and 1976  to  5.1  1991.  The r e l a t i v e a v a i l a b i l i t y  of land i n Surrey, Richmond,  and Delta w i l l permit these municipalities to provide the majority of single family detached dwellings constructed i n the Metro area during the next two decades.  I t i s expected  that these municipalities w i l l sustain a r e l a t i v e l y balanced housing mix, but that they too w i l l f e e l the increasing pressure towards multi-unit housing developments i n order to provide accommodation at reasonable p r i c e s . Analysis Of Future Apartment Shortages It i s expected that a t o t a l of 202,000 units of multifamily housing w i l l have to be constructed during the next twenty years to meet projected demand i n Metropolitan Vancouver.  Some of these units w i l l be f o r sale to homeowners,  while the remainder w i l l be retained i n the rental market. It i s d i f f i c u l t to divide the projected demand f o r multi-family units into those required f o r ownership and those required f o r r e n t a l .  Generally, i t can be assumed  that the higher income groups w i l l prefer ownership of t h e i r units to rental but i t would be very misleading to estimate what the proportion of condominiums to rental units demanded would be, since there are few s t a t i s t i c s to base such an estimate.  available on which  Instead, an examination of the  o v e r a l l picture, that i s , of both condominium and rental  26 units demanded, w i l l be conducted. A demand f o r 202,000 multi-family units i n twenty years requires that approximately 10,000 units must be constructed per year.  Based on the number of completions of multi-family  units i n 1972 (Tables 1 and 2), t h i s demand w i l l not be met. During the year only 7.800 units were constructed.  Further-  more, 1972 was a year of considerable f l u x i n the trends of apartment construction. The number of multiple dwelling completions decreased 20.? per cent from the previous year and represented only 6 2 . 3 per cent of the completions achieved i n the peak year of 1969•  In addition, an i n -  creasing proportion of those completions were f o r sale to i n d i v i d u a l homeowners rather than f o r r e n t a l to tenants. 29.4 per cent of multi-family completions were registered as s t r a t a l o t s i n 1972 as opposed to 20.0 per cent the previous year and only 5.0 per cent i n 1969. It i s expected that the construction of multi-family units f o r r e n t a l purposes w i l l continue to decrease over the next few years u n t i l rents are at such a l e v e l as to make r e n t a l development p r o f i t a b l e to the developer-investor. Correspondingly, the supply of multi-family condominium units should increase at a greater and greater rate. I t i s foreseen that as long as present conditions continue there w i l l be extensive shortages of units f o r rent. The beginning of the shortage i s already being seen, as the announced vacancy l e v e l of 0.6 per cent i n Metropolitan  27 Vancouver f o r December, 1972  demonstrates.  21  Many developers,  at present, are discontinuing r e n t a l construction and concentrating on condominium development where the p r o f i t s are considerably  greater.  Condominium and r e n t a l development together, may meet the goals of 10,000 new  units per year but, i f t h i s i s the  case, i t i s l i k e l y that i t w i l l be due to the construction of a large proportion of units f o r i n d i v i d u a l ownership and a small proportion f o r r e n t a l .  This w i l l lead to a shortage  of r e n t a l units and a possible over-supply of condominiums. Summary and  Conclusions  A population and demand analysis indicates that 202,000 multi-family units w i l l be demanded i n Metropolitan Vancouver over the next twenty years.  An examination of present  and  future trends i n the supply of units indicates that the demand w i l l probably not be met but i f i t i s , i t w i l l only be i n t o t a l since expectations  of an over-supply of condo-  miniums and an under-supply of r e n t a l units are The  foreseen.  succeeding chapters examine the reasons f o r the  unprofitable nature of r e n t a l units which are r e s u l t i n g i n reduced construction and consequently, increasing shortages.  28 CHAPTER III Rent Levels, Construction, Land And Financing Costs I t has been stated that because rents have been dragging behind increases i n land costs, construction costs and  inter-  est rates, the net return on investment that an investor can obtain from apartment blocks has slowly been decreasing  with  the resultant effect that the number of apartments being 22 produced per year has been d e c l i n i n g . The purpose of t h i s chapter i s to determine i f the statement i s true by comparing increases i n rents with i n creases i n construction, land and financing costs between 1964  and  1972.  Before doing t h i s , however, i t should be emphasized that larger increases i n c a p i t a l costs (land and construction costs) and financing costs than i n r e n t a l rates w i l l , o n l y reduce the y i e l d on new  apartment blocks coming into opera-  t i o n f o r the f i r s t time and not on blocks that are already i n existence, unless they are re-financed.  Once a block i s  constructed, i t s c a p i t a l cost i s fixed at that point of time and i t does not matter how  c a p i t a l costs change subsequently,  they w i l l not a f f e c t the y i e l d of the e x i s t i n g block. Another point worth noting i s that several authorities -* 2  have discovered that as a block gets older, operational costs increase f a s t e r than rents thus reducing p r o f i t s and y i e l d s ; the main reason f o r loss of p r o f i t a b i l i t y being increased  29 r e p a i r s and maintenance.  However, t h i s s e c t i o n i s not con-  cerned w i t h how a p r o p e r t y ' s p r o f i t margin d e c l i n e s as the b l o c k gets o l d e r but only with why the y i e l d on a b l o c k c o n s t r u c t e d , say, i n 1970 i s lower a t a p a r t i c u l a r p o i n t i n time of i t s o p e r a t i o n than a b l o c k c o n s t r u c t e d , at  say, i n 1966  a s i m i l a r o p e r a t i o n a l time p o i n t . A study  o f some apartment p r o p e r t i e s , the r e s u l t s o f  which a r e presented  i n a l a t e r chapter,  i n d i c a t e s t h a t opera-  t i o n a l c o s t s as a percentage o f gross income have remained fairly  constant  f o r a given year of operation ( f i r s t  year,  second year, e$ c e t e r a ) r e g a r d l e s s o f when the b l o c k was constructed.  F o r example, i t was found t h a t b l o c k s con-  s t r u c t e d i n 1968, i n 1969 and i n 1970 a l l had s i m i l a r opera t i n g c o s t s d u r i n g t h e i r f i r s t and second y e a r s o f o p e r a t i o n . Consequently, o p e r a t i o n a l c o s t s do not p l a y a r o l e i n t h i s s e c t i o n of the a n a l y s i s . Rent I n c r e a s e s .  1964 t o 1972  Two sources  o f data were used t o determine the average  annual percentage i n c r e a s e s i n r e n t s i n M e t r o p o l i t a n Vancouv e r between 1964 and 1972.  The f i r s t  source  i s from  informa-  ?4 t i o n p u b l i s h e d by the Real E s t a t e Board o f G r e a t e r Vancouver and the second i s from the R e s i d e n t i a l Rent Index p u b l i s h e d by S t a t i s t i c s Canada. ^ 2  The in  Real E s t a t e Board p u b l i s h e s l i s t s  s e l e c t e d areas  of t y p i c a l r e n t s  o f M e t r o p o l i t a n Vancouver every  second y e a r .  From 1966 onwards the r e n t s p u b l i s h e d were f o r s u i t e s o f  30 average q u a l i t y i n recently constructed, modern apartment buildings.  The suites were on the t h i r d f l o o r and of average  size and q u a l i t y f o r the area surveyed.  No s p e c i a l premiums  were attached f o r orientation or view and parking charges were not included. The 1964 r e n t a l survey, however, d i f f e r e d from that i n succeeding years.  Instead of surveying suites on the t h i r d  f l o o r of modern buildings, the survey was conducted on second f l o o r suites of buildings of a l l ages.  Since older buildings  tend to have lower rents because of reduced amenities, the t y p i c a l rents reported i n 1964 tended to be deflated r e l a t i v e to rents reported i n succeeding years.  Also, second f l o o r  suites generally rent at lower rates than t h i r d f l o o r ones because of the poorer views a v a i l a b l e .  These two factors  meant that the survey conducted i n 1964 was not s t r i c t l y comparable with those done i n l a t e r years.  Thus, the large  percentage rent increases reported i n Table 10 f o r the period 1964 to 1966 are due more to changing sampling techniques than to actual rent increases. Table 10 Average Percentage Rent Increases In Metropolitan Vancouver By Suite Type, 1964-1972 Suite Type Bachelor Studio One Bedroom Two Bedroom Average Source 1  1964-66  1966-68  1968-70  1970-72  J>  Jo  %  %  25.4 — 15.4 17.0 19.3  12.9 ~ 13.5 19.9 15.^  — 13.5 11.3 12.4  9.4 10.3 10.1 9.9  Real Estate Trends i n Metropolitan Vancouver. Greater Vancouver Real Estate Board, 1964-1972.  31 Table 11 presents the average annual percentage increase i n rents f o r selected areas of Metropolitan Vancouver by suite type between 1964  and  1972.  The o v e r a l l average annual rent increase i n Metropolitan Vancouver, taken as a whole, was approximately  6 per cent.  Bachelor suites l e d the way with an average annual increase of 8.7 per cent, followed by two bedroom suites at 6.3  per  cent, one bedroom suites at 6,1 per cent and studios at  4,7  per cent. The areas showing the greatest annual rent increases were the East Hastings area of Vancouver, Burnaby and Westminster, with increases of 9.3» respectively.  9.6  New  and 9.0 per cent,  Richmond had annual rent increases of 1.4  per  cent, by f a r the lowest f o r Metro. Comparing the rent increases reported by Real Estate Trends with those published by S t a t i s t i c s Canada i n the Resid e n t i a l Rent Index, i t i s found that the Index reports lower annual percentage increases than Trends.  Between 1964  1971 the Residential Rent Index f o r Vancouver rose from to 124.6.  and 100.1  This represented an average increase of approxi-  mately 3.5 per cent per annum. The discrepancy between the annual increase of 6.0  per  cent calculated from Trends and the 3.5 per cent of the Index appears to be due to d i f f e r i n g sampling techniques used i n the two surveys.  The Index i s compiled by sampling a broad  but s p e c i f i c group of urban f a m i l i e s and r e f l e c t s the p r i c e  32 Table 11 Average Annual Percentage Increase In Rents For Selected Areas Of Metropolitan Vancouver By Suite Type, 1964-1972 Bach. Studio 1-Bdrm. 2-Bdrm. Average  Area Vancouver C i t y West End  highrise  5.3  4.0  6.3  4.8  5.1  South Granville  frame  2.8  6.5  6.7  8.6  6.2  highrise  —  4.0  6.9  7.5  6.1  frame  8.5  4.4  7.6  9.5  7.5  highrise  —  2.0  5.8  6.8  4.9  frame  1.1  2.2  4.6  6.4  3.6  highrise  —  4.0  4.9  6,0  5.0  Marpole  frame  5.6  6.8  6.5  5.9  6.2  East Hastings  frame  13.9  4.6  9.3  9.4  9.3  Burnaby  frame  18.6  4.4  7.5  7.7  9.6  New Westminster  frame  14.3  7.5  7.1  6.9  9.0  North Vancouver  frame  12.9  4.4  7.7  8.6  8.4  West Vancouver  highrise  4.2  6.5  5.1  6.4  5.6  Coquitlam  frame  —  —  4.2  4.2  4.2  Port Coquitlam  frame  —  —  4.4  5.3  4.9  Richmond  frame  —  —  2.0  0.8  1.4  Surrey  frame  —  —  7.4  2.7  5.1  8.7  *.7  6.1  6.3  6.0  Kitsilano  Kerrisdale  Average  Source:  Based on data from Greater Vancouver Real Estate Board, op. c i t .  33 changes experienced by that "target group".  The "target  group" i s composed of families ranging i n size from adults to two adults with four c h i l d r e n . incomes ranging from $ 2 , 5 0 0 to $ 7 , 0 0 0 .  two  They have annual Thus, the Index does  not emphasize as much as Trends, increases i n rents due to better and more amenities.  The Index samples r e n t a l rates  on a broad basis and does not d i f f e r e n t i a t e between older buildings with fewer amenities and more modern blocks with more amenities.  Trends, on the other hand, concentrates only  on modern blocks (except i n the 1964 survey) which usually rent at premium rates. For the forthcoming comparisons of r e n t a l increases with c a p i t a l cost increases, i t w i l l be more appropriate to use the Trends survey as a basis because i t r e f l e c t s rents on recently constructed blocks.  Since t h i s study i s only  interested i n contemporary trends i n c a p i t a l costs, the comparisons with modern rents w i l l be more e f f e c t i v e . Land Costs Land costs f o r apartment projects have increased at a phenomenal rate i n Metropolitan Vancouver over the l a s t eight years, although there now appears to be a l e v e l l i n g o f f occurring. The data f o r t h i s section of the study were obtained from average figures published i n Real Estate Trends between 1964 and 1972.  The apartment s i t e values presented i n Table  12 are extracted from Real Estate Trends.  They were based  on sales occurring i n the year they were reported.  Sales  occurring well above or well below the average were eliminated. Real Estate Trends divided some apartment areas into smaller sub-areas f o r presentation.  For example, the West  End was divided into three sub-areas—North of Davie, South of Davie and West of Denman.  For purposes of Table 12 the  sub-areas have been eliminated.  The range presented f o r s i t e  values consists of the lowest value reported of a l l sub-areas and the highest value reported of a l l sub-areas. When examining the land prices presented, i t must be remembered that they have to be considered along with the amount of land needed per apartment u n i t .  This depends on  the f l o o r space r a t i o and the permitted maximum s i t e coverage. The f l o o r space r a t i o and maximum s i t e coverage d i f f e r from apartment zone to zone.  Thus, although land was the most  expensive per square foot i n the West End,  the land component  needed f o r one apartment u n i t i s l e s s i n d o l l a r terms than f o r other parts of Metropolitan Vancouver. In 1972 land was s e l l i n g i n the West End f o r $ 1 3 . 0 0 to $14.00 per square foot and the land cost per unit varied between $ 2 , 0 0 0 and $2,400.  In South Granville the land cost  per unit was $4,400 to $ 6 , 5 0 0 , but the price per square foot was between $ 9 . 0 0 and $ 1 0 , 5 0 ; i n K i t s i l a n o the land cost per unit was $ 3 , 8 0 0 to $ 4 , 5 0 0 , while the cost per square foot varied between $ 6 . 3 0 and $ 8 . 0 0 ; the land cost per apartment  35 Table 12 Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972  1964 $  Price Per Square Foot 1966 1968 1^0  12|2  Vancouver C i t y West End*  4.1- -6.5  5.5- - 8 . 0  7.0- -12.0  9.5- -12.0  13.0- •14.0  South Granville  4.5- -5.5  4.5- -5.9  7.0- - 8 . 0  7.8- -10.0  9.0- •10.5  Kitsilano  3.6- -3.7  3.3- -5.0  5.0- -6.3  6.3- -8.0  6 . 3 - •8.0  Kerrisdale  3.3- -3.8  4.0- •5.0  Marpole  1.7- -2.7  2.0-•3.0  East Hastings New  —  —  —  —  4.0- . 5 . 0  4.7- - 6 . 0  6.0- •7.5  4.0- •5.0  4.2- -5.0  4.2- •5.0  Westminster  1.1- -1.6  1.5- •3.0  3 . 3 - •4.5  3.5- •4.5  3,5-  North Vancouver  1.2- •1.7  1.8- •2.0  3 . 0 - •^.5  3.4- •6.3  6.0- 7.5  Surrey  —  West Vancouver  2.0- •3.9  —  3 . 0 - •4.0  1.0- •1.3  +  3.5- 4.7  —  2.0- • 2 . 2  5 . 3 - •7.0  5.3- 7.0  Coquitlam  —  —  1.0- •1.8  3.0- •3.8  3 . 3 - •3.9  Port Coquitlam  —  —  0.9-1.3  1.8- •2.0  2 . 3 - 2.5  Richmond  —  —  0 . 9 - •1.3  1.0- •2.7  2.8- 3 . 0  1.8- •4.4  2.5- •4.2  2.5- 5.0  1.0- •1.9  Burnaby  1.2- •2.0  +  * Land prices f o r s i t e s along English Bay and near Stanley Park have been omitted because they are considerably higher than other parts of the West End. +  Estimated.  Source:  Greater Vancouver Real Estate Board, op. c i t .  +  unit i n Marpole was $ 3 , 5 0 0 to $4,000, with a cost per square foot of $6.00 to $ 7 . 5 0 ; and i n the East Hastings area land sold f o r "between $4.20 and $5.00 per square foot, with a resultant cost per apartment unit of $2,200 to $3,000. In the suburban areas of Vancouver land was  generally  less expensive per square foot and per apartment unit than that found i n the c i t y .  In New  Westminster one apartment  unit required $2,000 to $2,300 worth of land at a cost of $ 3 . 5 0 to $4.50 per square foot; a per square foot cost of $2.50 to $5.00 was  experienced i n Burnaby, with a cost per  unit of $2,500 to $ 3 , 3 0 0 ;  i n North Vancouver the cost per  unit was $2,000 to $ 4 , 5 0 0 , with a corresponding per square foot cost of $6.00 to $ 7 . 5 0 ; West Vancouver experienced land costs per unit of $2,200 to $3,000 or a cost per square foot of $ 5 . 3 0 to $7.00; i n Coquitlam the land component per unit was between $2,000 and $ 2 , 5 0 0 , while the per square foot cost was $ 3 . 3 0 to $ 3 . 9 0 ; Surrey experienced the lowest land costs i n 1972,  with a cost per square foot of $2.00 to $2.20  and a cost per unit of $1,800 to $2,000; and Richmond also had low land costs of $1,800 to $2,500 per unit or $2.80 to $3.00 per square f o o t .  2 7  Land prices are greatly affected by the supply of and demand f o r s i t e s .  Looking at Figure 1 and Table 13,  can be seen that within Vancouver C i t y , the West End  it and  Marpole have shown the greatest increases i n land costs between 1964  and 1972.  Land prices increased between  14.4  F I G U R E  APARTdEMT I 4-.00  IM  5ITE1  METROPOLITAN  VALUES  1  FOR  V A N C O UVER  SELECTED 1364-73  /Nf2-EAS WE-ST  £KID  izoo4  J0-OO  5 O 0 T H  GRA.KJVILLE  -to-  6  8  0 0 +  o  KIT5JLANJ0  u. UJ DC <  i ^ M A ^ R P O L E W/EST  6.00+  N O R T H  EAST  N£W  o4 HI a  o  V A N / C O U V E R  HASTINGS WESTM?^  BUfcA/ABV  ax u a. 1964-  50URCE',  V A N C O U V E R .  TABLE  12,  4-  1966  4YEAR  1970  1372.  STER.  Table 13 Percentage Changes In Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972 Average Anni Change  1964-66  1966-68  1968-70  1970-72  23.1-35.8  27.3-50.0  0.0-35.7  16.7-36.8  14.4-27.6  1.1-6.3  36.8-55.6  10.7-25.0  5.0-16.1  11.4-12.8  25.0-53.8  25.0-28.0  0.0  9.2-14.5  66.7-100.0  17.5-20.0  25.0-27.7  22.9-31.6  0.0-3.8  0.0  0.0-1.0  %  %  %  %  Vancouver C i t y West End South G r a n v i l l e Kitsilano Marpole  (10.8)-35.1 13.2-17.6  East Hastings  —  New Westminster  42.9-89.4  48.5-116.7  0.0-7.7  0.0  22.7-29.2  North Vancouver  17.6-50.0  66.7-125.0  11.7-40.0  19.0-79.1  42.7-50.0  16.7-17.5  48.9-50.0  0.0  9.9-20.3  2.7-8.3  29.1-56.3  West Vancouver  2.6-50.0  Coquitlam  —  —  110.7-200.0  Richmond  —  —  11.1-112.0  13.2-180.0  35.0-45.0  50.0-125.6  0.0-38.9  0.0-20.5  18.8-20.4  42.2-80.5  21.4-51.0  7.4-33.5  19.6-22.6  Burnaby  2.6-20.0  Average Source 1  11.5-38.0  Based on Table 12.  and 27.6 per cent i n the West End during that time period, while i n Marpole they increased between 2 2 . 9 and 31.6 per cent.  The smallest increases i n land costs were recorded i n  East Hastings  ( 0 . 0 to 1.0 per cent) and i n K i t s i l a n o ( 9 . 2 to  14.5 per cent). In the suburbs, North Vancouver, Coquitlam and Richmond demonstrated the largest increases i n land costs, increasing at an average annual rate of 42.7 to 5 0 . 0 per cent, 2 9 . 1 to 5 6 . 3 per cent and 3 5 . 0 to 4 5 . 0 per cent, respectively. The lowest p r i c e increases were recorded i n West Vancouver and Burnaby, where prices rose at an average annual rate of 9 . 9 to 2 0 . 3 per cent and 18.8 to 2 0 . 4 per cent, respectively. To correlate the increases i n land costs with greater demand f o r s i t e s r e l a t i v e to supply, i t i s worthwhile to examine Table 14 where the percentage increases i n the t o t a l apartment stock between 1966 and 1972 are presented  as an  i n d i c a t i o n of demand f o r nine areas i n Metropolitan Vancouver. Comparing the average percentage increases i n t o t a l stock from 1966 to 1968, 1968 to 1970 and 1970 to 1972 with the average percentage increases i n land p r i c e s f o r the same time periods, i t i s seen that i n the 1966 to 1968 period, when the greatest percentage increases i n t o t a l stock were registered, there were correspondingly land p r i c e s .  large increases i n  S i m i l a r l y , i n the 1970 to 1972 period when the  percentage increases i n t o t a l stock were at t h e i r smallest, land p r i c e s rose at t h e i r lowest r a t e .  4o Table 14 Apartment Completions As A Percentage Of Total Stock In Selected Areas Of Metropolitan Vancouver, 1966-1972 Area  1966-68  1968-70  1970-72  Vancouver CityWest End  11.5  11.9  7.4  South Granville  16.5  16.0  0.0  Kitsilano  3^.8  21.0  2.6  Marpole  28.3  9.2  6.6  East Hastings  33.6  23.2  31.if  North Vancouver  39.7  71.3  27.0  New Westminster  43.2  38.0  11.3  West Vancouver  31.7  25.6  7.2  Burnaby  44.8  55.6  20.2  31.6  30.2  12.6  Average  In the 1970 to 1972 time period land prices l e v e l l e d off i n four areas of Metropolitan Vancouver—Kitsilano, East Hastings, New Westminster and West Vancouver.  For a l l of  these areas except East Hastings, the l e v e l l i n g o f f i s r e a d i l y explained by greatly reduced demand f o r s i t e s as evidenced i n Table 14 by the reductions i n the numbers of completions of apartment u n i t s . non, where completions  The East Hastings phenome-  continued at a steady pace, while  land p r i c e s remained constant, i s best explained by a f i n d i n g  41 from a 1968  survey ^ which discovered that only 2 5 . 0 per cent 2  of the available apartment s i t e s i n that area were developed. Thus, despite the large percentage increase i n the of apartment suites there was  completion  s t i l l a ready supply of s i t e s  which held land prices down. In the West End, South Granville and Marpole land prices continued to r i s e between 1966 increases i n demand.  and 1972  despite only marginal  This p e c u l i a r i t y i s explained also by  considering the supply of available s i t e s .  The 1968  survey-^  0  reported that only 46.0 per cent of the apartment s i t e s i n the West End were unoccupied.  In South Granville and Marpole  only 3 5 . 0 and 3 7 . 0 per cent, respectively, of the s i t e s were unoccupied.  Although the number of completions  was  small i n  these areas, the lack of apartment s i t e s allowed the small demand to influence p r i c e s s i g n i f i c a n t l y . In North Vancouver and Burnaby the demand f o r s i t e s f a i r l y heavy between 1966  and 1972  and consequently,  was  land  prices rose unabated. Construction Costs Attempts to obtain construction costs f o r s p e c i f i c apartment projects i n Metropolitan Vancouver resulted i n dismal failure.  Over a three week period every major developer i n  Vancouver, twenty major construction firms and a v a r i e t y of mortgage lending i n s t i t u t i o n s were contacted i n e f f o r t s to obtain accurate cost information.  42 Of those firms who were unable to supply cost data, the major reason appeared to be that they were unknown or so entangled with other factors that they were useless.  One major  developer who provides about 800 apartment units per year i n Metro was unable to provide cost data because cost accounts did not exist f o r i n d i v i d u a l p r o j e c t s . set up by materials and labour used.  Instead, accounts were For instance, they pur-  chased $50,000 worth of glass i n 1971 but they could not a l l o cate costs to s p e c i f i c projects.  S i m i l a r accounting problems  were encountered with other firms, thus r a i s i n g doubts i n the author*s mind that developers themselves knew how p r o f i t a b l e t h e i r projects were. I t was found that the cost data that were obtained were often misleading and inaccurate.  Problems were met where  apartment projects d i f f e r e d d r a s t i c a l l y i n the q u a l i t y of materials used and i n the types of amenities supplied, both factors which a f f e c t costs s i g n i f i c a n t l y .  In some projects  f o r which data were obtained, construction s t r i k e s and bankruptcies during development severely affected costs.  The  end r e s u l t was that many of these problems could not be r e solved and so a withdrawal to the use of national construction cost indexes had to be made. The use of Residential Construction Price Indexes-^ i s 1  unfortunate because data are only available at the national l e v e l and there are no allowances f o r l o c a l v a r i a t i o n s . The Indexes are also based on costs of materials and labour  associated with a l l forms of r e s i d e n t i a l construction and not just apartment u n i t s .  They also have an unfavourable bias  against highrise concrete  structures mainly because the  Building Materials Index does not apply as well to highr i s e s as i t does to frame apartment buildings and single family dwellings.  In computing the Materials Index lumber  and lumber products are weighted 42.64 per cent, while concrete i s only weighted 7 . 6 l per cent.^  2  These proportions  may be f a i r l y accurate f o r frame apartments and single family units but f o r highrises i t i s probable that the proportions of lumber and concrete would i n v e r t .  Since, i n 1972, the  Lumber Price Index stood at 176.8 while Concrete was only 1 3 8 . 2 , - ^ i t i s l i k e l y that the increases i n construction costs are being overrated f o r highrise apartment blocks. Despite these weaknesses i n the data i t was decided to u t i l i z e the Residential Price Indexes since they were the most r e l i a b l e source of information and gave a f a i r i n d i c a t i o n of how costs had increased i n the l a s t decade. Figure 2 and Table 15 present the Residential Price Indexes between 1964 and 1972.  The Building Materials Index  i s based on price movements of materials used i n construction. Changes i n Federal sales tax charges are r e f l e c t e d i n the Index,  Between 1964 and 1972 the Building Materials Index  rose 5 1 . 3 per cent or at an average annual rate of 6 . 4 per cent.  During the same time period the Wage Rate Index,  which i s a composite of wage rates obtained by the various  Table  15  Residential Construction Price Indexes (1961 = 100)  Fixed Weight Index**  Implicit Index"*"  Year  Materials  1964  109.5  113.1  111.3  106.9  1965  115.8  118.6  117.1  112.3  1966  120.5  128.1  124.2  119.2  1967  125.3  140.8  132.8  126.6  1968  132.1  152.8  142.0  129.2  1969  139.2  164.5  151.4  136.0  1970  137.6  188.7  162.2  138.0  1971  145.3  210.4  176.6  146,4  1972  160.8  234.0  196.0  158.3  Wage Rates*  * Includes non-residential construction. ** Composite of Columns 1 and 2. Materials weighted per cent and wage rates 37.5 per cent. +  62.5  Adjusted by changes i n p r o f i t margins and productivity f o r national accounts "Implicit Index f o r Business Gross Fixed C a p i t a l Formation".  Source:  S t a t i s t i c s Canada, Prices and Price Indexes. December 1972 and February 1973.  trades i n the b u i l d i n g industry, rose 120.9 an annual average of 15.1  per cent.  per cent or at  The Wage Rate Index i s  based on minimum rates given to workers on Federal Government construction contracts.  Fringe benefit costs are not  included and no adjustments are made to r e f l e c t the quantity and q u a l i t y of work. The Fixed Weight Index combines p r i c e indexes f o r  ma-  t e r i a l s used i n building construction with p r i c e indexes based on wage rates i n construction.  The impact of changing  p r o f i t margins and productivity are not r e f l e c t e d i n the Index movements and f o r t h i s reason, i t i s thought to have an upward bias as an i n d i c a t o r of p r i c e changes i n b u i l d i n g construction. rose 84.7 per  Between 1964  and 1972  the Fixed Weight Index 10.6  per cent, f o r an average annual increase of  cent. The I m p l i c i t Index i s the most u s e f u l one f o r t h i s  analysis.  Like the Fixed Weight Index i t i s a composite of  material p r i c e and wage rates but unlike the Fixed Weight Index, i t accounts f o r changes i n p r o f i t margins and productivity.  I t i s the most r e a l i s t i c index available that traces  price movements i n b u i l d i n g construction and w i l l thus be the one used f o r the analysis of changing y i e l d s from apartment investment, that i s presented l a t e r i n t h i s chapter. 1964  and 1972  the I m p l i c i t Index rose 51.4  equal to an annual average of 6.4  per  Between  per cent which i s  cent.  47 Construction costs, unlike land costs increased at a modest rate between 1964 and 1 9 7 2 .  While rents rose at an  average of 6 . 0 per cent per annum i n Metropolitan Vancouver, construction costs rose 6 . 4 per cent and land costs climbed 19.6  to 2 2 . 6 per cent per annum.  Financing Costs Since the 1964 to 1965 period mortgage rates have r i s e n r a p i d l y i n Canada,  This has been mainly due to economic  expansion and increased consumer borrowing.  Higher c a p i t a l  investment and increased consumption have had an i n f l a t i o n a r y e f f e c t on borrowing rates f o r a l l purposes, especially the financing of r e a l property.  Between 1964 and the peak year  of 1970 prime conventional rates rose from 7 . 0 per cent to 10,5  per cent.  After 1970, when the Federal Government changed  i t s monetary p o l i c y to reduce economic expansion, rates f e l l by about 1 . 0 per cent. Up u n t i l recently the majority of apartment financing has been conducted through the use of conventional mortgage 34 loans,  J  Conversations with o f f i c i a l s of some Vancouver  lending i n s t i t u t i o n s indicated that generally most soundly constructed apartment projects were able to obtain the prime conventional mortgage rate.  I t was also discovered that  prime conventional rates i n B r i t i s h Columbia d i f f e r only s l i g h t l y from those p r e v a i l i n g i n the rest of Canada. Accordingly, Table 16 presents average prime conventional mortgage rates i n Canada between 1964 and 1972 and also  48  Table 16 Interest Rates On Conventional Mortgage Loans* In Canada, 1964-1972  Percentage Increase Of Mortgage Rates Per Period  Year  Mortgage Rate  1964  6.97  0.72  1965  7.02  9.12  1966  7.66  5.35  196?  8.07  12.40  1968  9.07  8.49  1969  9.84  6.20  1970  10.45  (9.76)  1971  9.43  (2.38)  1972  9.21*  %  Average Annual Increase In Mortgage Rates i s 3.77 per cent. * Average of prime conventional mortgage interest rates.  Source*  Central Mortgage and Housing Corporation, Canadian Housing S t a t i s t i c s , 1972. p. 62.  shows by how much these rates have increased from year to year. Mortgage rates rose most dramatically between 1965 and 1966,  1967 and 1968 and 1968 and 1969. when rates increased  9.12,  1 2 . 4 0 and 8 . 4 9 per cent, r e s p e c t i v e l y .  Since 1970  lending rates have decreased by about 1 2 . 0 per cent. 1964  Between  and 1972 prime conventional mortgage rates increased at  an average of 3*77 per cent per annum. C a p i t a l Costs, Financing Costs, Rents And Yields I f rents increase at a slower rate than construction, land and financing costs, then the y i e l d that an investor can expect to obtain from apartment investment w i l l be r e duced assuming that the purchase price he pays r e f l e c t s the increased c a p i t a l c o s t s . ^ In the preceding sections i t has been assumed that construction costs have increased at the same rate regardless of l o c a t i o n i n Metropolitan Vancouver.  This i s also true 37  f o r financing costs or i n t e r e s t rates. '  Land costs and  rents, i n contrast, r i s e at d i f f e r e n t rates i n d i f f e r e n t locations.  Thus, although increased construction costs and  increased financing costs w i l l have s i m i l a r e f f e c t s on y i e l d s i n any l o c a t i o n , increases i n land costs and rents, which d i f f e r from l o c a t i o n to l o c a t i o n , w i l l have the effect of rendering some apartment d i s t r i c t s more p r o f i t a b l e than others, everything else being  equal.  I t i s assumed i n the following analysis that the y i e l d obtained from an apartment investment i s equal to t o t a l revenues minus i n t e r e s t charges on debt and divided by the c a p i t a l cost of the investment.  I t i s also assumed that the  loan to value r a t i o has remained constant f o r new buildings over time.  apartment  With these assumptions the r e s u l t of  greater increases i n c a p i t a l costs and financing costs than i n rents i s that y i e l d s w i l l decline. Normally, to determine y i e l d one must know what the operating expenses, depreciation charges, debt amortization, and investor's equity are f o r the investment.  Since  there  has been a lack of suitable data to analyze how y i e l d s have a c t u a l l y changed over time f o r new  apartment projects, i t  has been assumed that these factors do not have a role i n determining y i e l d s .  Thus, the d e f i n i t i o n of y i e l d used i n  t h i s analysis w i l l . o n l y give an i n d i c a t i o n of how  the pro-  f i t a b i l i t i e s of apartment investment i n the various areas of Metropolitan Vancouver have declined r e l a t i v e to one another. Table 17 which i s a summary of the findings of t h i s section presents the average annual percentage increases i n construction, land and financing costs and rents i n eleven areas of Metropolitan Vancouver.  To a i d i n the comparison  of increases i n c a p i t a l costs with increases i n rents, construction costs and land costs have been combined i n Table 18 to produce an o v e r a l l rate of increase f o r c a p i t a l costs. The analysis of some of the more accurate construction and  51 Table 17 Average Annual Increases In Construction Costs, Financing Costs, Land Costs, And Rents In Selected Areas Of Metropolitan Vancouver, 1964-1972 Average Annual Increase In: Construction Financing Land Costs Costs Costs  Area  %  %  Rent!  Vancouver C i t y West End*  6.4  3.77  14.4-27.6  5.1  South Granville  6.4  3.77  11.4-12.8  6.2  Kitsilano  6.4  3.77  9.2-14.5  7.5  Marpole  6.4  3.77  22.9-31.6  6.2  East  Hastings  6.4  3.77  0.0-1.0  9.3  New Westminster  6.4  3.77  22.7-29.2  9.0  North Vancouver  6.4  3.77  42.7-50.0  8.4  West Vancouver*  6.4  3.77  9.9-20.3  5.6  Coquitlam  6.4  3.77  29.1-56.3  4.2  Richmond  6.4  3.77  35.0-45.0  1.4  Burnaby  6.4  3.77  18.8-20.4  9.6  6.4  3.77  19.6-22.6  6.6  Average  * The data i s f o r highrise buildings only.  Table 18 Average Annual Increases In C a p i t a l Costs, Financing Costs And Rents In Selected Areas Of Metropolitan Vancouver, 1964-1972  Capital Costs"*"  Financing Costs  Rent:  West End*  7.6-9.6  3.77  5.1  South Granville  7.7-8.0  3.77  6.2  Kitsilano  7.1-8.4  3.77  7.5  10.5-12.7  3.77  6.2  4.8-5.1  3.77  9.3  New Westminster  9.0-10.0  3.77  9.0  North Vancouver  12.2-13.4  3.77  8.4  West Vancouver*  6.9-8.3  3.77  5.6  Coquitlam  10.0-13.4  3.77  4.2  Richmond  11.0-12.6  3.77  1.4  Burnaby  8.4-8.6  3.77  9.6  Area  %  %  i  Vancouver City  Marpole East  Hastings  For an explanation of how c a p i t a l cost increases are computed see accompanying text. * The data i s f o r highrise buildings only.  land cost data supplied by various developers and contractors indicates that f o r apartment blocks constructed i n 1964, land component as a percentage of t o t a l cost was  the  approxi-  mately 25.0 per cent within Vancouver City f o r frame apartment buildings; f o r highrise blocks, land made up about per cent of t o t a l cost. 1964  15.0  In the suburban municipalities i n  the land cost represented about 16.0 per cent of t o t a l  costs f o r frame dwellings and about 14.0 per cent f o r the concrete ones i n West Vancouver.  Using these weights f o r  land costs and construction costs, i t i s possible to determine by how much o v e r a l l c a p i t a l costs of apartment properties increased annually between 1964 and  1972.  From Table 18 i t would appear that Richmond apartment blocks which had cost increases of 11.0 to 12.6 per cent and rent increases of 1.4 per cent annually have suffered from the greatest erosions of y i e l d on investment of a l l the areas studied.  Richmond was  followed c l o s e l y by Coquitlam as  of the more unprofitable areas. rose at an annual average of 10.0  In Coquitlam to 13.4  rents only rose 4.2 per cent between 1964  one  c a p i t a l costs  per cent, while and 1972.  ment buildings coming into operation i n Richmond and  ApartCoquit-  lam during the late s i x t i e s and early seventies would be considerably less p r o f i t a b l e than t h e i r counterparts commencing operation i n the early s i x t i e s . Marpole and North Vancouver had s i m i l a r increases i n c a p i t a l costs as Richmond and Coquitlam, but f a i r l y high  5^ annual increases i n rents of 6.2 and 8.4 per cent, respect i v e l y , served to reduce the erosion of y i e l d s to some extent. In the West End, West Vancouver and South Granville intermediate annual increases i n c a p i t a l costs of 7.6 per cent, 6.9 to 8 . 3 per cent and 7.7  to 9.6  to 8 . 0 per cent, res-  pectively, helped to make these areas r e l a t i v e l y more prof i t a b l e than some others.  However, the annual rent increases  were not high enough to&offset the higher c a p i t a l cost i n creases and thus a small loss i n p r o f i t a b i l i t y  probably  occurred. The high annual rent increases of 7.5 lano, 9 . 0 per cent i n New  per cent i n K i t s i -  Westminster and 9.6 per cent i n  Burnaby helped to maintain y i e l d s from apartment investment i n these areas at a f a i r l y stable l e v e l . East Hastings i s the only apartment d i s t r i c t i n Metrop o l i t a n Vancouver which may y i e l d s through the 1964  have experienced an increase i n  to 1972  period.  This i s because the  annual increases i n c a p i t a l costs were lower than the annual increases i n rents, 4 . 8 to 5.1  per cent as opposed to  9.3  per cent. In Metropolitan Vancouver between 1964 appeared as though the y i e l d s from new  and 1972 i t  apartment investment  have been steadily declining, as evidenced by greater i n creases i n c a p i t a l costs and financing costs than i n rents. This i s believed to be one of the major reasons why  the  number of apartment starts f o r rental have declined since  1969.  To support t h i s conclusion, i t would be worthwhile to  attempt an in-depth study of y i e l d s from actual apartment projects constructed over the 1964 to 1972 time period. For t h i s author that study was not possible owing to the l i m i t e d amount of suitable data that could be obtained. Summary and Conclusions Average annual increases i n rents, construction costs, land costs and financing costs were calculated f o r the 1964 to 1972 period i n selected areas of Metropolitan Vancouver. Comparisons of rent increases with cost increases indicated that i n most areas of Metro y i e l d s on new apartment investment have been declining since 1964. Yields have been dec l i n i n g because rent l e v e l s have not been keeping pace with the costs of apartment investment.  The areas  apparently  suffering the greatest declines i n y i e l d s were the suburban municipalities of Richmond and Coquitlam.  East Hastings was  the only area studied where y i e l d s may have increased since 1964. Reduced y i e l d s from apartment investment are thought to be one of the major reasons why new apartment construction f o r r e n t a l purposes has been declining over the l a s t three years 1 another major reason, the changes i n the Federal Income Tax Act, w i l l be studied i n the next  chapter.  56 CHAPTER IV The Impact Of The New Federal Income Tax Act On The Residential Rental Market Since January 1,  1972 when the new Federal Income Tax  Act was introduced into law, the whole character of the r e a l estate market has been changed.  This chapter proposes  f i r s t l y , to outline and compare the more important amendments brought i n by the new Act, which a f f e c t r e a l estate transactions, with those regulations that applied under the old Act.  The second goal of the chapter i s to analyze the  effects that the new  income tax regulations are having, or  w i l l have on investment i n r e s i d e n t i a l rental property. The New Tax Regulations As They Affect Real Estate Transactions The new  Income Tax Act introduced two major amendments  a f f e c t i n g c a p i t a l cost allowances ( C C A . ) on r e a l estate which destroyed most of the advantages that many doctors, lawyers and other individuals with high professional incomes had obtained from investing i n r e a l estate.  These amendments  a r e :38 J  1.  Losses created by c a p i t a l cost allowance r e n t a l property cannot be deducted from non-rental income.  2.  Each rental building costing $ 5 0 , 0 0 0 or more must be placed i n a separate c a p i t a l cost allowance c l a s s .  on  The f i r s t amendment ends the practice used by many i n d i vidual investors whereby a property producing a p o s i t i v e cash  flow but a tax loss (through deducting C C A . ) was purchased so that the loss could be used to reduce non-rental income and thus taxes paid.  An example w i l l help c l a r i f y t h i s  point: Suppose an investor owns a concrete apartment b u i l d i n g with an undepreciated c a p i t a l cost of $100,000, an annual gross income of $20,000 and expenses of $17,000.  The tax treatment under  the o l d and new l e g i s l a t i o n i s : Old System Rental Income Expenses CCA.  (5%)  Taxable Income  New System  $20,000  $20,000  17,000  17,000  5.000  5.000  $(2,000)  NIL  Under the o l d Act the investor could apply the $2,000 loss to other income thus reducing h i s tax.  The new Act  only allows the c a p i t a l cost allowance claim to be used to the extent that i t reduces r e n t a l income to zero. Where an investor owns more than one rental property, any unclaimed C C A . on one property may be transferred over to another property to reduce that property's rental income. I f there i s an o v e r a l l loss from a l l rental properties, the loss cannot be deducted from other income but must be capit a l i z e d i n e f f e c t , by reducing the claim f o r C C A . Corporations, whose p r i n c i p a l business involves the r e n t a l , development or sale of real estate, can use losses  58 created by deducting C C A .  from r e n t a l income to reduce  other income from operations that do not involve the r e n t a l of r e a l estate. The second amendment to the Income Tax Act, which applies to both corporate  and i n d i v i d u a l investors, i s  that "pooling" of properties i n the same depreciation class i s no longer allowed. worth $ 5 0 , 0 0 0  Each b u i l d i n g acquired a f t e r 1971  and  or more must be put i n a separate depreciation  class f o r tax purposes.  This means that the recapture  depreciation can no longer be postponed. system recapture  of  Under the old tax  of depreciation could be postponed i n d e f i -  n i t e l y by "pooling".  For example, suppose an investor sold  an apartment block f o r $50,000 more than the undepreciated c a p i t a l cost.  I f , within the same taxation year, he pur-  chased another b u i l d i n g i n the same depreciation class f o r $ 1 5 0 , 0 0 0 , he could apply the excess depreciation of $50,000 to the new  building and thus reduce i t s undepreciated capi-  t a l cost to $ 1 0 0 , 0 0 0 , thus postponing repayment of the tax on recapture.  I f the investor continued  t h i s practice of  "pooling" throughout his l i f e t i m e , then he and his estate could avoid a l l recapture  of depreciation because the old  Act allowed property to pass to heirs at f a i r market value with no  recapture.  The new  Act provides that where a property i s sold, the  amount by which the s e l l i n g price exceeds depreciation deducted up to the o r i g i n a l cost i s brought into income.  This  59 i s c a l l e d recapture of depreciation and i s f u l l y taxable. Suppose, f o r example, an investor purchased an improvement at a c a p i t a l cost of $100,000 which i s depreciated to $ 7 5 , 0 0 0 by the time of sale.  I f the s e l l i n g price i s $ 1 0 0 , 0 0 0 , then  the recapture of depreciation w i l l be $ 2 5 , 0 0 0 and w i l l be taxable at f u l l rates. Another major amendment to the Income Tax Act i s that c a p i t a l gains received on the d i s p o s i t i o n of property w i l l be subject to taxation a f t e r December Jl, 1971 (V-Day).  A  c a p i t a l gain i s defined as the excess of proceeds over the greater of o r i g i n a l c a p i t a l cost of the property or V-Day value.  C a p i t a l gains which accrued before December 31 » 1971  go untaxed.  Capital gains are taxed at half the normal rate.  To i l l u s t r a t e how the new tax rules concerning c a p i t a l gains and recovery of depreciation function, consider the case of an investor who purchases an improvement valued at $100,000 i n 1972 and which he depreciates to $ 7 5 , 0 0 0 before selling for $125,000. Old System C a p i t a l Cost Undepreciated Capital Cost Recovery of Depreciation Taxable Amount Due to Recovery of Depreciation S e l l i n g Price O r i g i n a l Cost C a p i t a l Gain Taxable Amount Due to Capital Gain  $100,000  New System $100,000  75,000 $25,000  $25,000  $125,000 100.000 $25,000  75tooo  $25,000 $125,000 100,000 $25,000 $12,500  60 Although c a p i t a l gains are taxable, there are few opport u n i t i e s to obtain c a p i t a l losses except perhaps on the sale of undeveloped land.  Under the terms of the new Act c a p i t a l  losses are not available on the d i s p o s i t i o n of depreciable property.  In order to obtain a deductible loss from the sale  of depreciable property, there must be a "terminal" l o s s .  A  terminal loss arises when a depreciable asset i s sold f o r an amount less than i t s undepreciated  c a p i t a l cost.  For the  i n d i v i d u a l investor a terminal loss on one property i s f i r s t applied to c a p i t a l gains r e a l i z e d on other properties sold within the same taxation year? h a l f of any loss remaining thereafter i s deductible from other income to a maximum amount of $1,000 per taxation year.  Any r e s i d u a l loss r e -  maining, a f t e r deducting the maximum amount from other i n come, can be carried back one year or forward u n t i l used up. deductible.  indefinitely  Under the old Act terminal losses were not  A corporation can deduct a l l terminal losses  accrued from other income within the taxation year. The c a p i t a l gains tax rate only e x i s t s f o r those  indivi-  duals and corporations who are not considered to be "traders" i n the f i e l d .  Where an i n d i v i d u a l or company's a c t i v i t y i n -  volves the frequent buying and s e l l i n g of r e a l property, c a p i t a l gains are taxed at f u l l rates. The new Income Tax Act has provided two methods f o r determining c a p i t a l gains on d i s p o s i t i o n of assets; e i t h e r method may be used by the i n d i v i d u a l but the corporation  61 must use the second method.  The two alternatives are:  i  1.  The e l e c t i o n method.  The c a p i t a l gain i s  the excess of net proceeds of d i s p o s i t i o n over V-Day value. 2.  The tax free zone method.  The c a p i t a l gain i s  the excess of net proceeds over a c e r t a i n amount. This certain amount i s the middle value of o r i g i n a l cost, V-Day value and net sale proceeds. As a general rule, i f assets are worth more on V-Day than they cost, then the e l e c t i o n method should be used.  In  these circumstances an investor would not be paying more tax than i f he had used the tax free zone method and may pay less i f the value of the investment f a l l s a f t e r V-Day, are  I f assets  worth less on V-Day than the o r i g i n a l cost, then the tax  free zone method should be used.  Otherwise the investor  w i l l pay tax on any gains i n value achieved a f t e r V-Day. The new Act prevents end-of-the-year tax s e l l i n g which often occurs i n the United States.  In order to avoid  super-  f i c i a l " losses, i t i s impossible to s e l l assets at the end of a taxation year which have f a l l e n i n value to record the loss f o r tax purposes and immediately thereafter buy them back again at the beginning of the next taxation year.  There  must be a t h i r t y day time lapse between the s e l l i n g of an asset and re-buying i t , - " There are s p e c i a l rules i n the new Income Tax Act f o r determining proceeds of d i s p o s i t i o n of investments where the  investor dies; gives the property as a g i f t ? s e l l s i n a non-arms length transaction; where the property i s destroyed or expropriated; and where the property i s taken out of an income-producing use.  The rules f o r deemed dispositions are  adequately explained i n several publications,  and so, ex-  cept f o r deemed d i s p o s i t i o n s that occur on the  taxpayer's  death, w i l l not be dealt with here. Under the old Act when the taxpayer died, depreciable property passed to the heirs without recapture of depreciation.  The h e i r received the property at f a i r market value  and could s t a r t depreciating from that value. frequently the case, f a i r market value was  I f , as  was  substantially  higher than undepreciated c a p i t a l cost, t h i s gave the h e i r an a t t r a c t i v e "step up" i n c a p i t a l cost. the new Act now  The regulations i n  allow f o r recapture of depreciation and  c a p i t a l gains taxation when the death of the taxpayer  occurs.  The estate of the deceased i s considered to have sold the property at an amount halfway between undepreciated cost and f a i r market value at time of death.  capital  The beneficiary  i s considered to have acquired the property at the same amount.  I f the sale-purchase price arrived at by t h i s  method i s less than the deceased o r i g i n a l l y paid f o r the property, the beneficiary's o r i g i n a l cost i s the same as the deceased's.  The difference between the two amounts i s  treated as though i t were C.G.A. claimed by the new i n previous years.  owner  The c a p i t a l gain i s considered to be the  difference between the deemed proceeds and the o r i g i n a l cost. Where the property i s w i l l e d to the deceased's spouse, a tax-free r o l l o v e r occurs. To ease the e f f e c t of double taxation which the  new  Income Tax Act and p r o v i n c i a l death taxes create, i t i s thought that recapture of depreciation and c a p i t a l gains tax w i l l be subtracted from the net value of the properties before computations are made f o r p r o v i n c i a l death taxes. Before leaving t h i s section i t might be suitable to discuss the tax status of small private companies set up by individuals to hold t h e i r r e a l estate.  The new  low rate of  25 per cent f o r small Canadian-controlled private corporations applies only to income received from an "active business" and only on the f i r s t $ 5 0 , 0 0 0 of active business i n come earned each year, u n t i l the aggregate Otherwise,  exceeds $400,000.  income i s taxed at the basic corporate rate of 50  per cent i n 1972.  Although the Act contains no d e f i n i t i o n  of "active business", i t appears from the National Revenue's Interpretation B u l l e t i n ; I T - 7 2  that r e n t a l income would not  l i k e l y q u a l i f y as coming from an active business unless i t was a hotel-type of business. A private Canadian corporation, taxed at the 50 per cent rate on a l l non-active business income and property income, w i l l receive a refund of tax equal to h a l f the amount of income paid out to the shareholders as dividends.  Where the  tax rate of the shareholders i s less than 50 per cent, the  64 greater tax saving can be achieved by holding the r e a l estate d i r e c t l y as an i n d i v i d u a l .  I f the shareholder's tax rate i s  greater than 50 per cent, more tax can be saved by holding the r e a l estate through a p r i v a t e l y owned corporation.  These  points are i l l u s t r a t e d by the following example which compares the tax treatments f o r corporations and individuals at d i f f e r ent rates. Tax Rate of Individual  HI  IM  $40,000 16,000 $24,000  $40,000 20,000 $20,000  $40,000 24.000 $16,000  Net income from property Tax payable (50%) After-tax income Dividends paid to shareholders  $40,000 20,000 $20,000 $20,000  $40,000 20,000 $20,000 $20,000  $40,000 20,000 $20,000 §20,000  Tax refund to corporation (50%)  $10,000  $10,000  $10,000  Dividends received by shareholder Tax payable After-tax income  $20,000 8,000 $12,000  $20,000 10,000 $10,000  $20,000 112^000 $8,000  Income retained by corporation Income retained by shareholder Total after-tax income retained by corporation & shareholder Advantage i n holding property d i r e c t l y through i n d i v i d u a l  $10,000 12.000  $10,000 10,000  $10,000 8,000  $22,000  $20,000  $18,000  Property held d i r e c t l y by i n d i v i d u a l : Net income from property Tax payable After-tax income Property held through corporation:  $2,000  $(2,000)  The i n d i v i d u a l investor must be wary of holding r e a l estate through a corporation because of the r i s k of doubletaxation of c a p i t a l gains a f t e r h i s death.  I f the property  has increased i n value, the value of the deceased's shares i n  65 the corporation w i l l have increased too and w i l l be deemed to be disposed of on his death.  His estate must pay tax on  h a l f of the gain accrued by his shares.  Ultimately, when  the corporation disposes of the r e a l estate, i t w i l l also be subject to a tax on the c a p i t a l gain accrued by the property. The new Act provides f o r r e l i e f from t h i s double taxation i f the estate s e l l s the corporation's assets within twelve months of the individual's death.  The stripping of the cor-  porate assets w i l l e f f e c t i v e l y reduce the value of the to zero.  shares  The Act provides that the c a p i t a l loss that i s  sustained when the worthless shares are disposed of, can be offset against the c a p i t a l gain that i s deemed to be r e a l i z e d by the deceased's estate at time of death.  J  Such action  requires that the executors of the estate must be able to act  speedily. Another disadvantage of holding r e a l estate through a  corporation i s that when the shareholder dies, his estate loses the advantage of the deemed r e a l i z a t i o n rule which applies to depreciable property, whereby the assets are deemed to be disposed of at an undepreciated  c a p i t a l cost  plus half the difference between that and f a i r market value. His estate w i l l be deemed to have disposed of his shares at f u l l market value,  66 The Impact of the Income Tax Act on Investment i n Residential Rental Property Of the major amendments to the Income Tax Act, the loss of the tax shelter which allowed r e n t a l losses to be deducted from other income and the introduction of separate  CCA.  classes f o r each apartment building w i l l have the greatest impact i n re-shaping the investment nature of the r e s i d e n t i a l rental f i e l d . Throughout apartment  the 1960's much of the tremendous growth i n  starts was due to the i n f l u x of investment funds  into the market from doctors, lawyers and others with high professional incomes.  Their i n t e r e s t i n acquiring residen-  t i a l rental property was not so much to increase t h e i r t o t a l income but rather to achieve paper losses from C.CA.'s which could be applied to t h e i r other income and so shelter part or a l l of i t from taxation.  These investors cared less  about the economics of apartment investment and more about the tax savings they could obtain.  They wanted investments  which produced a positive cash flow and a loss f o r tax purposes.  This type of investment v/as usually a small- to  medium-sized frame apartment block. a maximum C C A .  Frame properties with  of 10 per cent were more desirable than  concrete ones which only have a maximum C C A .  of 5 per cent.  Because professional men who invested i n apartment properties were w i l l i n g to take a lower than normal rate of return and were desirous to obtain a tax shelter, they purchased apartment blocks at a higher price than that j u s t i f i e d  by y i e l d and rented them at lower rates than normal, since they were usually only concerned with meeting mortgage payments and expenses. Now  that the new  tax regulations are i n e f f e c t and  the  tax shelter no longer e x i s t s , apartment buildings have to s e l l s t r i c t l y on the basis of y i e l d as investments. the present  With  l e v e l of rents i t i s no longer a t t r a c t i v e to  b u i l d such apartments i f they have to be sold on a y i e l d basis.  This i s quite apparent from the number of multi-  family completions constructed i n Metropolitan Vancouver since 1969.  This opinion was  borne out by interviews with  two of Vancouver's leading developers.  In the past these  developers have b u i l t many frame apartment buildings which were immediately sold at high prices to professionals as tax shelters.  However, they are now  f i n d i n g that with the re-  moval of the tax shelter that they cannot s e l l buildings f o r as high a p r i c e , nor can they rent them out at economical rents because of the higher c a p i t a l and financing costs  and  thus, they have ceased to develop apartments f o r the r e n t a l field.  This reduction i n construction has checked the trend  of r i s i n g land p r i c e s to some extent  (Table  13).  As the shortage of r e n t a l units increases, i t i s expected that rents w i l l increase u n t i l apartment values and y i e l d s are restored to an economic l e v e l ; only then w i l l t i o n resume i n r e n t a l accommodation.  construc-  When t h i s happens, i t  i s expected that the trend w i l l be towards larger projects  68 of concrete construction which are more economical to r u n . ^ These apartment investments w i l l probably be retained by larger r e a l estate companies rather than sold to i n d i v i d u a l investors.  This i s because corporations receive a more  favourable tax treatment under the new regulations than individuals. To demonstrate how the c a p i t a l gains tax and the regul a t i o n s governing c a p i t a l cost allowances can a f f e c t the return from apartment investment consider the following example. Assume the following conditions! 1.  Original cost of apartment block Land $100,000 Improvements $1,000,000 Total $1,100,000  2.  Original mortgage $ 7 0 0 , 0 0 0 f o r 25 years at 10.0%.  3.  Original equity $400,000.  4.  Capital cost allowance 5 . 0 % .  5.  Property sold at end of the 5 t h year f o r $1,600,000.  6.  Outstanding mortgage at the end of the 5"th year is $667,064.  7.  Assumed tax rate f o r the investor 5 0 . 0 % .  8.  The investor has other professional income i n excess of the loss on the property.  9.  Funds are assumed to be reinvested i n a s i m i l a r property i n year of the sale.  The tax and net cash flow calculations are shown belowi  69 Tax Calculation Net operating income XJ6 S S iivfc©!*© si* on mortgage Less C C A . Taxable income  Year 1  Year 2  Year 3  Year 4  Year 5  $85,000  $85,000  $85,000  $85,000  $85,000  71,750 71,200 70,593 69,924 69,187 50.000 47.500 45.125 42,869 40,725 $(36,750) $(33,700) $(30,718) $(27,055) $(24,912)  Tax saving (50#) $18,375  $16,850  $15,359  $13,528  $12,456  Year 2  Year 3  Year 4  Year 5  $85,000  $85,000  $85,000  $85,000  77.118 16,850 $7,882 $24,732 16,850  77,118 15.359 $7,882 $23,24l 15.359  77.118 13.528 $7,882 $21,4l0 13.528  77.118 12,456 $7,882 $20,338 12,456  Net Cash Flow Calculation  Year 1  Net operating income $85,000 Less p r i n c i p a l and interest 77.118 18,375 Cash flow $7,882 $26,257 Plus tax saving 18,375 Net cash flow Rates of return: 1.  Rate of return f o r 5 years under old tax regulations: Annual net cash flow - see above Residual cash value: Sales Price $1,600,000 Outstanding mortgage 66?,064 Available to re-invest $932,936 Average rate of return on equity including c a p i t a l gain 29.5$  2.  Rate of return f o r 5 years under new tax regulations: Annual net cash flow - $7,882* Residual cash value: Sales price $1,600,000 Outstanding mortgage 667,064 Tax on c a p i t a l gain 125,000 Tax on recovery of C C A . 36.173 Available to re-invest $771,763 Average rate of return on equity including c a p i t a l gain * No tax saving.  18,1%  The r e s u l t of the new regulations has been a reduction i n the returns on apartment investment.  In t h i s example,  the average rate of return on equity has been reduced from the 2 9 . 5 per cent that could be obtained under the old tax l e g i s l a t i o n to 18.1 per cent under the new regulations.  To  regain the return on equity that was possible under the o l d l e g i s l a t i o n , either rents w i l l have to increase, or equity ( s e l l i n g p r i c e ) w i l l have to decrease, A further e f f e c t of the new l e g i s l a t i o n i s that i t may reduce the l i q u i d i t y of the c a p i t a l markets.  Consider the  case of an investor, with a 50 per cent marginal tax rate, who owns an improvement costing $ 2 0 0 , 0 0 0 .  At the time he  wishes to s e l l the improvement, he has an outstanding mortgage of $ 1 5 0 , 0 0 0 , equity of $ 5 0 , 0 0 0 and has depreciated the building to $ 1 6 0 , 0 0 0 .  I f the investor s e l l s the property  for $ 2 1 0 , 0 0 0 , he w i l l receive net proceeds, a f t e r taxation of c a p i t a l gains and recovery of depreciation, of $ 3 7 , 5 0 0 . This i s less than the equity of $ 5 0 , 0 0 0 which he had established i n the property.  Thus, i f he sold his property at  the stage described, the investor would see an erosion of h i s c a p i t a l through taxation. The new tax laws raise a new problem f o r the investor. He now not only has to worry about a return "on" h i s c a p i t a l but also a return "of" the sum invested.  The f i r s t i s a pay-  ment of i n t e r e s t or y i e l d and the second i s a repayment of his  equity.  I f and when the equity i s returned and i t i s  reduced i n value measured i n constant d o l l a r s through i n f l a t i o n and taxation, then part of the y i e l d must be set aside as a sinking fund to make up the difference so that, at term, the c a p i t a l sum  i s constant.  The r e s i d u a l , a f t e r allowance  f o r the sinking fund, i s the true y i e l d . Income Tax Act may  Thus, the  new  not only reduce y i e l d s by taxing the  income stream but also by taxing the c a p i t a l as w e l l . The o v e r a l l e f f e c t s of the amendments to the Income Tax Act are thus, a decrease i n construction of r e n t a l units and a reduced mobility of c a p i t a l within the market.  Construction  has been reduced because those with professional incomes no longer f i n d i t advantageous to invest i n apartments and  be-  cause landlords are f i n d i n g that an economical return cannot be obtained from renting.  The dangers of the taxation of  c a p i t a l has or w i l l r e s u l t i n a decrease i n apartment sales and a freezing of investments within the market. The combined e f f e c t s of the tax changes, plus the rapid increase i n c a p i t a l costs seen i n the previous chapter,  indi-  cate that rents w i l l have to climb f a i r l y steeply to return the investment i n r e n t a l housing to an economical footing. In the meantime developers are turning away from the r e n t a l market to the development of condominiums, commercial and o f f i c e space where the p r o f i t s are considerably greater than i n r e n t a l housing.  Summary and  Conclusions  This chapter was  the second to consider factors a f f e c t i n g  the reduced construction of r e n t a l housing i n Metropolitan Vancouver since 1969.  A general outline of the new  Income  Tax Act was presented and a b r i e f discussion of the e f f e c t s of the new I t was  regulations on apartment investment was  concluded that the new  conducted.  Act w i l l force professionals  out of the r e n t a l f i e l d because of the loss of the tax shelter.  In addition, y i e l d s may  be reduced due to taxation  of c a p i t a l gains and recovery of depreciation.  The  reduction  i n y i e l d s caused by taxation, combined with increased capit a l and financing costs, w i l l keep additional supplies of r e n t a l units at a low l e v e l u n t i l rents increase to a point high enough to produce economic returns. The following chapter considers the municipal bureaucracy and costs involved i n the processing of applications for apartment projects.  This aspect i s being deliberated  because i t i s f e l t that bureaucracy and the costs involved have been p a r t l y responsible f o r discouraging developers from supplying new  apartment r e n t a l u n i t s .  73 CHAPTER V The Processing of Apartment Development Permits by Municipal Authorities In recent years much c r i t i c i s m has been l e v e l l e d at municipal authorities f o r the time delays and red tape i n volved i n processing the plans and documents that are r e quired p r i o r to the granting of development permits.  In  addition, the increasing popularity of land use contracts with t h e i r necessary public hearings has l e f t the f e a s i b i l i t y of many apartment projects to the whims of the public and t h e i r elected representatives.  These factors have had  the e f f e c t of discouraging apartment development, e s p e c i a l l y since they are one of the less desirable r e a l estate investments. The purpose of t h i s chapter i s to examine the procedures used i n several municipalities f o r processing development applications to determine the extent of the bureaucracy i n volved and the time required to complete processing.  It is  hoped that t h i s methodology w i l l throw l i g h t on ways processing can be speeded up and so reduce the costs that developers have while holding land awaiting f o r municipal approv a l to construct.  These costs include optioning land,  interim financing and future higher construction costs. Besides the costs associated with delays created at the municipal l e v e l , developers also have to pay d i r e c t l y to the municipality monies f o r processing documents, impost charges  74 and other l e v i e s imposed by municipal a u t h o r i t i e s .  In some  municipalities these costs have been approaching astronomical l e v e l s i n recent years.  An outline of the charges i n  three municipalities w i l l also be included i n t h i s discussion. The D i s t r i c t of Surrey and the C i t i e s of Vancouver and North Vancouver were selected f o r examination i n the above context.  These areas were chosen because i n the past few  years almost 50 per cent of a l l apartment completions have taken place within t h e i r boundaries and thus, t h e i r p o l i c i e s regarding apartment development w i l l have a s i g n i f i c a n t impact on the whole r e s i d e n t i a l r e n t a l f i e l d . 46 North Vancouver—Outright Use North Vancouver C i t y s procedure f o r processing plans 1  f o r building permits i s probably the most e f f i c i e n t of the three areas studied. U n t i l f a i r l y recently a l l developments were carried out under e x i s t i n g zoning and building by-laws but i n June,  1972  Council passed a resolution which provided that a l l developments costing $600,000 or more or occupying more than one acre of land would only be given approval v i a the use of 47 land use contracts. '  The procedures f o r obtaining land use  contracts w i l l be examined l a t e r , f i r s t l y , the processing of building permit applications under e x i s t i n g by-laws w i l l be inspected. Before making an o f f i c i a l application f o r a building 48 permit, a developer may elect to submit preliminary drawings  to the Gity o f f i c i a l s f o r examination to check i f they are i n accordance with e x i s t i n g zoning by-laws.  This i s a good  procedure because i f the use proposed f a i l s to meet the bylaw standards» the plan can be rejected before any expensive detailed s i t e drawings are prepared and before any monies are expended f o r processing. To make an o f f i c i a l application f o r a b u i l d i n g permit, the applicant must f i r s t request, i n writing, b u i l d i n g grades and services information from the C i t y Engineering Department. He then must submit two complete b u i l d i n g plans plus three s i t e and drainage plans and f i l l out a building permit a p p l i cation.  The s i t e and drainage plans must show a l l building  grades and distances involved and the location and grades of a l l e x i s t i n g and proposed service l i n e s and the d i r e c t i o n of flow. Once these plans have been f i l e d , a quick review i s made by the C i t y o f f i c i a l s to see i f they are adequate. The applicant i s n o t i f i e d at t h i s time i f they are not.  At the  time of application two copies of the s i t e and drainage plans are passed to the City Engineering Department. The plans are checked f o r compliance  with the building,  zoning and plumbing regulations by the Building Inspector and a l i s t i s made of by-law i n f r a c t i o n s .  The Engineering Depart-  ment also l i s t s any by-law i n f r a c t i o n s they detect and pass these along to the Building Inspector.  A l l i n f r a c t i o n s are  brought to the attention of the developer.  The process i s  repeated u n t i l a l l plans are completely corrected.  76 Once these approvals have been obtained, the City Engineering Department keeps one copy of the s i t e and drainage plans and returns the others to the Building Inspector,  who  returns one plan to the applicant and gives the other to the Plumbing Inspector. After a l l plans are found to have complied with the relevant by-laws, the F i r e Warden i s asked to examine them to see i f they meet f i r e safety regulations. I f the plans are i n order, he signs them, i f not the developer i s asked to r e c t i f y the f a u l t . Where any C i t y streets or lanes must be occupied during construction, a Street Occupancy Permit i s needed.  Permits  are also needed f o r plumbing, e l e c t r i c a l , sewer, water and swimming pool connections. Once a l l these conditions have been met and a l l approvals obtained, the building permit i s issued.  Normally a l l the  processing required to issue a building permit w i l l take to three weeks i f a l l plans and drawings are i n order.  two Where  the plans are not correct, the processing, of course, i s longer; i t pays i n time and money f o r the developer to ensure that the plans submitted are correct.  Occasionally, during  busy construction periods, processing may  take a couple of  weeks longer than normal. As was mentioned, the C i t y of North Vancouver's processing procedures f o r development plans are the most e f f i c i e n t of any municipality studied.  The e f f i c i e n c i e s appear to be due  77 to the fact that the Building Department and the C i t y Engineering Department, the two departments where the majority of processing occurs, examine and process the plans simultaneously.  Further, the lack of a Planning Department reduces  the amount of processing to "be done.  In other municipalities  (see the City of Vancouver below) processing i s done i n a chain-type manner, that i s , through one department and on to the next.  This i s an i n f e r i o r system because i t takes much  longer to advance through approval stages one department at a time than to advance on a broad front through several departments simultaneously.  Where municipal departments  suggest modifications or changes i n the proposed development, i t i s easier to evaluate them when a l l departments are working on the development at the same time and are thus aware of the nature of the development proposed, than where one department i n a chain-type process suggests changes to the plans and has to r e f e r them back through those departments that have already completed processing. In North Vancouver the Building Inspector i s responsible f o r the o v e r a l l supervision of processing i n a l l departments. He i s aware of a l l problems i n the development plans and i s thus able to communicate  the problems to the developer and  the municipal departments concerned i n an e f f e c t i v e manner. Fees i n the C i t y of North Vancouver f o r processing and building permits are f a i r l y reasonable.  The processing fee,  which i s non-refundable, i s 50 per cent of the Building Permit  Fee up to a maximum of $ 5 0 , 0 0 . ^  The Building Permit Fees,  which are payable only i f the building permit i s granted, are based on the value of works to be constructed.  The fee  schedule isi^° When the cost of works does not exceed $ 1 , 0 0 0 . . . . $ 6 . 0 0 For each additional $ 1 , 0 0 0 or part between $ 1 , 0 0 0 and $15,000 $3.00 For each additional $ 1 , 0 0 0 or part between $ 1 5 , 0 0 0 and $ 5 0 , 0 0 0 $2.50 For each additional $ 1 , 0 0 0 or part between $ 5 0 , 0 0 0 and $100,000 $2.00 For each additional $ 1 , 0 0 0 or part over $100,000 $1.50 Plus an additional inspection fee of $ 5 0 . 0 0 per unit On a 35 suite apartment block costing $315,000 the Building Permit Fee would be $ 2 , 3 0 8 . 0 0 .  Nominal fees are  also charged f o r Street Occupancy Permits and permits required f o r the connection of water, sewer, e l e c t r i c i t y , et cetera. Any o f f - s i t e works?required by the development must be paid f o r by the developer.  These include a l l service con-  nections and any additional charges that may be l e v i e d f o r construction of o f f - s i t e works.  Normally any o f f - s i t e con-  struction i s done by the City at cost and charged to the developer. The impressions obtained of North Vancouver's processing procedures were that there was a minimum of red tape and that permission to commence construction was forthcoming within a reasonable time from the i n i t i a l application date.  79 The fees charged were not excessive and probably  represent  f a i r l y , the cost of the City's input required f o r processing and inspection.  The procedure used i n North Vancouver i s  one which could be better followed by other m u n i c i p a l i t i e s . Land Use One  Contracts of the reasons why  so many municipalities are turn-  ing to the a p p l i c a t i o n of land use contracts f o r development purposes, i s that i t i s thought that major developments have a s i g n i f i c a n t impact upon the community and consequently, the inhabitants should be allowedcto opinions of any such developments.  express t h e i r views and They have t h i s oppor-  tunity at public hearings which must be held p r i o r to the conclusion of any agreement between the municipality and  the  developer. Land use contracts, although admirable i n p r i n c i p l e , do not work as well i n p r a c t i c e .  Often a development w i l l be  cancelled because a few p o l i t i c a l a c t i v i s t s , with more power than t h e i r numbers j u s t i f y , create strong opposition to the proposed use.  I t i s not often that a broad spectrum of the  community are represented at these hearings since usually only those who  oppose the development w i l l attend the public  hearing. Land use contracts also tend to greatly increase the costs involved i n obtaining municipal approval f o r construction.  The developer faces costs of presentations of the  proposed development to the public: costs of holding land;  80 c o s t s of i n t e r i m f i n a n c i n g ; f u t u r e h i g h e r c o n s t r u c t i o n c o s t s a t t r i b u t e d t o the much l o n g e r p e r i o d o f time r e q u i r e d f o r municipal  approval;  c o s t s o f concessions  t o the m u n i c i p a l i t y ,  such as deeding o f r e c r e a t i o n a l l a n d , expansion o r p r o v i s i o n of p u b l i c f a c i l i t i e s ,  e t c e t e r a ; and l e g a l c o s t s a t t r i b u t e d  to the drawing up o f the a c t u a l c o n t r a c t . p a r t l y responsible f o r reducing  These f a c t o r s are  the d e s i r a b i l i t y o f develop-  ment from an e n t r e p r e n e u r i a l viewpoint,  e s p e c i a l l y i n apart-  ment development where the gains are l i m i t e d . From the developer's  p o i n t o f view l a n d use c o n t r a c t s  are v e r y c o s t l y , somewhat o f a gamble and should not be entered  i n t o u n l e s s there i s a c o n s i d e r a b l e  For apartment r e n t a l u n i t s t h i s gainfdoes  g a i n t o be made.  not e x i s t .  The  c o s t s a s s o c i a t e d with l a n d use c o n t r a c t s can run i n t o the hundreds of thousand d o l l a r s , e s p e c i a l l y where l a n d must be deeded t o the m u n i c i p a l i t y .  The gamble i s g r e a t because  there i s a s u b s t a n t i a l p o s s i b i l i t y t h a t the p r o p o s a l w i l l be r e j e c t e d a t some p o i n t along the approval the concessions  process  or that  the C o u n c i l r e q u i r e s w i l l be t o o burdensome  to a l l o w f o r an economic development. c r e a s i n g l y being r e c o g n i z e d  T h i s gamble i s i n -  by developers;  where the out-  r i g h t purchase o f a s i t e was once the common method, are now sought as an insurance  options  against project r e j e c t i o n .  81 North Vancouver—Land Use Contracts^  1  In the C i t y of North Vancouver developments costing $600,000 or more or occupying more than one acre require employment of a land use contract.  To obtain a contract,  an application o u t l i n i n g the type and size of development must be submitted to the City Clerk, the Planning Consultant and the Advisory Planning Commission.  These bodies study  the a p p l i c a t i o n and report t h e i r recommendations to Council. If Council accepts the application, i t authorizes the preparation of a land use contract and designates the s i t e as a development area. The Planning Consultant obtains comments from the C i t y s t a f f , especially the Engineering and Building Departments, and draws up the contract based on these comments and those of the Advisory Planning Commission and Council.  He nego-  t i a t e s with the developer to arrive at an acceptable contract and development plan.  I f during t h i s process major changes  to the development are made, they must be re-submitted to the various advisory groups f o r approval. i s then submitted to Council f o r review.  The draft contract A date i s set f o r  a public hearing i f Council accepts the a p p l i c a t i o n .  No  public hearing i s held i f the Council rejects the a p p l i c a t i o n . I f the public hearing i s favourable to the development, Counc i l signs the contract and has i t registered i n the Land Registry O f f i c e .  The developer now follows the normal pro-  cedure f o r obtaining a building permit.  82 The time taken from the date of i n i t i a l a p p l i c a t i o n u n t i l f i n a l approval can vary between two months to a year or longer.  This i s because of a l l the additional bodies and  boards that must be consulted p r i o r to entering into the contract.  In addition, the absence of guide-lines to a i d i n  the preparation of the contract leaves much room f o r negotiat i o n which can take a considerable period of time. Since Council and the various advisory bodies have other tasks besides reviewing new development proposals, they often do not have the time to study a proposed land use contract i n a continuous fashion through i t s formulation.  This results  i n long delays before overall approval i s obtained. The costs to the developer of developing  through the  medium of land use contracts have already been pointed out i n a generalized form i n the previous section.  The s p e c i f i c  costs he must bear i n North Vancouver are the a p p l i c a t i o n fee and the Building Permit Fee.  The a p p l i c a t i o n fee i s  $300 f o r developments on s i t e s up to one acre and an addit i o n a l $100 per acre or part above one acre.-*  2  The Building  Permit Fee i s the same as that outlined f o r outright uses. In North Vancouver i t would greatly aid the developer i f guidelines could be established which indicated the probable terms and conditions which would be incorporated i n a land use contract.  In t h i s way, before the developer f i n a l -  ized a development scheme, he would have some idea of the costs involved i n obtaining a land use contract.  In addition,  83 time l i m i t s should be set up within which the various advisory bodies must make t h e i r recommendations. To give the community a voice i n the approval of proposed developments, there seems to be no other way through a public hearing.  than  Council, however, should be on  the lookout f o r those groups who have a greater influence than that j u s t i f i e d by t h e i r numbers and ensure that no segment of the community i s over-represented. C i t y of Vancouver-*^ In Vancouver land use contracts are not used, however, a special type of zoning, c a l l e d Comprehensive Development Zoning, serves the same purpose.  Since t h i s zoning i s r a r e l y  used f o r apartment developments, i t need not be considered. Only the procedures f o r processing apartment development plans that meet existing zoning by-laws w i l l be referred to. To apply f o r b u i l d i n g and development permits i n Vancouver, s i t e plans, elevation plans, f l o o r plans and roof plans must be submitted i n t r i p l i c a t e to the Building Department.  This Department checks f o r completeness of the plans.  The plans are then sent to the Engineering Department.  This  Department examines the plans as they a f f e c t sewers, water, street crossings, a i r p o l l u t i o n control and highways.  If  the Department approves them, they are returned to the Building Department.  Generally approval takes two to three weeks  but can be much longer.  84 The B u i l d i n g Department re-routes the plans to the Planning Department where i t i s ensured that the proposed development i s not i n an area required f o r schools, parks or highways or i s under consideration f o r rezoning, re-subdiv i d i n g or re-development. l e f t f o r clearance.  I f i n such an area the plans are  In some cases where matters of design  of the structure are involved, the plans are referred to the advisory Design Panel f o r approval. Department approves the plans.  Otherwise, the Planning  This stage of the processing  procedure may take between two days and several weeks. Once Planning Department approval i s obtained, the plans return to the Building Department where they are checked i n d e t a i l f o r compliance  with the Zoning and Development By-Law  and with the various building by-laws. one hour to several weeks.  This may take from  In the majority of cases, the  plans do not wholly comply with the by-laws and the developer i s required to a l t e r them.  Considerable time i s spent i n  explaining and discussing the various items and also i n checking any amendments to the plans. When the plans are approved by a l l the departments concerned, the b u i l d i n g and development permits are issued. Where a proposed use does not and cannot meet e x i s t i n g building and zoning and development by-laws, the plans are referred to the Technical Planning Board f o r approval.  The  Technical Planning Board may refuse approval i f the development w i l l create a t r a f f i c hazard; be injurious to amenity;  cannot "be properly drained; or does not conform to an amendment to the Zoning and Development By-Law which i s under consideration by Council.  I f Technical Planning Board ap-  proval i s needed, a further two weeks of processing i s added. In Vancouver the processing and building permit fees are quite nominal.  To have development plans f o r an apart-  ment use processed, a non-refundable fee of $18 on the f i r s t 5 , 0 0 0 square feet of gross f l o o r area to be constructed i s charged.  $ 1 . 5 0 f o r each additional 1,000 square feet i s  added u n t i l the maximum processing fee of $300 i s reached.-^" The Building Permit Fee i s $160 per $ 1 0 0 , 0 0 0 of works to be constructed.^^  Any o f f - s i t e works that the developer re-  quires w i l l be constructed by the C i t y at the expense of the developer. In Vancouver processing can take a few days or several months, often the l a t t e r .  The time necessary to approve a  set of development plans and issue a b u i l d i n g permit, i s generally longer i n Vancouver than i n North Vancouver,  The  reason f o r t h i s appears to be i n the d i f f e r e n t organizational structure of the departments involved i n processing i n the two c i t i e s .  Plans are processed i n Vancouver i n a chain-  type manner; when one department has studied and approved the plans, they are passed along to the next department, never does more than one department work on the plans at any one time.  This means that the speed at which plans move  through a department i s very much dependent on the s t a f f of that department.  86 Even assuming that a chain-type processing procedure i s the most e f f i c i e n t , i t would seem that the order i n which departments study plans i s i n e f f i c i e n t .  Before i t i s even  known i f the proposed use would comply with building and zoning and development by-laws, a r e l a t i v e l y simple thing to confirm, the Engineering Department has to process the plans. This Department has to study the plans i n considerable det a i l to determine i f such things as the l o c a t i o n of sewer and water l i n e s are correct.  This takes a lengthy period of  time and i t i s completely wasted i f i t i s subsequently found that the proposed use does not comply with the relevant bylaws.  The proposal would then have to be re-designed and  the Engineering Department would have to re-examine the amended plans.  I t would be more l o g i c a l and e f f i c i e n t i f  departments such as Planning and Building who have a more general and less time-consuming function i n the processing procedure were to examine the plans i n i t i a l l y .  In t h i s way  Engineering's time would not be wasted i n examining plans that don't meet zoning requirements. D i s t r i c t of Surrey-^ In June, 1973  "the D i s t r i c t of Surrey adopted a new muni-  c i p a l development p o l i c y which requires that a l l apartment developments be c a r r i e d out under the terms of a land use contract.  As has been mentioned, a considerable period of  time i s needed to approve land use contract applications, with the r e s u l t that the developer's costs increase  87 significantly.  The processing procedure i n the D i s t r i c t of  Surrey varies l i t t l e from that found i n North Vancouver and so only a general outline of i t w i l l be given.  The main  reason f o r including a study of Surrey i s that t h e i r new development p o l i c y s p e c i f i e s exactly what the terms of any land use contract f o r apartment development w i l l be.  The  terms are heavily biased i n favour of the D i s t r i c t and i n crease the cost of development considerably. To apply f o r a land use contract i n Surrey the developer must f i l l out an application and include« 1.  a sketch showing the location and use of a l l buildings on the property and approximate l o c a t i o n and use of the nearest buildings on adjacent land;  2.  a perspective drawing i n d i c a t i n g landscaping and the general appearance of buildings, parking l o t s , et cetera; and  3.  a b r i e f description of the project with an i n d i c a t i o n of the number and mixture of suites, and an outline of the amenities fprovided.  The application and plans must be submitted 16 days p r i o r t o the meeting of the Advisory Planning Commission, to be considered at that meeting.  The Advisory Planning Com-  mission studies the plans f o r the proposed development and makes recommendations to Council.  Council may or may not  decide t o hold a p u b l i c hearing depending on whether they reject the proposal immediately n i t y express i t s views.  or decide to l e t the commu-  The development cannot be granted  permission to proceed without a public hearing.  As a r e s u l t  88  of t h i s public hearing Council may or may not decide to pass the necessary by-law. I f approval i n p r i n c i p l e i s given by Council a f t e r the public hearing, plans must then be submitted f o r examination to the Planning Department and the Advisory Design Panel. Once the development plans are approved, based on Council p o l i c y and by-law requirements, engineering design drawings are submitted to the Engineering and Building Departments for study and approval.  Once t h i s i s done development can  proceed. The D i s t r i c t of Surrey's municipal development p o l i c y , which became e f f e c t i v e i n June, 1973• states that the following impost charges w i l l be an i n t e g r a l part of any land use contract» 1.  $650 f o r each apartment unit constructed where the development abuts a roadway not constructed to municipal standards and where the developer -„ does not improve the roadway to these standardsj^'  2.  $200 f o r each apartment unit constructed f o r the upgrading of a l l municipal highways;58  3.  $300 per apartment unit constructed f o r the improvement of municipal drainage f a c i l i t i e s  4.  $150 f o r each apartment unit constructed f o r the improvement of the waterworks system; and°0  5.  $1,295 Iter apartment unit constructed f o r the a c q u i s i t i o n of lands f o r public use.°l  The impost charges that a developer has to pay amount to $2,595 per u n i t .  In today's market the construction cost of  b u i l d i n g one unit i n a frame apartment block varies between  $ 8 , 0 0 0 and $14,000!°^ adding these impost charges to the cost would raise t h i s l e v e l to between $ 1 0 , 6 0 0 and $ 1 6 , 6 0 0 . means that impost charges represent between 15.7 per cent of the t o t a l cost of development financing costs. of development  and  This 24.5  excluding land and  This i s an enormous and unreasonable cost  and i t i s expected that the charges w i l l se-  verely reduce the number of apartment units constructed i n the  District. In addition to the impost charges, the developer i s re-  sponsible f o r the i n s t a l l a t i o n of a l l water, and sanitary and storm sewers needed to connect his development works.^  to e x i s t i n g  He i s also responsible f o r placing a l l e x i s t i n g  and proposed u t i l i t y wires underground both on roads abutting 64 the  development  and on s i t e .  On top of t h i s , a charge of  four per cent of the cost of a l l works excluding impost charges and the cost of placing u t i l i t y wire underground, i s extracted from the developer f o r administration, engineering, 65 l e g a l and inspection services.  J  The D i s t r i c t of Surrey has surely helped to discourage apartment development  f o r r e n t a l purposes, as much as the  increases i n c a p i t a l costs and financing costs and the changes to the Income Tax Act.  The charges i t has decided  to impose on developers must seriously reduce the a t t r a c t i v e ness of investment i n that area.  Developers should be  charged c e r t a i n costs f o r improving municipal services since t h e i r developments are the p a r t i a l cause of the need f o r  90  such improvements, but to levy charges to the extent that the D i s t r i c t of Surrey has determined, must be looked upon as an excessive use of t h e i r delegated powers. Summary and Conclusions It has been demonstrated i n previous chapters that the changes i n the Income Tax Act and the higher costs of construction, land and financing have reduced the d e s i r a b i l i t y of apartment investment.  This chapter continues the inquiry  into those factors which are causing reduced levels of construction of rental units. are the delays encountered  The factors examined i n t h i s case at the municipal l e v e l i n pro-  cessing proposed development plans and the costs of such delays.  Municipal l e v i e s on proposed developments are also  considered as a factor i n discouraging development of apartments.  Ways are examined by which municipal processing time  can be lessened. It was discovered that the processing procedures City of North Vancouver were the most e f f i c i e n t .  i n the  This was  because a l l the municipal departments involved i n the approv a l process simultaneously received the plans to determine i f they were appropriate.  In Vancouver the processing was  carried out i n a chain-type manner} plans were received by one department and when approved were passed to the next. This took a considerably longer period of time than where the plans were received by a l l the concerned departments at once.  91 Where land use contracts were used, the processing procedure was much more complicated and time consuming and the costs of such contracts to the developer were much greater. I t i s advised that developers do t h e i r utmost to avoid land use contracts because they are more expensive i n time and money and are more uncertain than an outright approval procedure , The D i s t r i c t  of Surrey has l a i d down p o l i c i e s which w i l l  give i t the maximum advantage i n the negotiation of land use contracts.  The costs of contracts to the developer are so  great that i t i s expected that apartment development w i l l a l l but cease i n that municipality. I t i s hoped that municipalities w i l l t r y and simplify the processing procedure f o r apartment development plans so that developers may be given approval i n the fastest possible time.  The longer processing takes, the greater are the costs  of development and the less l i k e l y that apartment units w i l l be constructed f o r r e n t a l .  A major step that would simplify  processing would be to scrap the land use contract concept and the need f o r separate negotiations f o r each development and provide guidelines by which a l l developments would be judged, so f a r as l e v i e s and concessions to the municipality are concerned. The succeeding chapter analyzes the role that apartment operating costs have played i n reducing the d e s i r a b i l i t y of new apartment investment.  92 CHAPTER VI Operating  Costs  Previous chapters have discussed the major reasons f o r the reduction i n the number of apartment starts i n Greater Vancouver i n recent years.  No mention, however, has yet  been made of the role operating costs have taken i n a f f e c t i n g apartment investment. Operating costs are defined to be a l l those costs which are necessary  to maintain apartment blocks as income-  producing investments.  They include the costs of u t i l i t i e s ,  maintenance and r e p a i r s , administration and property taxes. A major study of the Vancouver apartment market conducted by Dale-Johnson indicated that one of the reasons new  why  apartment construction was f a l l i n g o f f was because i n -  f l a t i o n a r y pressures were f o r c i n g operating costs up at a 66 faster rate than rents.  The purpose of t h i s chapter i s to  test the v a l i d i t y of t h i s statement by analyzing operating expense statements f o r apartment blocks.  Dataiswere obtained 67 from Real Estate Trends i n Metropolitan Vancouver ' and from 68  the Dale-Johnson d i s s e r t a t i o n . When i t i s said that greater increases i n operating costs than i n rents have adversely affected the provision of new  apartment u n i t s , the statement does not mean that the  inevitable increases i n operating costs that occur as a building becomes older are the reasons f o r the decline i n  apartment construction.  What i s meant i s that, i f operating  expenses as a percentage of gross income are higher on newer buildings than on older ones at s i m i l a r timepoints i n t h e i r l i f e c y c l e s , then the p r o f i t a b i l i t y of the more recently constructed apartment buildings w i l l be less than older ones at similar stages and some investors w i l l either postpone or cancel t h e i r decisions to construct new  apartment buildings.  Assume, f o r example, that most blocks constructed i n , say, 1965 had operating costs as a percentage of gross i n come during t h e i r f i r s t , second and t h i r d years of operation of 30t 32 and 35 per cent, respectively. I f most apartment blocks constructed, say, i n 1970 also had operating costs of 30» 32 and 35 per cent during the same periods of operat i o n , then investors contemplating  construction of new  blocks  would not have t h e i r decisions unduly influenced by the l e v e l of operating costs, anymore than investors did i n 1965.  I f , however, the trend was to have operating costs  of 40, 42 and 44 per cent during the f i r s t , second and t h i r d years of operation of 1970 apartment blocks, then today's investor would possibly cancel any plans f o r the construction of a new  apartment b u i l d i n g because his p r o f i t  would be lower than what he could have obtained i n 1965. This chapter hopes to discover i f p r o f i t s have been reduced by increased operating costs i n newer apartment buildings compared to those b u i l t several years  ago.  94 To test the v a l i d i t y of Dale-Johnson s reasoning that 1  operating cost increases are p a r t i a l l y responsible f o r the reduction i n the number of apartment s t a r t s i n recent years, i t has to be demonstrated that operating costs as a percentage of gross income are higher on newer apartment blocks than on older ones during s i m i l a r periods of operation. Operating Costs as Presented i n Real Estate Trends The Greater Vancouver Real Estate Board publishes average annual operating costs as a percentage f o r frame and concrete apartment blocks.  of gross income Statements are  69  published every two years.  7  Operating statements from 1966 to 1972 were analyzed. The statements present a range of costs f o r newer buildings and thus, represent operating costs during e a r l i e r years of operation.  The buildings analyzed o f f e r contemporary ame-  n i t i e s and are located i n the more central regions of Greater Vancouver. Since the statements were not s t r i c t l y comparable between years, estimates of c e r t a i n expenses had to be made to make them more uniform.  The 1970 operating cost  statements  did not include a p r o v i s i o n f o r management expenses which a l l the other years analyzed hadj therefore, 5 per cent of gross income was added to the t o t a l percentage costs presented. f o r replacement  The 1968 statements reserves.  operating  included a provision  Since no other years  1  statements  had t h i s provision, i t was deducted from the 1968  statements.  Table 19 presents the summary of t o t a l operating costs as a percentage of gross income, f o r frame and concrete apartment buildings located i n Metropolitan Vancouver. Table  19  Total Operating Costs As A Percentage Of Gross Income For Frame And Concrete Apartment Blocks In Metropolitan Vancouver, 1966-1972 Operating Costs As A Percentage Of Gross Income 1966 MO 1972  Hp  %  Frame Apartments Range  %  34.94?.3 41.1  —  Median of Range  40.0  Concrete Apartments Range  —  Median of Range  39.0  32.946.1 39.5  fo  — 39.0 — ^0.0  %  35.046.0 40.5 34.544.0 38.1  As Table 19 indicates, operating costs as a percentage of gross income have not increased nor decreased substantially for  concrete and frame apartment buildings during t h e i r ear-  l i e r years of operation between 1966  and 1972.  This i s s i g -  n i f i c a n t because i f the Real Estate Trends' data i s representative of the apartment market as a whole, then operating costs cannot have had any meaningful e f f e c t on the p r o f i t a b i l i t y of apartment investment.  I f t h i s i s the case, then  the reduction i n apartment construction i n recent years cannot be t i e d to i n f l a t i o n a r y increases i n operating costs.  96 Operating Costs Presented i n the Dale-Johnson Dissertation To further test the conclusion reached above, an anal y s i s of operating expense statements of several dozen apartment blocks was conducted.  The data were f i r s t presented i n 70  an appendix to the Dale-Johnson study.  They have some  severe l i m i t a t i o n s . F i r s t l y , the data do not represent a s t a t i s t i c a l sample. Many owners of apartment buildings view information about operating expenses as highly c o n f i d e n t i a l and are unwilling to donate i t f o r research purposes.  Consequently,  data could  not be obtained by s t a t i s t i c a l samples and were taken from whoever was w i l l i n g to supply them.  The r e s u l t was that a  high proportion of the apartment blocks studied were owned by professional men and thus, may not represent normal i n vestments i n r e a l estate.  The apartment blocks sampled were  primarily held as tax shelters rather than as long-term investments. Secondly, operating expense statements are only a v a i l able f o r the years 1968 to 1970.  I t would have been desirable  to have statements f o r a greater number of years i n order to produce a more e f f e c t i v e test of whether operating expenses are increasing enough to discourage apartment construction. Thirdly, not enough data are available to analyze apartment cost increases f o r each area i n Greater Vancouver. Operating costs as a percentage of gross income are a function of the rents being charged amongst other t h i n g s .  7 1  The rents  97 i n the outlying m u n i c i p a l i t i e s are lower than i n the more central parts of the C i t y of Vancouver and thus, these apartments have higher operating costs as a percentage of gross income.  I t was thus necessary to eliminate those apartment  blocks whose rents varied considerably from the majority of apartment blocks i n the sample.  This excluded most frame  apartment blocks i n the more central regions of Vancouver, It also excluded a l l concrete apartment buildings, f o r t h e i r rents were found to be too diverse to properly compare them. F i n a l l y , not enough data were available to analyze operating costs by size of apartment block.  I f a l l the  available data were lumped into one group, the analysis would produce misleading r e s u l t s because apartment blocks with a r e l a t i v e l y large number of suites generally have lower operating costs as a percentage of gross income than smaller ones.  I t was necessary to either analyze the apart-  ment blocks i n groups, according to the number of suites each had, or to eliminate the extremes i n size and the remainder as one group.  analyze  Not enough data were available  to accomplish the former and so the l a t t e r approach was followed. Those apartment blocks remaining that were older than eight years i n 1970 were excluded from the analysis because there were too few of them to compare with each other. Buildings having extraordinary expenses were also excluded.  98 The f i n a l sample, which was analyzed, consisted of 39 frame apartment blocks.  For these blocks, operating expense  statements were available f o r a t o t a l of 63 years of operat i o n , or an average of 1,6 years of operation per apartment block.  Tables 20 and 21 present the c h a r a c t e r i s t i c s of the  sample•regarding l o c a t i o n and s i z e . Table 20 Location Of Frame Apartment Blocks In The Sample Location  Number of Blocks  East Hastings Burnaby New Westminster Surrey Coquitlam North Vancouver  5 8 20 2 1 3 Table 21  Size Of Frame Apartment Blocks In The Sample Number of Suites  Number of Blocks  18 - 37 38 - 57 58-89  14 17 8  The nature of the apartment blocks constituting the sample i s r e l a t i v e l y uniform as Tables 20 and 21 t e s t i f y . Rents do not d i f f e r appreciably among the s i x areas from which the sample was drawn.  Accordingly, operating expenses  as a percentage of gross income are not unduly influenced by the l o c a t i o n of the buildings.  Apartment building sizes  encountered i n the sample appear to be uniform enough to  make sure that no buildings have s i g n i f i c a n t operating economies of scale r e l a t i v e to other buildings. For the analysis each annual operating expense statement was categorized according to the calendar year i n which i t occurred.  The statements were further subdivided f o r  each calendar year into three groups, according to whether they occurred i n the f i r s t and second years, t h i r d and fourth years, or f i f t h to eighth years of the building's operation to which they r e f e r . By categorizing operating statements i n t h i s manner, increasing operating costs with building age are taken into consideration.  Optimally, t h i s table should have further  been subdivided by area and by size of property, however, there were not enough data available to do t h i s and s t i l l r e t a i n categories with enough members to analyze. I f , as the Real Estate Trends' data indicate;,  operating  costs as a percentage of gross income have remained constant over the past few years, then the average operating costs as a percentage of gross income i n each sub-category of each calendar year should be equal to the corresponding subcategory i n every other calendar year.  For instance, the  average operating costs as a percentage of gross income f o r the t h i r d and fourth years of operation i n 1968 should be equal to the average operating costs as a percentage of gross income f o r the t h i r d and fourth years i n 1969 and 1970. Table 22 presents the results of the categorization of operating statements.  Table 22 Operating Costs As A Percentage Of Gross Income For Frame Apartment Buildings In Metropolitan Vancouver Defined By Building Age 1st and 2nd Years of Operation 1968 . 1 9 6 9 Number of operating expense statements i n each category  1970  7  17  16  37.3  38.2  36.9  3 r d and 4th Years of Operation 1968  2  1969  6  5 t h to 8th Years of Operation  1970  9  1968  1  1969  1  1970  4  Average operating expenses per category (%)  40.4  40.9  39.6  40.1  43.7  40.7  101 The  t a b l e shows t h a t frame apartment b u i l d i n g s , oper-  a t i n g d u r i n g t h e i r f i r s t and  second y e a r s , had  operating  c o s t s as a percentage of gross income of 37.3» 38.2 36.9  per cent.  Those apartment b u i l d i n g s , o p e r a t i n g i n  t h e i r t h i r d and  f o u r t h y e a r s , had average o p e r a t i n g  as a percentage of gross income i n 1968, 40.4,  40.9  and  and  1969  39•6 per cent r e s p e c t i v e l y .  costs  and 1970  of  Buildings i n  t h e i r f i f t h t o e i g h t h years of o p e r a t i o n , had average opera t i n g c o s t s as a percentage of g r o s s income of 40.1 i n 1968,  43.7  per cent i n 1969  and 40.?  These f i g u r e s tend t o support  per cent i n  per  cent  1970.  the c o n c l u s i o n reached  from the Real E s t a t e Trends*data t h a t o p e r a t i n g c o s t s as a percentage of gross income have not i n c r e a s e d over the few y e a r s . pressures  last  Dale-Johnson*s statement t h a t i n f l a t i o n a r y were f o r c i n g o p e r a t i n g c o s t s up a t a f a s t e r r a t e  than r e n t s appears t o be i n c o r r e c t .  Operating  c o s t s as a  percentage of gross income would i n c r e a s e w i t h i n each p e r i o d of o p e r a t i o n w i t h time, i f o p e r a t i n g c o s t s were i n c r e a s i n g f a s t e r than r e n t s .  The  f a c t t h a t these  i n c r e a s e s d i d not  take p l a c e i n d i c a t e s t h a t r e n t s have been i n c r e a s i n g as f a s t as o p e r a t i n g c o s t s .  Therefore,  the r e d u c t i o n i n the  number of apartment s t a r t s cannot be a t t r i b u t e d t o i n c r e a s e d operating costs. Summary and  Conclusions  An i n v e s t i g a t i o n was  c a r r i e d out t o determine i f oper-  a t i n g c o s t s have been i n c r e a s i n g f a s t e r than r e n t s over the  102 past few years, enough to discourage new tion.  apartment construc-  Operating expense data obtained from Real Estate  Trends were analyzed f o r frame and concrete apartment blocks between 1966  and 1972.  These data indicated that operating  expenses have been increasing at about the same rate as rents over the time period.  This conclusion prompted a further  analysis of operating expense statements f o r frame apartment buildings which were o r i g i n a l l y presented i n the Dale-Johnson dissertation.  The analysis of these statements  supported  the conclusion reached from the analysis of Real Estate Trends' data. The fact that operating expenses as a percentage of gross income have not increased i n the past few years, i n d i cates that operating expenses have not beenrresponsible f o r the reduction i n new  apartment construction.  The present shortage of r e n t a l accommodation i n Greater Vancouver w i l l remain u n t i l rents increase enough to make apartment construction and investment a more economical proposition.  Increases i n rents w i l l probably stimulate tenant  unrest and could r e s u l t i n pressure being applied on the P r o v i n c i a l Governments to implement some form of rent control.  The implications of rent control are the subject of  the next chapter.  103 CHAPTER VII Rent Control: Is I t A Solution Or Aggravation Of P r i c i n g P o l i c i e s In The Housing Market? The combined e f f e c t s of high c a p i t a l costs, financing costs, low rents, changes i n the Income Tax Act, and the costs and time delays associated with obtaining municipal approval f o r proposed apartment dwellings, are reducing the number of multi-family rental units completed  each year.  The small number of r e n t a l units supplied coupled with the high demand f o r such units w i l l r e s u l t i n higher and higher rents.  Rents w i l l continue to increase u n t i l the return on  investment i s a t t r a c t i v e enough to stimulate increased construction. Increasing rents generally create tenant unrest and demands are made to government authorities to stop the i n creases.  Although, f o r the present, the B.C. P r o v i n c i a l  Government has ruled out any attempt at c o n t r o l l i n g rents, i t i s expected that as rents continue to r i s e and the shortage of housing becomes more acute, tenant groups w i l l bring increasing pressure on the Government to implement some form of c o n t r o l l i n g l e g i s l a t i o n . This chapter's purpose i s to study rent control p o l i c i e s i n two areas where controls have been i n existence f o r many years, the United Kingdom and New York C i t y , i n the hope that the lessons learned there w i l l serve to discourage any form of rent control i n B.C.  104 72  The United Kingdom Experience'  In response to the severe housing shortages and r e s u l t ant rent increases i n the United Kingdom during World War One, Parliament placed controls on rents by passing the Rent and Mortgage Interest R e s t r i c t i o n Act of 1915.  This Act  fixed rents on the cheaper housing types that were rented unfurnished? provided security against e v i c t i o n ! and halted r i s i n g mortgage i n t e r e s t rates.  At the time of i t s concep-  t i o n , the Act was considered to be a temporary measure which would be abolished with the return of peace.  Unfortunately,  t h i s was not the case and rents have been controlled to a greater or lesser extent ever since. Since the 1915 Act rent control i n Great B r i t a i n has been an entanglement of contradictory s o c i a l and economic policies.  In some periods the l e g i s l a t i o n was aimed at  reducing the range of controls» while i n others i t i n creased them.  Constantly changing rent c o n t r o l l i n g laws  have created severe inadequacies i n the B r i t i s h housing market. The 1915 Act was extended i n 1920 to include "middle" class dwellings; however, i n 1923 i t was decided that too large a sector of the housing market was under control and so dwellings were allowed to become decontrolled i f tenants v o l u n t a r i l y moved.  The same year a Committee was  study the rent control system.  set up to  No conclusive r e s u l t s were  produced by t h i s Committee and another was organized i n  1931* 1933  In the meantime, annual l e g i s l a t i o n between 1924  and  was allowing decontrol to continue where tenants moved  voluntarily.  The 1931  Committee recommended that the more  expensive dwellings be released from the scope of rent control.  This was  again i n 1938.  given approval by Parliament The 1938  i n 1933  and  l e g i s l a t i o n , although i t allowed  the decontrol of more expensive r e s i d e n t i a l units, tightened the controls on the cheaper ones. The beginning of the Second World War  i n 1939  created  the necessity f o r extending rent controls over a l a r g e r range of properties.  Between 1939  p o l i c i e s remained s t a t i c .  In 1954  and 1954  rent control  the l e v e l s of c o n t r o l l e d  rents were increased to t r y and encourage landlords to better maintain the housing. achieving i t s goals.  This l e g i s l a t i o n was unsuccessful i n Accordingly, i n 195?  the Rent Act  was  passed which freed those dwellings with higher rateable values i n London and Scotland from rent c o n t r o l . for choosing these areas f o r p a r t i a l decontrol was there was  The reason that  a c r i t i c a l housing shortage and i t was hoped that  t h i s action would stimulate new  investment i n housing.  At  the same time rent c e i l i n g s were raised on a l l controlled stock remaining, to t r y and further encourage better maintenance. The 1957  Act was unsuccessful i n achieving better main-  tenance and more investment. was  In 1963  a Committee of Inquiry  established to revamp the whole rent c o n t r o l l i n g  106  legislation. 1965.  Their report resulted i n a new Rent Act i n  This Act was meant to be so designed that i t would  encourage investment i n rental housing.  I t was revolution-  ary i n that i t d i d away with r i g i d forms of rent control and allowed landlord and tenant the opportunity to negotiate a rent together.  Where agreement was not achieved, the Act  provided that a " f a i r rent" would be established by a Rent Officer.  F a i r rent was b a s i c a l l y considered  to be the r e -  venue a landlord would obtain from h i s dwelling i f the s c a r c i t y of housing was discounted taken into account.  so that i t would not be  Once f a i r rent was determined, i t would  be registered f o r three years and could not be a l t e r e d . The 1965 Rent Act extended some forms of rent control over a large part of the f i e l d of private r e n t a l housing. Dwellings brought under the provisions of the new Act had t h e i r rents determined by the f a i r rent approach and were c a l l e d "regulated tenancies".  Those dwellings which were  subject to control under previous Acts remained i n that status and were c a l l e d "controlled tenancies".  Once they  became vacant, they would be evaluated as regulated tenancies.  The 1965 Act was the f i r s t l e g i s l a t i o n which d i d  not f i x rents according to a s t r i c t formula but i t d i d preserve the security of tenure that tenants enjoyed under previous  Acts.  In order to further s h i f t tenancies from controlled to regulated status, the Housing Act was passed i n 1969.  This  10? allowed landlords who added standard amenities  (bath, wash  basin, sink, t o i l e t and hot water) to controlled tenancies, to have them s h i f t e d into regulated tenancies subject to f a i r rents. Also, i n 1969 another Committee, commonly known as the Francis Committee, was organized to evaluate the e f f e c t s of the 1965 Act on the housing market.  This Committee reported  that l i t t l e or no new unfurnished accommodation was being rented because the f a i r rent scheme had been unsuccessful i n providing a large enough return f o r landlords to encourage them to continue renting. -^ 7  They also communicated that  there was a large amount of t r a n s f e r r i n g of tenancies from unfurnished (controlled or regulated) to furnished (noncontrolled) uses.  The reasons f o r t h i s , according to the  Committee, werei' 1.  Mortgagees w i l l not permit t h e i r borrowers to l e t unfurnished because unfurnished tenancies, being protected, depreciate the value of the security to a substantial extents  2.  Landlords of furnished accommodation obtain a better return on t h e i r investment; and  3.  I t i s easier f o r landlords to obtain possession of furnished premises.  The Francis Committee recommended that more properties be switched from controlled to regulated tenancies.  It  suggested that rent increases be spread over two or three years and that increased investment i n housing could be achieved by reducing the classes of property that came under  regulation or c o n t r o l .  In 1972 the Housing Finance Act was  passed to implement some of these recommendations. One was  of the major changes, which the new Act  introduced,  that tenants, who could not a f f o r d to rent i n a free  market, be subsidized d i r e c t l y by the Government, instead of using the old procedure of controlled rents and i n d i r e c t l y f o r c i n g the landlord to subsidize the tenant.  The Act also  s p e c i f i e d that a l l dwellings s t i l l subject to control be phased into the f a i r rent sector by 1975* The conclusion to be drawn from the above h i s t o r y of B r i t i s h rent control experiences i s that f i x i n g of rents, below the l e v e l that would e x i s t i n the free market, d i s courages new investment i n housing and may dissuade landlords from carrying out necessary maintenance.  Since 1954  i t would appear that the Government has recognized  these  points, as witnessed by the Acts of 1954, 1957* 1965, 1969 and 1972 which a l l reduced controls to some degree. The New York Experience*^ Restrictions on rents were enforced throughout the United States during the Second World War.  In a l l areas of  the country except New York C i t y the r e s t r i c t i o n s were abolished soon a f t e r the War's end. In New York there are rent controls on most lower class dwellings.  These include a l l accommodation b u i l t  before  1951 and run-down properties inhabited by more than one family.  In the 1960's rents i n controlled properties were  109  set by the Office of Rent Control.  Base rents were esta-  blished as of A p r i l 30, 1962 and any increase above the base had to be approved by the O f f i c e .  Increases were granted  where f a c i l i t i e s were increased or capital.improvements carried out; where there was an increase i n the number of occupants i n a, dwelling unit; where the landlord's annual net return f e l l below s i x per cent; where the rent charged was  less than 32i per cent above that charged on March 1,  19^3; and where labour costs increased.  Conversely,  rents  were reduced f o r a reduction i n services and where the base rent was  judged to be higher than that f o r comparable housing.  These measures were found to d i s t o r t the r e n t a l housing market i n a serious manner. shortage,  There was  a c r i t i c a l housing  too rapid deterioration of e x i s t i n g dwellings  very high rents i n the uncontrolled sector.  I t was  and  esti-  mated that the number of multi-family units which were s t r u c t u r a l l y sound but had been abandoned because of poor returns were approaching 30»000 per A new  procedure was  year, ^ 7  i n i t i a t e d i n 1969 which was  designed  to make r e n t a l housing a more economic venture f o r landlords and increase new  investment i n housing.  This procedure  established a system of rent control i n which b u i l d i n g rents (called maximum base rents) r e f l e c t the costs of properly operating, maintaining and financing buildings.  I t applied  to a much broader range of accommodation than previously covered by rent c o n t r o l .  Rent increases, to a maximum of  7.5 per cent per annum, were allowed.  110 New York, l i k e Great B r i t a i n , has found that r i g i d forms of rent control do not work to a l l e v i a t e housing problems.  In New York the trend has been to move away  from rent control per se into a more f l e x i b l e system which allows the landlord to recover some p r o f i t from his investment and to have a greater incentive to maintain h i s buildings. The Case Against Rent Control Rent control i s a statutory l i m i t on the amount of rent which can be charged, with the r e s u l t that controlled rents are l e s s than the rents which could be obtained i n the free 77 market.  Governments embark on systems of rent control  when housing i s i n short supply and there i s a danger that low income groups may be priced out of the market. Rent control r e s u l t s i n tenants being subsidized by landlords.  I t i s intended to secure to low income families  a larger proportion of the t o t a l housing stock than they would be able to command i n a free market. Rent controls are introduced at times of housing shortages and r i s i n g rents. to these problems.  Rent control, however, i s no solution  I t can be nothing more than a  p a r t i a l solution to the problem of soaring rents.  short-term It i s  detrimental to housing production because developers are u n l i k e l y to enter a f i e l d i n which t h e i r p r o f i t s are certain to be l i m i t e d .  Furthermore, i t could give landlords an  excuse to neglect maintenance and repairs i n order to offset  Ill their limited profits.  D i f f i c u l t y i n establishing c r i t e r i a  f o r f a i r rent or f a i r p r o f i t , makes rent control hard to administer. In areas where rent controls have been introduced, the controls have not been placed on the whole range of rental housing but only on c e r t a i n classes and types.  Experience  has shown that, with the passage of time, the number of controlled premises diminish as landlords convert to noncontrolled uses.  This has been found i n Great B r i t a i n where  many landlords converted from unfurnished to furnished, as premises became vacant.  Controls aggravate the housing  shortage i n areas where the statutory rent l i m i t s apply. Lack of controlled housing reduces the mobility of tenants since they are reluctant to move i f the p o s s i b i l i t y of finding another controlled dwelling i s small. A survey c a r r i e d out i n Greater London f o r the Francis Committee demonstrated that 60 per cent of tenants of f u r nished (uncontrolled) accommodation moved i n an 18 month period while only 17 per cent of tenants i n unfurnished (controlled) accommodation moved i n the same period.  Fur-  thermore, the people l i v i n g i n unfurnished premises, who had l i v e d i n London since b i r t h , exceeded those who had l i v e d i n London since b i r t h i n furnished tenancies, by more than four to one. When tenant mobility i s reduced, the use of the housing stock declines i n e f f i c i e n c y .  Older tenants continue to  112 occupy accommodation larger than they require because the rent i s not associated to the amount of use and because i t i s d i f f i c u l t to f i n d smaller premises i n the controlled sector.  The  survey conducted f o r the Francis Committee  indicated that 78 per cent of furnished tenancies  had  household heads under the age of 35 while only 39 per cent of unfurnished  tenancies had household heads under 35•  In  addition, only s i x to seven per cent of tenants i n furnished accommodation were over 60, as opposed to 22 per cent i n 79  unfurnished  accommodation.'  7  Where rent controls e x i s t , black markets often develop f o r rent controlled premises.  Unscrupulous landlords have  been known to charge "key" money to new controlled accommodation.  tenants seeking  This i s an "under the table" pay-  ment to the landlord over and above the controlled rent, f o r the p r i v i l e g e of receiving a key to enter the premises. i s often the poor and uneducated who  It  are the victims of  black marketeering, the very group f o r whom rent controls are designed to help. Prices and rents i n the uncontrolled sector often r i s e to l e v e l s considerably higher than would have been the case i f rent controls had not been introduced. v i r t u a l l y a l l of the new  This i s because  demand i s directed to t h i s part of 80  the market and exceeds supply. When rent controls are introduced i n selected segments of the housing market, tenants i n uncontrolled housing are  discriminated against.  They are not given the benefit of  reduced rents which t h e i r counterparts sector enjoy and, i n f a c t , they may  i n the controlled  f i n d rents increasing  at a f a s t e r rate than would otherwise have been the case i n a free market.  Landlords of controlled premises are also  discriminated against because they, i n e f f e c t , are ordered to subsidize t h e i r tenants and accept lower returns than 81  those landlords i n the uncontrolled sector. Experience has shown that governments that embark on systems of rent control f i n d i t d i f f i c u l t to abandon the practice.  This i s i l l u s t r a t e d i n both New  United Kingdom.  York and  the  Rent controls were introduced as temporary  wartime measures yet they are s t i l l i n existence i n a modif i e d form today. In present day society, there w i l l always be some people who  cannot a f f o r d to pay free market rents.  Instead  of penalizing the whole system to benefit the minority of tenancies, only those who  need to be protected from free  market rents, should be protected and at the expense of the community, rather than at the expense of the landlord. Rents should be allowed to f i n d t h e i r own  levels i n the mar-  ket place and those that cannot bear the burden should  be  subsidized by society. At the present  time i n the Lower Mainland of B r i t i s h  Columbia, the supply of rental accommodation i s small r e l a tive to the demand.  Previous  chapters i n t h i s c r i t i q u e have  114 attempted to explain why e f f e c t i v e way  the shortage e x i s t s .  to overcome the shortage i s to allow rents to  r i s e to a l e v e l that w i l l j u s t i f y new housing.  The most  investment i n r e n t a l  I f rent control i s introduced, i t w i l l serve to  delay the attainment of economic f e a s i b i l i t y f o r further r e n t a l housing development and further increase the shortage situation.  I f the B.C.  Government f e e l s that r i s i n g rents  w i l l hurt c e r t a i n segments of society economically,  i t should  subsidize the rents of those groups and leave the free market rents to f i n d t h e i r own Summary and  level.  Conclusions  The chapter concentrated  on examining the history of  rent control i n two areas—New York and Great B r i t a i n — i n order to determine what e f f e c t s government interference has had on the operations  of the housing market.  The case h i s -  t o r i e s i l l u s t r a t e d that rent controls increased the shortage of housing by discouraging new  investment; they reduced  maintenance of e x i s t i n g dwellings; opened the door f o r black market operations; reduced mobility of tenants; and  increased  the prices i n the uncontrolled sectors of the housing market. Subsidization of the rents of the needy i s preferred to broad, sweeping p o l i c i e s that control rents i n large segments of the market place.  115 CHAPTER VIII A Study Of The P r o f i t a b i l i t y Of Some Greater Vancouver Apartment Buildings Up u n t i l thisppoint, t h i s d i s s e r t a t i o n has concentrated on examining those factors which have contributed to the reduction i n construction of new apartment units i n recent years.  This chapter moves away from the study of supply  and investigates those physical, operating and f i n a n c i a l c h a r a c t e r i s t i c s of apartment buildings that determine the degree of p r o f i t a b i l i t y that can be achieved  from apartment  investment. The main point of t h i s study i s to i l l u s t r a t e why some apartment buildings produce p r o f i t a b l e returns f o r t h e i r owners while others do not. Method of Analysis The sample used f o r the analysis of the p r o f i t a b i l i t y of apartment investment was chosen from the data i n the Appendix of the Dale-Johnson work.  Dale-Johnson calcu-  lated the return on investment f o r several dozen Greater Vancouver apartment buildings. measure r e t u r n — t h e  He used two parameters to  average rate of return excluding capi-  t a l gains or losses and the i n t e r n a l rate of return including gains or losses.  The average rate of return i s , f o r any  given year of operation, the t o t a l cash flow of that year as a percentage of the o r i g i n a l equity.  Where average rates of  116 return were available f o r more than one year of operation, the mean of these returns was  calculated and used i n the  analysis. The i n t e r n a l rate of return i s the return i n any  one  year based upon the equity i n that year summed with the returns i n other years based upon the equity positions i n each of the corresponding years.  Each year's component i s then  compounded by a per cent f a c t o r to a r r i v e at a value  equiva-  lent to the equity value at the sale date or date of valuation. To calculate the i n t e r n a l rate of return including capit a l gains and losses. Dale-Johnson, i n many cases, had to predict hypothetical sale values.  To a r r i v e at h i s predic-  t i o n , he considered the rate of c a p i t a l i z a t i o n the market demands f o r apartment properties: the condition of the block with respect to q u a l i t y and r e p a i r j the r e n t a l demand; gross income; the l e v e l of expenses; the i n t e r e s t rates on mortQL  gages; and personal judgement. For the analysis that i s to be conducted i n t h i s  chapter,  the actual and hypothetical c a p i t a l gains and losses are not important because the primary emphasis w i l l be on the returns on investment obtained excluding gains and losses. Whether a c a p i t a l gain or loss did or might occur was, however, noted f o r each apartment block i n the sample. The apartment buildings f o r which Dale-Johnson calculated average rates of return excluding gains or losses were  divided into two groups f o r the analysis; the f i r s t group was made up of those apartment blocks that achieved an average rate of return excluding c a p i t a l gains or losses of l e s s than 10 per cent; the second group consisted of those buildings that had average rates of return of more than 10 nit per cent.  Physical, operating and f i n a n c i a l character-  i s t i c s of the two groups of apartment buildings were examined to determine what factors appeared to influence the l e v e l s of p r o f i t a b i l i t y that were being obtained by both groups.  Before presenting the r e s u l t s of the analysis, the  l i m i t a t i o n s of the sample w i l l be discussed. Limitations of the Sample A major l i m i t a t i o n of the Dale-Johnson data was that approximately 58 per cent of the apartment buildings ana86 lyzed were owned by professional men.  As has been men-  tioned before, professionals tended to buy into apartment buildings f o r tax reasons rather than f o r pure investment reasons.  They were w i l l i n g to trade o f f a reduction i n re-  turns f o r tax savings.  Thus, the returns on investment  achieved by apartment buildings i n t h i s sample were probably lower than would be found i n a proper s t a t i s t i c a l sample. Another problem with the sample obtained from DaleJohnson's work was that returns on investment were only available up to 19?0.  Since 1970 several f a c t o r s , which  have been discussed i n previous chapters, have altered the l e v e l of returns that can be obtained.  Among these, are the  118 amendments to the Income Tax Act and r i s i n g construction, land and financing costs. Despite the fact that the two groups of apartment buildings studied do not r e f l e c t current investment returns, they are s t i l l useful i n that comparisons of c e r t a i n charact e r i s t i c s demonstrated by the two groups shed some l i g h t on the factors that a f f e c t t h e i r p r o f i t a b i l i t y . The Results of the Apartment Investment Analysis Various p h y s i c a l , f i n a n c i a l and operating  character-  i s t i c s of the two groups of apartment buildings are presented i n Table 23. The f i r s t point to note i s that only three properties out of the seventeen analyzed  i n the group having average  returns on investment of l e s s than 10.0 per cent sold or would s e l l f o r a c a p i t a l gain.  In the group of properties  having returns of greater than 10.0 per cent, twenty-six out of the thirty-one properties sampled sold or would s e l l f o r a c a p i t a l gain.  This i s not a surprising r e s u l t f o r a  r a t i o n a l purchaser would consider the r a t i o of expenses to income, the amount of debt service, the l e v e l of r e n t a l s , the l o c a t i o n and q u a l i t y of the block and other factors to a r r i v e at a c a p i t a l i z a t i o n rate to determine value.  Since  these components also determine average return on investment, i f they are detrimental to the successful f i n a n c i a l operation of an apartment building, they w i l l produce a low average return on investment, a high c a p i t a l i z a t i o n rate  119 Table 23 A Comparison Of The P r o f i t a b i l i t i e s Displayed By Two Groups Of Greater Vancouver Apartment Buildings(a) Average Rate of Return Excluding C a p i t a l Gains or Losses  Item No.  Less than 10.0% Greater than 10.0%  1. Number of properties i n sample 2. Number of properties that sold or would s e l l for a capital gain  17  31  3  26  3. Number of suites per propertyW 4. Property age i n 1970  11 (40) 89  11 (4?) 154  1 (3.3) 17  1 (7.5) 45  5. Median property age i n years 2 6. Operating expenses as a percentage of gross income 30.1 (39.7) 46.2 7. Percentage of prop e r t i e s i n high rent areas(°) 17.6  5 28.8 (36.4) 46.2 16.1  8. Percentage of prop e r t i e s i n average rent areas* )  41.2  29.0  9. Percentage of prop e r t i e s i n low rent areas(c)  41.2  54.9  25.0  24.0  11. Debt service ( p r i n c i p a l and i n t e r e s t ) as a percentage of gross income  42.6 (57.6) 72.5  28.8 (51.7) 64.3  12. Loan/value r a t i o * )  68.3 (?4.0) 91.5 40.4 (76.2) 99.9  0  10. Percentage of prop e r t i e s judged to be renting at below market rent given t h e i r l o c a t i o n and c o n d i t i o n * ) 0  d  13. Term o f i ,* - f i r s t mortgage^,' 20.0 (23.4) 30.0 20.0 (a4.3) 50.0 - second mortgage** ) 2.0 (14.3) 20.0 5.0 (14.7) 20.0 3  120  Table 23 A Comparison Of The P r o f i t a b i l i t i e s Displayed By Two Groups Of Greater Vancouver Apartment B u i l d i n g s v ) a  Average Rate of Return Excluding C a p i t a l Gains or Losses  Item No. 14.  15. 16.  Less than 10,0%  Greater than 10.(  Weighted i n t e r e s t ^ rate on a l l mortgages  8.50 (9.46) 12.45  7.00 (8.44) 9.88  Percentage of prop e r t i e s having more than one mortgage  82.4  66.7  Purchase price per suite  $8,545 ($11,237) $13,442  $6,95? ($10,113) $15,547  A ^Based on data presented i n R. Dale-Johnson, Returns On Apartment Properties (University of B r i t i s h Columbia: Master's t h e s i s , 1972). a  ^)where three numbers are presented alongside an Item, the number within the brackets i s the average f o r the group and the numbers on either side represent the lowest and highest values i n the range. ^See  text f o r explanations.  ^^The loan amount i s a l l financing received by the blocks. I t includes mortgages and agreements f o r s a l e . (e) 'The term of mortgages i s the period of years over which the mortgage i s amortized. v  (f)  'The weighted mortgage i n t e r e s t rate was calculated by multiplying the i n t e r e s t rate of each mortgage charged against an apartment building by the r a t i o of the o r i g i n a l amount of funds borrowed under that mortgage agreement to the amount of funds borrowed through a l l the mortgage agreements on the b u i l d i n g . The r e s u l t i n g interest rate f a c t o r was added to the i n t e r e s t rate factors f o r a l l the other mortgages on the b u i l d i n g . Agreements f o r sale were included i n these calculations. v  121  and consequently, a possible c a p i t a l l o s s . Item 3 i n Table 23 demonstrates that the less p r o f i t able apartment blocks (those with an average return of under 10.0 per cent) had fewer suites on the average than the more p r o f i t a b l e ones (those with an average return of greater than 10.0 per cent). The average property age (Item 4) and the median property age (Item 5) f o r each group of apartment buildings are presented i n Table 23.  Use of the median age as a means of  comparison between the two groups i s preferred because the average age i s unduly influenced by the extremes i n age of each group.  Those buildings with average rates of return of  under 10,0 per cent were newer than those with average returns of over 10,0 per centj a median age of two i n 1970 f o r the "under 10,0 per cent" group, as opposed to a median age of f i v e i n 1970 f o r the "over 10,0 per cent" group. Item 6 presents the average operating expenses as a percentage of gross income f o r each group of apartment buildings.  The less p r o f i t a b l e group of buildings had aver-  age operating costs of 39.7 per cent, while those with a return of over 10.0 per cent had costs of 36.4 per cent. Higher operating costs as a percentage of gross income i n the less p r o f i t a b l e group of apartment buildings than i n the more p r o f i t a b l e group appear to be one of the reasons why the former group of buildings did not achieve such good returns on investment.  These higher operating costs may be  122 due to the fact that the l e s s p r o f i t a b l e buildings had a fewer number of suites per block than the more p r o f i t a b l e ones.  Dale-Johnson indicated i n his study of apartment  operating costs that the more suites, to a point, that a building had the lower would be the operating costs as a percentage of gross income.  This was  because economies of  scale were captured as buildings increased i n s i z e . ^  How-  ever, Dale-Johnson also found that operating costs as a percentage of gross income tended to increase with b u i l d i n g 8.8  Table 23 i l l u s t r a t e s that, despite the more p r o f i t -  age.  able class of buildings being older than the l e s s p r o f i t a b l e class, they had a lower r a t i o of operating costs to gross income.  From studying Dale-Johnson's r e s u l t s of the oper-  ating cost analysis, i t i s not f e l t that an average of seven more suites per building, which the more p r o f i t a b l e group had over the l e s s p r o f i t a b l e group, would be enough to outweigh the e f f e c t s of increasing b u i l d i n g age on  operating  89 cost r a t i o s .  7  For t h i s reason i t i s concluded that the  major cause f o r the less p r o f i t a b l e group of apartment buildings having a higher operating cost r a t i o than the more p r o f i t a b l e group, must l i e i n the e f f i c i e n c y of management of the buildings.  I t would appear that the l e s s p r o f i t a b l e  group were having serious mismanagement problems. Since the l e v e l of operating costs as a percentage of gross income i s dependent on the amount of rent being charged, i t i s possible that the high r a t i o of expenses, demonstrated  123 by the less p r o f i t a b l e group of apartment buildings, was due to the fact that lower rents were being charged by them, r e l a t i v e to those being charged i n the more p r o f i t a b l e group. To determine i f t h i s was the case, a l l the apartment  build-  ings comprising each group were categorized according to l o c a t i o n and divided into three classes.  The three classes  were those areas of Greater Vancouver considered to be areas where high rents were charged? average rents were charged? and low rents were charged.  Apartment buildings i n the  South Granville area, Kerrisdale, the West End and West Vancouver were considered to be i n high rent areas.  Average  rent areas were Marpole, East Hastings, North Vancouver and Burnaby.  Low rent areas were New Westminster, Surrey,  Mission and Coquitlam. Once the apartment buildings had been categorized by area, t h e i r rents were examined to see i f they were below market value f o r the areas i n which they were located. I t was found that 25.0 per cent of those buildings i n the "less than 10.0 per cent return" group were renting at l e v e l s below the market rent f o r the areas i n which they were located. 24.0 per cent of apartment buildings having average returns of greater than 10.0 per cent were renting at below market l e v e l s (Item 10, Table 23).  Since approximately the same  percentages of apartment buildings i n each group were renting at below market l e v e l s f o r t h e i r locations, the e f f e c t s of low rents on operating cost r a t i o s w i l l be s i m i l a r f o r each group and can thus be ignored.  124 Table 23 i l l u s t r a t e s i n Items 7 to 9 the categorizat i o n of the apartment buildings into high, average and low rent areas, respectively.  There were approximately the same  percentages of apartment buildings having returns of l e s s than 10.0 per cent as those having returns of more than 10.0 per cent i n high rent areas, 17.6 per cent compared to 16.1 per cent.  41.2 per cent of the l e s s p r o f i t a b l e group of  apartment buildings were i n average rent areas, while only 29.0 per cent of the more p r o f i t a b l e group were i n such areas.  41.2 per cent of the l e s s p r o f i t a b l e group of b u i l d -  ings were located i n low rent areas, as opposed to 54.9 per cent of the more p r o f i t a b l e group. These r e s u l t s demonstrate that lower rents were not being charged i n the less p r o f i t a b l e group of apartment buildings than i n the more p r o f i t a b l e group and thus, the high r a t i o of operating costs experienced by the former group were not due to lower rents.  In f a c t , as Item 9 i l l u s t r a t e s ,  i t would appear that rents were generally lower i n the more p r o f i t a b l e group than i n the less p r o f i t a b l e one.  Every-  thing else being equal, i t would be expected that the more p r o f i t a b l e group would have higher expense r a t i o s because of t h i s f a c t o r .  The fact that they d i d not, reinforces the  idea that the l e s s p r o f i t a b l e group were experiencing i n e f f i c i e n c i e s i n management. To continue with the search f o r factors influencing the p r o f i t a b i l i t y of apartment investment, Item 11 i n Table 23  125  demonstrates that those apartment buildings having an average return of less than 10.0 per cent had paid an average of 57.6 per cent of t h e i r gross income toward repayment of the p r i n c i p a l and interest on mortgage loans.  Those apartment  buildings having an average return of greater than 10.0 per cent had paid an average of 51.7 per cent i n combined p r i n c i p a l and i n t e r e s t payments. Referring back to the previous discussion on the e f f e c t s of rent l e v e l s on operating cost r a t i o s , i t was  concluded  that rents were lower i n those buildings with average returns of greater than 10.0 per cent.  Because of t h i s factor, i t  i s l i k e l y that the debt service r a t i o f o r those buildings i s exaggerated r e l a t i v e to the debt service r a t i o f o r the buildings with average returns of l e s s than 10.0 per cent. Item 12 i n Table 23 presents the average loan to value r a t i o s f o r the two groups of apartment b u i l d i n g s . The less p r o f i t a b l e group of apartment buildings had a s l i g h t l y  lower  loan to value r a t i o than the more p r o f i t a b l e group, 74,9 per cent as opposed to 76.2 per cent. The average length of the terms f o r f i r s t and second mortgages i n the less p r o f i t a b l e group of apartment buildings were 23.4 and 14,3 years, respectively.  For the more p r o f i t -  able group, the corresponding terms of the mortgages were 24,3 and 14,7 years, respectively (Item 13), Since both groups of apartment buildings had approximately the same loan to value r a t i o s when purchased  and  126  s i m i l a r lengths of terms f o r f i r s t and second mortgages, i t i s c l e a r that the reason f o r the l e s s p r o f i t a b l e group of apartment buildings having to pay a higher percentage of gross income towards p r i n c i p a l and i n t e r e s t payments than the more p r o f i t a b l e group, i s because of higher i n t e r e s t rates on t h e i r mortgage loans, higher purchase p r i c e s paid, or a combination of both of these f a c t o r s . The average weighted mortgage i n t e r e s t rate f o r each group of apartment buildings i s presented i n Table 23 as Item 14,  I t can be seen that those buildings having a re-  turn of l e s s than 10.0 per cent had an average weighted interest rate of 9.46  per cent; those buildings with a re-  turn of greater than 10.0 interest rate of 8.44  per cent had an average weighted  per cent.  I t thus appears that another  reason f o r the less p r o f i t a b l e group<aof buildings being i n that f i n a n c i a l condition i s because of higher financing costs on mortgage loans. A p a r t i a l reason f o r the l e s s p r o f i t a b l e group of apartment buildings having higher financing costs than the more p r o f i t a b l e group i s that they were of more recent construction (see Item 5).  From 1965  to 1970  on mortgage loans had climbed s t e a d i l y .  i n t e r e s t rates  Since the l e s s pro-  f i t a b l e buildings were newer than the more p r o f i t a b l e ones, they were faced with higher borrowing costs. Increased borrowing costs f o r the l e s s p r o f i t a b l e group of apartment buildings were also due to the larger percentage  12?  of blocks i n the group that had to resort to higher priced secondary financing. 82.4 per cent of t h i s group had more than one mortgage while only 66.7 per cent of the group, made up of more p r o f i t a b l e buildings, had more than one mortgage (Item 15). Despite the fact that a much smaller percentage  of the  apartment blocks i n the more p r o f i t a b l e group than i n the l e s s p r o f i t a b l e group had more than one mortgage, the two groups had s i m i l a r loan to value r a t i o s .  This indicates  that lenders have been becoming more reluctant to give high r a t i o f i r s t mortgages than they have been i n the past. As was mentioned previously, the higher average debt service r a t i o experienced by that group of apartment b u i l d ings having average returns of l e s s than 10.0 per cent was p a r t i a l l y due to higher interest rates on mortgage loans. It was also due to the fact that that group had paid higher purchase p r i c e s per suite than the group having average returns of more than 10.0 per cent.  The average purchase  price per suite f o r the less p r o f i t a b l e group of buildings was $11,273 andffor the more p r o f i t a b l e group, $10,113 (Item 16). Since the loan to value r a t i o s f o r both the more prof i t a b l e and less p r o f i t a b l e groups of apartment buildings were approximately the same and since the lengths of the terms f o r the f i r s t and second mortgages i n both groups were also similar, then the higher purchase p r i c e s per suite paid  128 by the less p r o f i t a b l e group meant that larger mortgage loans had to be obtained by the group.  These larger loans  required greater periodic payments of p r i n c i p a l and i n t e r e s t and consequently, a higher portion of gross income had to be set aside to service the debts. The question arises as to what was the reason f o r the less p r o f i t a b l e group of apartment buildings being bought f o r higher purchase prices per suite than the more p r o f i t a b l e group.  Purchase price i s dependent on many factors including  the l o c a t i o n of the property; the time purchase was made; the age, q u a l i t y and condition of the block; and the types and sizes of suites and amenities provided within the block. Not enough data were available to properly compare the purchase prices f o r both groups of apartment buildings.  To  conduct a proper comparison, i t would be necessary to have enough data to c l a s s i f y the buildings into various subgroups according to the myriad of c h a r a c t e r i s t i c s which they possessed that affected the purchase prices paid f o r them. Since the sample size was so small, such a c l a s s i f i c a t i o n here could not r e a d i l y be accomplished without having as many sub-groups as there were buildings.  Witheonly one  building i n each sub-group, comparisons would not be possible. There were a few apartment buildings, however, from the less p r o f i t a b l e and more p r o f i t a b l e groups which had s i m i l a r c h a r a c t e r i s t i c s and thus, allowed a reasonable comparison of t h e i r purchase p r i c e s .  In the East Hastings area of  129  Vancouver one frame apartment building of 35 suites, which had an average return of less than 10,0 per cent, was purchased i n 1968 f o r an average of $10,080 per s u i t e .  A  s i m i l a r b u i l d i n g of 21 suites with an average return of greater than 10,0 per cent was purchased i n the same year f o r an average of $9,790 per s u i t e .  In New Westminster two  frame buildings from the less p r o f i t a b l e group were purchased i n 1968 f o r $11,548 per suite and $10,759 per s u i t e .  The  building to which the former purchase price r e f e r s , had 42 suites and the l a t t e r had 29 s u i t e s .  Three s i m i l a r  buildings  from the more p r o f i t a b l e group were bought i n 1968 i n the same area f o r $10,160 per suite (25 s u i t e s ) , $10,692 per suite (26 s u i t e s ) , and $11,111 per suite (63 s u i t e s ) . From these r e s u l t s i t would appear that those buildings i n the l e s s p r o f i t a b l e group were purchased at higher prices than s i m i l a r buildings  i n the more p r o f i t a b l e group.  indicates that a possible  This  reason f o r some buildings having  lower average returns i s that the investors who bought the buildings paid too much. Since there were very few buildings  i n the sample f o r  which purchase prices could be r e a l i s t i c a l l y compared, i t cannot be f a i r l y concluded without much more extensive r e search that the u n p r o f i t a b i l i t y of some apartment  buildings  was p a r t i a l l y due to investors paying more f o r them than they were worth.  I t i s , however, quite possible  that t h i s was  the case, f o r many apartment blocks purchased p r i o r to 1970  130 were used as tax shelters rather than as long-term economic investments. benefits.^  Premiums were often paid f o r the tax shelter  0  Summary and  Conclusions  The purpose of t h i s chapter was  to determine the rea-  sons f o r some apartment buildings obtaining good returns on investment, while others received poor returns. A sample of 48 apartment buildings was  obtained from  the data provided i n the Appendix to the Dale-Johnson d i s s e r tation.  The sample was  divided i n t o those buildings with  average returns excluding c a p i t a l gains or losses of l e s s than 10.0  per cent (the l e s s p r o f i t a b l e group) and into  those buildings with average returns excluding gains or losses of more than 10.0  per cent (the more p r o f i t a b l e group).  Physical, operating and f i n a n c i a l c h a r a c t e r i s t i c s of the  two  groups of apartment buildings were calculated and compared. These c h a r a c t e r i s t i c s threw l i g h t on the reasons f o r low returns on investment i n some apartment blocks and  higher  returns i n other blocks. Return on investment excluding c a p i t a l gains or losses i s a function of several v a r i a b l e s .  I t i s dependent on the  cash flow obtained from the operations  of the building; the  amount of p r i n c i p a l repaid; and the i n i t i a l amount of equity. A comparison of the average purchase prices paid per suite f o r each group of buildings, demonstrated that the less p r o f i t a b l e group of apartment buildings generally had  131  paid a higher purchase price than the more p r o f i t a b l e group. Since the loan to value r a t i o s of both groups of apartment buildings were approximately the same, higher purchase p r i c e s i n the l e s s p r o f i t a b l e group meant that the equity requirements f o r that group were also higher than i n the more prof i t a b l e group.  Everything else being equal, higher equity  positions r e s u l t i n lower average returns. Higher purchase p r i c e s i n the l e s s p r o f i t a b l e group of apartment buildings than i n the more p r o f i t a b l e group also meant that a greater amount of i n t e r e s t was paid on mortgage loans by the former group compared to the l a t t e r .  Calcula-  tions also showed that i n t e r e s t rateseon the mortgage loans received by the l e s s p r o f i t a b l e group were higher than those received by the more p r o f i t a b l e group.  This was p a r t l y  attributable to the greater amount of secondary financing obtained by the l e s s p r o f i t a b l e group and p a r t l y due to the newness of these buildings.  Between 1964 and 1970 i n t e r e s t  rates had climbed s t e a d i l y , so that the newer a b u i l d i n g , the higher the i n t e r e s t rates on loans.  Since i n t e r e s t pay-  ments are deducted from cash flow p r i o r to rate of return calculations, the larger the amount of i n t e r e s t paid, the smaller the cash flow and the lower the return oniinvestment. Preliminary analysis indicated that the higher purchase prices paid f o r apartment buildings i n the l e s s p r o f i t a b l e group than i n the more p r o f i t a b l e group were due to investor ignorance.  Too much money was paid f o r some apartment blocks  given t h e i r physical and economic conditions.  132 Comparisons of operating cost r a t i o s i n each group demonstrated that the less p r o f i t a b l e group were paying a higher proportion of gross income i n operating expenses than the more p r o f i t a b l e group.  Operating costs are  deducted from gross income before c a l c u l a t i n g cash flows. Therefore, higher costs i n the less p r o f i t a b l e group lowered the l e v e l of cash flows and thus the return on equity. Despite the facts that the l e s s p r o f i t a b l e group of apartment blocks had higher rents and were newer than the more p r o f i t a b l e group, t h e i r operating cost r a t i o s were also higher.  This indicated that the less p r o f i t a b l e group of  buildings were being managed i n e f f i c i e n t l y . To conclude, the major reasons f o r low  returnseon  investment on some apartment buildings were due t o i 1.  High  2.  High i n t e r e s t payments on mortgage loans; and  3.  High operating costs.  purchasepprices;  133 CHAPTER IX Findings And Conclusions Since i 9 6 0 Metropolitan Vancouver has experienced a rapid expansion i n i t s stock of multiple dwelling u n i t s . The expansion reached i t s peak i n 1969 when 1 2 , 5 2 5 units were completed.  Between 1969 and 1972 the number of addi-  t i o n a l units constructed declined annually so that by 1972, fewer were completed than at any time a f t e r 1966. One of the main goals of the d i s s e r t a t i o n was to exp l a i n the reasons f o r the decline inaapartment construction after 1969. 1.  These reasons f e l l into three main groups 1  Larger increases i n construction, land and financing costs than i n rents;  2.  Amendments to the Income Tax Act which destroyed many advantages that r e a l estate investments had over other forms • of investment; and  3.  Obstacles placed before developers by municipal authorities and the costs of such b a r r i e r s to developers.  Rents and Construction, Land and Financing Costs In Metropolitan Vancouver, rents increased at an average rate of 6 . 6 per cent per annum while construction costs increased at a rate of 6 , 4 per cent, financing at 3.77 per cent, and land costs between 1 9 . 6 and 2 2 . 6 per cent per annum between 1964 and 1972.  134 I t was assumed that the y i e l d from apartment investment was  equal to t o t a l rent minus i n t e r e s t charges on mortgage  loans, divided by the c a p i t a l cost of the investment, and i t was  further assumed that loan to value r a t i o s were the same  f o r a l l areas of Metropolitan Vancouver, and had not changed over time.  These assumptions meant that greater increases  i n c a p i t a l costs (construction and land costs) than i n rents would result i n y i e l d s being less on newly constructed buildings than on older apartment buildings at any  given  point i n time. For these assumptions on y i e l d c a l c u l a t i o n s , only i n t e r est charges and not operating expenses were deducted from t o t a l rent.  This was because further research whose r e s u l t s  were presented  i n Chapter VI of t h i s t h e s i s , demonstrated  that operating expenses expressed as a percentagesof gross income had remained constant f o r new  buildings i n the l a s t  few years, thus i n d i c a t i n g that they had been increasing at the same rate as rents. In Table 18 i n Chapter I I I , average annual increases i n c a p i t a l costs and financing costs were compared with average annual increases i n rents between 1964 and 1972 f o r selected areas of Metropolitan Vancouver.  On the basis of the above  assumptions f o r y i e l d calculations i t appeared that  new  buildings i n Richmond and Coquitlam had suffered the greatest erosion i n y i e l d s because of greater increases i n c a p i t a l and financing costs than i n rents.  In East Hastings  and  Burnaby where rents often increased f a s t e r than c a p i t a l costs and financing costs, y i e l d s have become greater.  A l l other  apartment areas of Metropolitan Vancouver f e l l between the extremes established on the one hand by Richmond and  Coquit-  lam and on the other by East Hastings and Burnaby. To i l l u s t r a t e with a hypothetical example how  the l e v e l  of y i e l d s have been affected by changing costs and rents, consider the following data f o r apartment buildings constructed i n Richmond and the East Hastings area of Vancouver* Buildings.1A and 2A were completed and i n 1964}  operating  Buildings IB and 2B were completed and  operating i n 1965.  Rents, c a p i t a l costs and  financing costs are assumed to have increased between 1964 and 1965 at the average annual rates calculated f o r Richmond and East Hastings presented  i n Table 18.  and  Since the annual change  i n c a p i t a l costs has been presented as a range of values, the median of t h i s range w i l l be used f o r t h i s example.  The loan to value r a t i o i s assumed  to remain constant i n Richmond and East i n 1964 and i n 1965} cent.  Hastings  i t i s assumed to be 50 per  The mortgage interest rate i s assumed to  be 10.0 per cent i n Richmond and East i n 1964.  Hastings  In 1965» t h i s would have increased to  10.377 per cent i f i t increased at the average annual rate of 3.77 per cent presented  i n Table  18.  136  With these assumptions, the following changes i n y i e l d would occurs Richmond  C a p i t a l cost of buildings  East Hastings  Bldg. 1A  Bldg. IB  Bldg. 2A  Bldg. 2B  $1,000.00  $1,118.00  $1,000.00  $1,050.00  $100.00 50.00 $50.00  $101.40 58.01 $43.39  $100.00 50.00 $50.00  $109.30 54.48 $54.82  5.0#  3.9#  5.0$  Gross rent less i n t e r e s t Net income Yield  5.: 7o  In the hypothetical case f o r Richmond the apartment building going into operation i n 1965 would achieve a 1.1 per cent lower y i e l d than i t s counterpart which began operating i n 1964.  This decline i n y i e l d i s due to the fact that  c a p i t a l costs were increasing f a s t e r than rents. In East Hastings y i e l d on the b u i l d i n g which began operating i n 1965 increased by 0,2 per cent over i t s counterpart building operating i n 1964,  The reason f o r t h i s was due to  the fact that rents increased at a greater rate than c a p i t a l and financing costs. I f these examples were calculated on f o r more periods, y i e l d s from Richmond apartment buildings would continue to decline, while y i e l d s from East Hastings buildings would increase.  In 1966, y i e l d from new  apartment buildings i n  Richmond would f a l l to 3*1 per cent; i n 1967, they would f a l l to 2,1 per cent.  S i m i l a r l y , i n East Hastings y i e l d s  would increase to 5*6 per cent i n 1966 and 5.8 per cent i n 1967.  In r e a l i t y , however, changes i n construction, land and financing costs and rents do not a f f e c t y i e l d s i n the d i r e c t manner that was  assumed i n the above i l l u s t r a t i o n s , except  i n the case of the developer of the apartment property also becomes the long-term investor.  who  More common, e s p e c i a l l y  p r i o r to the amendments to the Income Tax Act, i s the case of the developer who  builds an apartment block and then s e l l s  to an investor. The investor normally pays the f a i r market value f o r an apartment b u i l d i n g and t h i s i s usually determined by a capit a l i z a t i o n of the income obtainable from the property.  The  c a p i t a l i z a t i o n rate chosen i s not affected by increases i n construction and land costs and should be the same f o r two buildings i n the same physical and economic conditions regardless of the cost of constructing them. With a c a p i t a l i z a t i o n rate which i s independent of the c a p i t a l cost of an apartment building, i t i s found that i n a time when c a p i t a l costs are increasing at a f a s t e r rate than rents that the c a p i t a l i z a t i o n rate of the investor w i l l not change proportionately to the c a p i t a l costs of the developer.  The r e s u l t i s that the developer cannot s e l l  his apartment building at a price high enough to cover his c a p i t a l costs, development costs and p r o f i t margin.  Conse-  quently, he ceases to construct apartment buildings. No matter whether an apartment b u i l d i n g i s constructed and operated by a developer or constructedfeby  a developer  138 and sold to an investor, the r e s u l t s of greater  increases  i n construction, land and financing costs than i n rents have the e f f e c t of reducing new  apartment construction "by reducing  the y i e l d s e i t h e r d i r e c t l y or i n d i r e c t l y .  As the data i n  Chapter III demonstrated, t h i s i s what has happened i n Metropolitan Vancouver between 1964  and  1972.  In addition to the rapid increases i n construction land costs, the passing of the Strata T i t l e s Act i n  and  1966,  which allowed i n d i v i d u a l ownership of apartment u n i t s , has encouraged developers to move away from the construction of r e n t a l units into the condominium market.  Tables 1 and 2  i n Chapter I i l l u s t r a t e d the construction trends i n the r e n t a l and condominium markets. Condominiums remain economical ventures f o r developers because they can pass a l l t h e i r increased costs on to the purchaser.  This i s because they are being sold to people  desiring l i v i n g accommodation rather than investments. The Income Tax  Act  Besides those cost factors which have played a r o l e i n discouraging  apartment construction, amendments to the In-  Come Tax Act have also had considerable e f f e c t s . P r i o r to the amendments of the Income Tax Act which became law i n 1972,  many apartment investors were charac-  t e r i z e d by having high incomes and high marginal tax rates. These investors were prepared to trade o f f a reduction i n return on apartmentxinvestment f o r a large tax saving.  This  139  philosophy resulted i n a rapid expansion of the r e n t a l housing market throughout the 1960's, p a r t i c u l a r l y f o r three storey wood frame blocks. The amendments to the Income Tax Act destroyed the p o s s i b i l i t y f o r many investors of obtaining large tax savings from apartment buildings. two  This was  mainly due  to  amendments« 1.  Losses created by c a p i t a l cost allowances on r e n t a l property cannot be deducted from  non-  r e n t a l income; and 2.  Each r e n t a l building costing $50,000 or more must be placed i n a separate c a p i t a l cost allowance group.  Return on apartment investment was amendments. flow that was comes who  reduced by these  The f i r s t amendment reduced the annual cash available to those with high professional i n -  i n v e s t e d i i n apartment buildings, by disallowing  the deducting of r e n t a l losses from other income and thus, decreasing  tax savings to zero.  The  second amendment i n -  creased the taxation that occurred upon the saleoof the apartment b u i l d i n g by taxing at f u l l rates a l l depreciation that was  recovered.  A t h i r d amendment to the Tax Act allowed f o r the  taxa-  t i o n at h a l f normal rates of a l l c a p i t a l gains that were forthcoming upon the sale of the investment. reduced the investor's after-tax return.  This further  In addition to the reduction i n the return on investment by taxation of recovery of depreciation and c a p i t a l gains and the loss of tax savings obtainable from the use of C.C.A.'s, the return on investment can often be reduced by the need of the investor to e s t a b l i s h a sinking fund t o maintain the l e v e l of his equity throughout the l i f e of h i s investment. When an investor s e l l s his apartment building, taxation of recovery of depreciation and c a p i t a l gains can reduce h i s after-tax equity to a l e v e l which i s lower than that which he had when he f i r s t purchased the b u i l d i n g .  To prevent  t h i s , the investor must contribute to a sinking fund each year to be used f o r maintaining level.  his equity at a constant  Since contributions to t h i s fund are s i m i l a r to  other expenses, they reduce income and hence return on investment. Before the introduction of the new Income Tax Act, the nature of the r e n t a l market was such that many investors i n apartment buildings were, i n e f f e c t , subsidizing t h e i r tenants* rents by seeking tax losses from t h e i r apartment buildings i n order to o f f s e t t h e i r other income.  In s t r i v i n g  for these losses, rents were often set at uneconomic l e v e l s to the benefit of the tenants.  Now that the new Income Tax  Act i s i n effect, apartment investments have to be economic ventures i n themselves because they cannot provide any benef i t s to other income.  This means that rents w i l l have to  141 r i s e to restore the economic v i a b i l i t y of apartment buildings. The amendments to the Income Tax Act w i l l l i k e l y change the types of investors who invest i n r e s i d e n t i a l r e n t a l property.  I t i s expected that professional men, who heavily  invested i n apartment properties f o r tax shelter purposes, w i l l turn to other forms of investment.  Their place w i l l  be taken by large companies whose business i s the provision of rental accommodation.  Companies have an advantage over  individuals i n the r e n t a l market because they can deduct r e n t a l losses from other income. New apartment buildings w i l l probably be of a larger, more economic size than many that e x i s t today.  Frame apart-  ment buildings which o f f e r an advantageous C C A . w i l l dec l i n e i n importance because the benefit of t h e i r C C A . rate i s l e s s important and because they are more uneconomic to operate r e l a t i v e to concrete buildings. Municipal Approval f o r Apartment Developments The t h i r d major set of factors which have i n t e r f e r e d with the provision of new apartment buildings f o r r e n t a l purposes are the long and c o s t l y delays involved i n obtaining municipal approval f o r apartment developments.  The increasing  use of land use contracts by municipalities i s also increasing the r i s k that developers have to face i n i n i t i a t i n g a project and t r y i n g to obtain municipal and public approval.  Land  use contracts also add to the cost of developments because the developer often has to grant expensive concessions to  142 the municipality to obtain the contract. The delays and costs found when trying to obtain munic i p a l approval are, of course, faced by every developer no matter whether he i s going to produce an apartment block, o f f i c e tower or i n d u s t r i a l park.  However, the return on  investment available from non-residential r e n t a l projects usually f a r exceeds that which can be obtained from r e s i dential r e n t a l uses.  Thus, developers are w i l l i n g to take  the time, costs and r i s k s to obtain approval f o r these other uses but they f i n d that the return from apartment investment does not warrant the trouble. In t h i s d i s s e r t a t i o n , three municipalities were studied to determine the procedures followed i n granting approval of apartment developments under e x i s t i n g by-laws and under land use contracts. The length of time involved and the costs of approval were also examined. The City of North Vancouver was found to have the most e f f i c i e n t and least time-consuming process f o r approval under e x i s t i n g by-laws of apartment developments.  It  appeared that the reasons f o r the e f f i c i e n c y were due to two factors.  F i r s t l y , only one body had r e s p o n s i b i l i t y f o r  guiding development proposals through the processing proc e d u r e — t h i s was the Building Inspector.  Secondly, a l l the  departments concerned i n the approval simultaneously processed the documents.  This avoided time delays since each  department did not have to wait f o r approval by the previous department before processing could begin.  143 The organization of the C i t y of North Vancouver was established i n such a manner that processing f o r a building permit could be accomplished i n a minimum of time, usually three weeks.  Where developers  did not submit plans  and  documents complying with the City's by-laws, processing took longer. The approvalpprocedure i n the City of Vancouver was much more complex and time-consuming than i n North Vancouver. This was p a r t l y due to a larger number of municipal  depart-  ments involved i n the approval process; p a r t l y due to the apparent lack of an o v e r a l l authority to guide the developer's a p p l i c a t i o n through the bureaucratic procedures; and p a r t l y due to the organization of the approval  process.  Unlike North Vancouver, the C i t y of Vancouver only processed plans and documents through one department at a time.  This was  a longer procedure than one where several  departments were studying the development proposal  simul-  taneously. The amount of time necessary to obtain development approval i n Vancouver varied between a few days and several months, the l a t t e r time period being quite prevalent.  This  added s i g n i f i c a n t costs to the development by increasing the developer's  holding costs, interim financing and future con-  struction costs. The time delays involved i n obtaining municipal f o r developments were not e n t i r e l y the f a u l t of c i v i c  approval officials,  ILL  however.  I t was  often the case that those who  were applying  f o r approval were not f a m i l i a r enough with c i t y by-laws to ensure that t h e i r developments complied with zoning by-laws and b u i l d i n g codes.  Also, the plans and sketches submitted  with the development proposal were sometimes not of s u f f i cient d e t a i l nor contained a l l the required information that was necessary to grant  approval.  The actual processing fees and fees f o r development and building permits were a reasonable amount i n North Vancouver and Vancouver, and added l i t t l e to development costs. More and more today, municipal governments are regul a t i n g the development of land by land use contracts rather than by zoning by-laws. land use contracts was  I n i t i a l l y , the reason f o r employing that some development concepts could  not be approved under existing by-laws because they encompassed a multiple use of land which r i g i d zoning by-laws did not l e g a l l y allow. Today, the increasing popularity of land use  contracts  f o r the regulation of development i s p r i m a r i l y due to three reasons: 1.  The municipal government i s able to gauge the reactions of the community to a proposed development at public hearings which must be held p r i o r to the granting of a land use  2.  contract.  The public i s given a voice i n the approval a proposed development.  of  145 3.  The municipality can extract concessions,  such  as the deeding of land, from developers which i t cannot do under e x i s t i n g by-laws. The procedures, time required and some of the costs to the developer involved i n processing development applications under land use contracts i n the C i t y of North Vancouver and the D i s t r i c t  of Surrey were examined i n t h i s d i s s e r t a t i o n .  In the C i t y of North Vancouver, land use contracts must be used f o r a l l developments costing $600,000 or more or occupying more than one acre.  I t was found that a much  longer period of time was required f o r approval where land use contracts were involved than where development could proceed under e x i s t i n g by-laws.  I t could often take a year  or longer from the i n i t i a l date of the developer's applicat i o n f o r a land use contract u n t i l permission was f i n a l l y granted. There were several reasons f o r the much longer period of time required to obtain municipal approval with land use contracts than with e x i s t i n g C i t y by-laws.  F i r s t l y , several  additional bodies were involved i n the approval  process  where land use contracts were used than where development approval was authorized by e x i s t i n g zoning by-laws. bodies were the Planning Consultant, the Advisory Commission, C i t y Council and the p u b l i c .  These  Planning  A l l of these  groups act i n an advisory capacity to the proposed development with Council having the f i n a l decision on the approval of the p r o j e c t .  Secondly, negotiations must take place between the Planning Consultant and the developer to reach agreement on the terms of the contract.  Since there was an absence  of guidelines outlining the terms and conditions which the City would seek to be included i n the land use contract, the negotiations could often be very lengthy and timeconsuming. Finally» the proposed development must be presented to the public at a hearing before permission could be granted to the developer to proceed.  The primary purpose of a  public hearing was to give Council a chance to gauge the community reaction towards the development.  This process  of determining public opinion could often continue  long  a f t e r the public hearing had been held, e s p e c i a l l y i f the views of the community were not c l e a r . The considerable amount of time expended i n processing development applications where land use contracts were i n volved was d i r e c t l y attributable to the nature of such contracts.  I t was necessary f o r a l l the various advisory  boards on land use and C i t y Council to become involved i n the approval process because only they could decide i f a proposed development which d i d not come under e x i s t i n g zoning by-laws would be b e n e f i c i a l f o r the community.  It  was also necessary under the Municipal Act f o r the public to be allowed a hearing before approval was given.  Thus, much  of the delay i n obtaining approval was d i r e c t l y related to  14? the nature of land use contracts rather than to i n e f f i ciencies within the municipal government.  However, i n the  C i t y of North Vancouver, some changes could be made to speed up the approval  process.  Much of the delay i n obtaining municipal  approval  centered around the negotiations between the Planning Consultant and the developer.  No guidelines had been published  on which these negotiations were to be based and they could thus become quite drawn out.  In addition, the developer was  faced with considerable r i s k because he had no idea of what terms and conditions he would be required to meet u n t i l the negotiations began.  The developer often had to deed land  to the municipality or contribute to the improvement of other municipal services, both of which could be very c o s t l y . I t would ease the developer's  r i s k and speed up the  negotiating of land use contracts i f there were some publ i s h e d guidelines outlining the basic p o l i c i e s to be followed during negotiations and the probable costs of the p o l i c i e s . In the D i s t r i c t of Surrey, land use contracts must be used f o r a l l apartment developments.  The procedure f o r  obtaining development approval was much the same as i n North Vancouver.  However, Surrey Council had introduced a  development p o l i c y which s p e c i f i c a l l y outlined a l l the charges that a developer had to pay before being  granted  municipal approval to proceed with the construction of his project.  These charges were an i n t e g r a l part of a l l land  use contracts and amounted to $2,595 f o r each apartment u n i t .  148 The developer who counterpart  wanted to b u i l d i n Surrey, unlike his  i n North Vancouver, was well aware of the costs  of his land use contract before negotiations began.  However,  the costs of such contracts were so high that often they could make an apartment development uneconomic. Operating Expenses Besides the study of the effects of construction, land and financing costs, the amendments to the Income Tax  Act  and the i n e f f i c i e n c i e s of municipal processing procedures on new  apartment construction, a fourth f a c t o r was  This was  also examined.  the e f f e c t of operating expenses on apartment pro-  fitability. It has been stated i n several publications that operating costs have been increasing faster than rents.  An ana-  l y s i s of data presented i n Real Estate Trends and i n the Dale-Johnson thesis demonstrated that while operating  costs  do increase as a percentage of gross income as a building increases i n age,  they have been remaining r e l a t i v e l y  constant  for buildings of the same age when compared i n d i f f e r e n t years.  For example, a comparison of buildings between one  and two years old i n 1968,  one and two years old i n 1969,  one and two years old i n 1970  and  showed that a l l groups of b u i l d -  ings i n the same age bracket had s i m i l a r operating expenses as a percentage of gross income, regardless of the year i n which they occurred.  This indicated that the p r o f i t a b i l i t y  of more recently constructed apartment buildings has  not  149 been reduced by greater increases i n operating expenses than i n rents r e l a t i v e to older apartment buildings. Future Demand f o r Apartment Units While the supply of additional apartment units f o r rental i s gradually dwindling,  demand i s continuing unabated.  Demand i s growing p a r t l y because of the migration of f a m i l i e s into B.C.; p a r t l y because of the increasing affluence of people i n t h e i r late teens and early twenties who are able to leave home at an e a r l i e r age and compete f o r shelter i n the r e n t a l market; and p a r t l y because of r i s i n g costs of land, construction and financing i n the home ownership sector which are squeezing some p o t e n t i a l home buyers into the apartment market. I t i s expected that the population of the Vancouver Metropolitan Area w i l l increase by 70 per cent between 1971 and 1991* an increase of ?29t000 people.  Applying  estimates  of average household size and replacement rates f o r the e x i s t i n g stock of dwellings, i t i s calculated that there w i l l be a need f o r an additional 310,000 units of single and multi-family dwellings by 1991.  Using h i s t o r i c a l rates of  growth f o r single and multi-family u n i t s , i t would appear that 202,000 units w i l l be needed to accommodate the multifamily sector. Between 1971 and 1991 an average of 10,000 additional multiple dwelling units per annum w i l l be needed to meet forecasted demand.  Since 1969, the number of multiple  150 family completions per annum has been declining and at no time since 1969 10,000 u n i t s .  have the number of completions exceeded Thus, while demand i s increasing the p r o v i -  sion of additional supplies of multi-family units has been declining, with the r e s u l t that the shortage of apartment housing w i l l increase. Only when rents r i s e to a l e v e l high enough to provide investors with a s u f f i c i e n t return on investment w i l l apartment construction pick up and ease the shortage of housing. Already,  increasing rents are creating tenant unrest  and  pressure  i s slowly mounting on the various municipal govern-  ments and the P r o v i n c i a l Government to consider some form of l e g i s l a t i o n to control r e n t a l increases, or h a l t them a l together. Rent Control Studies of rent control systems i n the United Kingdom and i n New  York C i t y indicated that rent controls aggravated  housing shortages by reducing developers* incentive to provide new  r e n t a l dwellings.  and investors* This was  construction costs, land costs, financing costs and expenses continued The r e s u l t was c l i n e and new  to increase while rents were held  that the investor's return continued  because operating constant. to de-  construction became increasingly unprofitable.  Rent controls also discouraged  the proper maintenance  of e x i s t i n g buildings because operating costs continued increase and reduced the margin of p r o f i t a b i l i t y f o r the  to  151 landlord.  In some cases, buildings which s t i l l had some  economic l i f e were abandoned because the margin of p r o f i t a b i l i t y became very  low.  Experiences i n both New  York C i t y and the United Kingdom  demonstrated that the following consequences were f e l t when rent controls were introduced« 1.  Housing construction f o r r e n t a l purposes was reduced p a r t l y because landlords could not obtain a s u f f i c i e n t return on investment and p a r t l y because mortgagees were reluctant to finance r e n t a l projects where they would f a l l under the j u r i s d i c t i o n of rent c o n t r o l .  2.  Maintenance of e x i s t i n g controlled dwellings declined.  3.  The mobility of tenants was  reduced because  the demand f o r controlled tenancies usually far  outweighed the supply and thus the tenant  who  vacated a controlled premise had much  d i f f i c u l t y i n l o c a t i n g i n another. 4.  Those tenants i n the uncontrolled sector were discriminated against because they did not receive the benefit of lower rents that those i n the controlled sector enjoyed and because a l l new  demand f o r r e n t a l housing was  channelled  into the uncontrolled sector f o r c i n g rents above that which would have prevailed i f rent controls had not been introduced.  5.  With time, the number of controlled tenancies was reduced because landlords t r i e d to convert those premises that were controlled into uncontrolled dwellings.  6.  The e f f i c i e n c y of the housing stock was  de-  creased because tenants i n controlled premises who  occupied more space than they required  were unwilling to relocate to smaller  dwellings  because of the d i f f i c u l t y i n f i n d i n g other controlled housing. Rent controls were also d i f f i c u l t to administer because i t was  almost impossible to f i n d c r i t e r i a f o r e s t a b l i s h i n g  f a i r rents or p r o f i t s and thus rents were set at a l e v e l which was u n r e a l i s t i c when compared to those that would p r e v a i l i n the free market with the r e s u l t that serious inadequacies  were introduced into the market.  In both New  York and the United Kingdom the consequences  of rent controls have been r e a l i z e d and major e f f o r t s are now  being made to abolish s t r i c t rent controls and  duce systems whereby those who  intro-  cannot compete i n a free mar-  ket w i l l be subsidized by the state, rather than by the landlord. In B.C.  those who  w i l l not be able to meet the increased  rents that w i l l be charged by landlords should be subsidized by the government rather than by the owners of r e n t a l property.  Only i f rents are allowed to increase f r e e l y w i l l  153  apartment investment become economic again and stimulate new construction and reduce the housing shortage. A Comparison of the P r o f i t a b i l i t i e s of Some Vancouver Apartment Buildings The f i n a l study conducted f o r t h i s d i s s e r t a t i o n was an analysis of the physical, f i n a n c i a l and operating characteri s t i c s of some apartment buildings operating i n Metropolitan Vancouver.  The sample was s p l i t into two groups—those  buildings with an average rate of return on investment of less than 10.0 per cent excluding any c a p i t a l gains or losses and those with an average rate of return of more than 10.0 per cent excluding gains or losses. It was found that the more p r o f i t a b l e group of apartment buildings (those with a return of more than 10.0 per cent) had a higher median age i n 1970 than the less p r o f i t able group, 5 years old f o r the former and 2 f o r the l a t t e r . The more p r o f i t a b l e group of apartment buildings used a lower percentage of gross income to pay p r i n c i p a l and interest on mortgage loans than the less p r o f i t a b l e group despite both groups having s i m i l a r loan to value r a t i o s . This was due to two factors. F i r s t l y , the weighted interest rate on mortgages of the more p r o f i t a b l e group was almost 1.0 per cent lower than for the less p r o f i t a b l e group.  The difference i n interest  rates was due to the d i f f e r i n g ages of the two groups and due to the higher percentage of buildings i n the less  154 p r o f i t a b l e group having high interest second mortgages. Since the buildings  i n the more p r o f i t a b l e group were  older, they obtained financing  e a r l i e r and thus at lower  interest rates than the less p r o f i t a b l e group. Secondly, higher purchase prices per suite were paid f o r buildings  i n the less p r o f i t a b l e group than i n the more  p r o f i t a b l e group.  This meant that the amounts borrowed by  the less p r o f i t a b l e group were larger than the amounts borrowed by the more p r o f i t a b l e group since the loan to value r a t i o s were approximately the same f o r the two groups. These two factors tend to indicate that investors owned buildings  i n the less p r o f i t a b l e group were generally  misinformed i n the purchasing and financing ment buildings. of buildings  who  of t h e i r apart-  As was mentioned, the less p r o f i t a b l e group  had a higher percentage of i t s members carrying  second mortgages than the more p r o f i t a b l e group and yet the loan to value r a t i o s i n the two groups were s i m i l a r .  An  examination of the data i n Dale-Johnson*s thesis d i d not indicate any v a l i d reasons f o r t h i s and therefore i t could only be concluded that some investors amount of financing  were not aware of the  that might be obtained with f i r s t mort-  gages or that mortgagees were less w i l l i n g to give high r a t i o f i r s t mortgages. Relative  to those investors  who purchased apartment  buildings  which belong to the more p r o f i t a b l e group, the  investors  i n the l e s s p r o f i t a b l e group paid too much f o r  155 t h e i r buildings given the l e v e l of rents and expenses of t h e i r purchases.  This was  operating  indicated by the  poorer returns that the more expensive buildings obtained. An analysis of operating expenses lent further support to the hypothesis that the investors i n the l e s s p r o f i t a b l e group were poorly educated i n the ways of the apartment investment market.  I t was found that the less p r o f i t a b l e  group of buildings had higher operating expenses as a percentage of gross income than the more p r o f i t a b l e group desp i t e the f a c t s that they were newer and i n higher rental areas.  This indicated that buildings i n the less p r o f i t a b l e  group were being mismanaged. The Future of the Apartment Rental Market i n Greater Vancouver As has been shown, rents i n Metropolitan Vancouver have not been increasing as fast as construction, land and  fin-  ancing costs and thus, y i e l d s from apartment investment have f a l l e n i n recent years.  The amendments to the Income Tax  Act have further reduced y i e l d s by taxing c a p i t a l gains  and  recovery of depreciation and outlawing tax shelters i n r e n t a l property.  Municipal bureaucracy has slowed down the pro-  cessing of development proposals and the increasing popul a r i t y of land use contracts has increased the costs and r i s k s of development. To offset these factors and reduce current and future shortages  of r e n t a l accommodation, rents must increase  substantially i n the next few years to return apartment investment to an economic footing.  Increasing rents w i l l  face s t i f f opposition from tenants and i f t h e i r implementat i o n i s to be successful, landlords must go out of t h e i r way to explain to tenants the necessity of these increases. Apartment investors of the future w i l l have to become more knowledgeable and more sophisticated than t h e i r counterparts i n recent years.  Increasingly, landlords w i l l become  larger companies s p e c i a l i z i n g i n the r e n t a l of r e s i d e n t i a l r e a l estate; projects w i l l become larger and more economic to operate. Public involvement i n the planning process i s c e r t a i n to increase with the r e s u l t that land use contracts and public hearings w i l l become more frequent.  Developers,  therefore, w i l l have to design t h e i r projects so that they are more amicable to the community and w i l l have to communicate more e f f e c t i v e l y at public hearings i f t h e i r projects are to succeed i n gaining  approval.  Governments should be prepared to step into the r e n t a l market and subsidize those tenants who cannot compete i n the market of increased r e n t a l s .  L e g i s l a t i o n should also be pro-  duced to l i m i t the time allowed f o r municipal approval of development proposals and to l i m i t the powers of municip a l i t i e s i n the negotiating of land use contracts.  157 FOOTNOTES Chapter I •^R. Dale-Johnson, Returns On Apartment Properties (University of B r i t i s h Columbia: Master's thesis, 1972), p. 1. This assumption i s not s t r i c t l y correct. Some of the units i n Table 2 were created by the conversion of e x i s t i n g r e n t a l accommodation into condominiums rather than being newly constructed. CMHC s t a f f have indicated that probably no more than 2 0 . 0 per cent of condominium units were created by conversion. •^Dale-Johns on, op. c i t . . Appendix. L,  S t a t i s t i c s Canada, Census of Canada (Ottawa: Printer, 1 9 6 6 ) , V o l . 1.  Queen's  ^Acres Western, Ltd., Residential Market Opportunity Study (Unpublished, 1971). Corporation of the D i s t r i c t of North Vancouver, Planning Department, Apartment Report (May, 1 9 6 8 ) . . "^Greater Vancouver Real Estate Board, Real Estate Trends i n Metropolitan Vancouver, 1964-1972. Q  S t a t i s t i c s Canada, "Residential Rent Index," Prices And Price Indexes (Ottawa: Queen's Printer, D e c , 1 9 7 2 ) , p. 4 9 . ^ S t a t i s t i c s Canada, Prices and Price Indexes (Ottawa: Queen's P r i n t e r , D e c , 1972 and Feb., 1973). P. 73 and p. 75. 10  G r e a t e r Vancouver Real Estate Board, op. c i t .  ^ F i n a n c i a l Post (Toronto: MacLean-Hunter Ltd., 196419727: 12 Central Mortgage and Housing Corporation, Canadian Housing S t a t i s t i c s (Ottawa: Queen's Printer, 1 9 7 2 ) , p. 6 2 . "•"^Greater Vancouver Real Estate Board, op. c i t . 14 Dale-Johnson, op. c i t . , Appendix. 1 5  Ibid.  158 Chapter I I ^ A c r e s Western, L t d . , R e s i d e n t i a l Market Opportunity Study (Unpublished, 1971), p. 5 . 1  E c o n o m i c C o u n c i l o f Canada, S i x t h Annual Review (Ottawa: Queen's P r i n t e r , 1969), p. 22. 17  ifi  Acres Western, L t d . , op. c i t . , p. 9. " ^ G r e a t e r Vancouver Real E s t a t e Board, Real E s t a t e Trends i n M e t r o p o l i t a n Vancouver (1970), p. B - l l .  20 Recent p r o v i n c i a l l e g i s l a t i o n has "brought f o r t h new p o l i c i e s f o r the management o f l a n d which may mean t h a t h i s t o r i c r a t e s o f development w i l l no l o n g e r c o n t i n u e . The major impact of the l e g i s l a t i o n i s t h a t the r a t e of t r a n s f o r m a t i o n of a g r i c u l t u r a l l a n d i n t o urban l a n d w i l l decrease, e s p e c i a l l y i n the South Shore m u n i c i p a l i t i e s . T h i s means t h a t l a n d w i l l n o t be a v a i l a b l e t o accommodate a l l the new demand f o r s i n g l e - f a m i l y d w e l l i n g s . The excess demand w i l l be c h a n n e l l e d i n t o a d d i t i o n a l demand f o r m u l t i - f a m i l y housing w i t h the r e s u l t t h a t the p r o j e c t i o n s i n Table 8 f o r m u l t i - f a m i l y housing may be underestimated.  21  C e n t r a l Mortgage and Housing C o r p o r a t i o n , Vacancy Survey, M e t r o p o l i t a n Vancouver, D e c , i,  ft  Apartment 1972.  Chapter I I I 22  "Future Apartment Development," (August, 1972), p. 8.  Apartment Owners J o u r n a l ,  ^Most n o t a b l y R, Dale-Johnson, Returns on Apartment P r o p e r t i e s ( U n i v e r s i t y of B r i t i s h Columbia: Master's t h e s i s , 1972), p . 40. 2  24 G r e a t e r Vancouver Real E s t a t e Board, Real E s t a t e Trends i n M e t r o p o l i t a n Vancouver (1964-1972). 2< ^ S t a t i s t i c s Canada, " R e s i d e n t i a l Rent Index," P r i c e s and P r i c e Indexes (Ottawa: Queen's P r i n t e r , D e c , 1972).  26  2 7  S t a t i s t i c s Canada, op. c i t . G r e a t e r Vancouver Real E s t a t e Board, op. c i t . . (1972),  p. B-3. 28  I t was mentioned p r e v i o u s l y t h a t l a n d c o s t s must be examined i n the l i g h t of the a p p l i c a b l e zoning r e g u l a t i o n s as they r e f e r t o f l o o r space r a t i o s and maximum s i t e  159  coverage. Since 1964, there have generally "been only minor changes i n F.S.R. i n the various Greater Vancouver municip a l i t i e s . Consequently, comparisons of land cost increases on a square foot basis among the various m u n i c i p a l i t i e s i s f a i r l y v a l i d since the land cost per apartment unit has been unchanged by zoning regulations. The exception to t h i s generality occurs i n the West End where new multiple dwelling densities were imposed i n 1973. The new RM-4A zoning reduces F.S.R.'s to 1.4 with bonuses, from 2.6 with bonuses. This change, however, does not a f f e c t the analysis presented here, as i t i s very recent. 29 7  "Vancouver Urban Renewal Study:  Apartment D i s t r i c t s , "  3°Ibid. 31 Canada, op. c i t . » P. 73. Statistics S t a t i s t i c s Canada, op. c i t . (May, 1970), p. X.  J  3 2  • ^ S t a t i s t i c s Canada, op. c i t . (Feb., 1973). P . 73. 34  Central Mortgage and Housing Corporation, Canadian Housing S t a t i s t i c s (Ottawa: Queen's P r i n t e r , 1971), pp. J  35-36.  -^This information was obtained from o f f i c e r s of the following firms on July 3, 1973» Metropolitan Trust Co. Ltd.! Canada Permanent Trust; and North American L i f e Insurance Co. -^This i s , i n p r a c t i c e , an u n r e a l i s t i c assumption because i n the apartment market properties s e l l on the basis of y i e l d and not on the basis of c a p i t a l costs. Since y i e l d s are not increasing as f a s t as c a p i t a l costs, developers of apartment buildings cannot s e l l t h e i r apartments to investors at a high enough price to cover the increasing c a p i t a l costs. Consequently, fewer apartment buildings are constructed. •^Construction costs and financing costs do vary s i g n i f i cantly from region to region. Within a region construction costs only vary because of the transportation costs involved i n moving materials. Financing costs can vary according to the lender's view of the p r o f i t a b i l i t y of a p r o j e c t . Since Metropolitan Vancouver i s such a small area, i t i s assumed that construction and financing costs are uniform regardless of l o c a t i o n .  160 Chapter IV 3 Benjamin Swirsky, "The Income Tax Treatment of Depreciable Property," Papers on Real Estate and Income Tax (The Real Estate Institute of Canada, 1972), p. 13. 8  -^Bernard shinder, "Capital Gains and Real Estate Transactions," Papers on Real Estate and Income Tax (The Real Estate Institute of Canada, 1972), p. 3. ^ S e e especially Swirsky, op. c i t . . pp. 11-18 op. c i t . , pp. 1-10.  and Shinder,  in  David A. Ward, "Forms of Ownership of Real Estate," Papers on Real Estate and Income Tax (The Real Estate I n s t i t u t e of Canada, 1972), p. 22.  k  2  Department of National Revenue, Taxation, Interpretat i o n B u l l e t i n No. IT-72 (Ottawa: Queen*s Printer, 1972). ^Ward, op. c i t . . p. 24. Interviews were conducted with o f f i c i a l s of Block Bros. Realty Ltd. and Wall and Redekop Corporation Ltd. i n June, 1973. r"Future Apartment Development," Apartment Owners Journal (August, 1972), p. 8. Chapter V ^Much of the information presented i n t h i s section was obtained from theiiBuilding Inspector f o r the C i t y of North Vancouver at an interview on July 6, 1973* ^ C i t y of North Vancouver, Resolution of Council (June 12, 1972). 7  ha  Development permits are not required i n the City of North Vancouver. ^ C i t y of North Vancouver, Building By-Law No. 4361 (1972), Subsection 1.9.3.  -  ^°Ibid., Appendix A. -^See footnote 46. -* City of North Vancouver, Resolution of Council, op. c i t . 2  161 -^Most of the information concerning processing procedures was obtained from o f f i c i a l s i n the Building Department i n July, 1973. ^ C i t y of Vancouver, Zoning and Development Fee By-Law No, 4188 (September, 1965). 5 5  Ibid.  -^Most of the information concerning processing procedures was obtained from the Planning Department i n the D i s t r i c t of Surrey i n July, 1973. ^ D i s t r i c t of Surrey, Municipal Development Policy (June, 1973), P. 3. 58, 'Ibid., p. 3. 5 9  I b i d . , p. 4.  6 0  I b i d . , p. 7.  6 1  I b i d . , p. 9.  62  These figures were obtained from some developers who were interviewed during e f f o r t s to obtain construction cost data. ^ D i s t r i c t of Surrey, op. c i t . , p. 14. 6 4  6  I b i d . , p. 14.  ^ I b i d . , p. 10.  Chapter VI  66  R. Dale-Johnson, Returns on Apartment Properties (University of B r i t i s h Columbia: Master's thesis, 1972), p. 18. ^ G r e a t e r Vancouver Real Estate Board, Real Estate Trends i n Metropolitan Vancouver, 1966-1972.  68 69  Dale-Johnson, op. c i t . , Appendix.  ^Greater Vancouver Real Estate Board, op. c i t .  70  Dale-Johnson, op. c i t . . Appendix. 7 1  I b i d . . p. 57.  162 Chapter VII T h e B r i t i s h history of rent control has l a r g e l y been drawn from Adela A. Nevitt, The Nature of Rent Controlling L e g i s l a t i o n i n the United Kingdom (Londont Centre f o r Environmental Studies, 1 9 7 0 ) , 22 pp. and Michael Audain and C. Bradshaw, "Rent Regulation," Is There a Case For Rent Control (Canadian Council on S o c i a l Development, 1 9 7 3 ) , PP. 1 3 - 3 7 . 72  % . M. S. 0 . , Report of the Committee on the Rent Acts, Cmnd. 4609 ( 1 9 7 1 ) . P. 82. 7  7 4  I b i d . , p. 8 3 .  -*Michael Audain and C. Bradshaw, op. ^ c i t . , pp. 13-37 a valuable source of information f o r t h i s section. 7  was  ^"New York Eases Rent Controls," Apartment Owners Journal (February, 1 9 7 2 ) , p. 10. 7  P h i l i p H. White, The Case Against Rent Control (Torontot Canadian Council on Social Development, 1 9 7 2 ) , p. 1. 7 7  78, 'H. M. S. 0 . , op. e d i t " P* 7 9  80  8 1  I b i d . , p.  1 3 2 ,  131.  White, op. c i t . , p. 7 . I b i d . , pp. 6 - 9 .  Chapter VIII ftp R. Dale-Johnson, Returns on Apartment Properties (University of B r i t i s h Columbiaj Master's thesis, 1972), Appendix. I b i d . , pp. 71-72. 84 The data was drawn from Dale-Johnson and i s summarized i n that work i n Table 14, p. 66; Table 15, p. 74; and Table 16, p. 77. -*Many of the l i m i t a t i o n s were previously discussed i n Chapter VI. 86 8 3  8  Dale-Johnson, op. c i t . . p. i i i . 8 7  I b i d . , p. 48.  163 I b i d . , pp. 39-42. 89 ^The results of Dale-Johnson's analysis of operating cost r a t i o s i n r e l a t i o n to number of suites are presented i n Table 6 of his t h e s i s . Those results show a weak c o r r e l a t i o n between decreasing operating cost r a t i o s and increasing building s i z e . For t h i s reason, i t i s doubtful that an apartment b u i l d i n g with seven more apartment suites than another building would have a s i g n i f i c a n t l y lower operating cost r a t i o . Table 5, however, i n Dale-Johnson's thesis shows a c l e a r relationship between increasing operating costs and building age. The f a c t that the more p r o f i t a b l e group of buildings are older and have lower operating cost r a t i o s than the l e s s p r o f i t a b l e graph must indicate some management problems i n the l a t t e r group. 90 Dale-Johnson, op. c i t . , pp. 8-11, u u  164 BIBLIOGRAPHY Acres Western, Ltd. Residential Market Opportunity Study. Unpublished report prepared f o r Dawson Developments Ltd. 1971. 55 PP. Aldridge, T. M. Rent Control and Leasehold Enfranchisement. London: Oyez Publications. 1970. 161 pp. Audain, Michael and Bradshaw, C. Tenants Rights i n Canada. Ottawai The Canadian Council on S o c i a l Development. 1971. 49 pp. Central Mortgage and Housing Corporation. Canadian Housing S t a t i s t i c s 1972. Ottawat Queen's P r i n t e r , 1973. 103 pp. Central Mortgage and Housing Corporation. Apartment Vacancy Survey: Metropolitan Vancouver. December, 1972. "The Changing Apartment Challenge of the Seventies." Apartment Owners Journal. (October, 1971). p. 6. City of North Vancouver.  Building By-Law No. 4361.  C i t y of North Vancouver. 1972.  Resolution of Council.  1972.  June 12,  C i t y of Vancouver, Zoning and Development Fee By-Law No, 4188. September, 1965. Clettenberg, Karel J . and Kroncke, Charles 0. "How to Calculate Real Estate Return on Investment." Real Estate Review. 2(4) (Winter, 1973). PP. 105-109. Conradi, A. P. Governmental P o l i c i e s Concerning Residential Condominium Development i n B r i t i s h Columbia. Unpublished Master's t h e s i s : University of B r i t i s h Columbia, 1971. 214 pp. Corporation of the D i s t r i c t of North Vancouver, Planning Department. Apartment Report. May, 1968. Dale-Johnson, R. Returns on Apartment Properties. Unpublished Master's t h e s i s : University of B r i t i s h Columbia, 1972. 3^5vPP« Department of National Revenue, Taxation. Interpretation B u l l e t i n Nos. IT-43. IT-44. IT-45. IT-72 and IT-79. Ottawa: Queen's Printer, 1971-1972.  165 Department of National Revenue, Taxation. "Rental Income and Undeveloped Land." Tax Reform and You. Ottawa: Queen's P r i n t e r , undated"!! 6 pp. D i s t r i c t of Surrey. 1973. 16 pp.  Municipal Development P o l i c y .  Economic Council of Canada. Queen's P r i n t e r , 1969.  Sixth Annual Review.  June, Ottawa:  Parish, W. G. The Shortage of Residential Mortgage Market Funds i n Canada. Vancouver: The Real Estate Institute of B r i t i s h Columbia, A p r i l , 1968. 23 pp. F i n a n c i a l Post. Toronto: 1964-December, 1972.  MacLean-Hunter, Ltd., January,  Flaum, T. K. and Salzman, E. C. The Tenants' Rights Movement. Chicago: Urban Research Corporation, 1969. 5? PP. "Future Apartment Development." (August, 1972). p. 8.  Apartment Owners Journal.  Giesler, J . A. "The Condominium—Canada's Newest Concept i n Housing." Canadian Realtor, 16 (May, 1970). pp. 10-19. Greater Vancouver Apartment Owners' Association. B r i e f On White Paper Proposals. Unpublished, 1970. 40 pp. Greater Vancouver Real Estate Board. Real Estate Trends i n Metropolitan Vancouver. 1964-1972. Hamilton, Stanley W., Davis, I., and Lowden, J . Condominium Development i n Metropolitan Vancouver. Vancouver: The Real Estate Council of B r i t i s h Columbia, 1971. H. M. S. 0. Report of the Committee on the Rent Acts. Cmnd. 4609, 1971. 526 pp. Higgins, J . W. Impact of Federal Taxation on Real Estate Decisions. University of Connecticut: Center f o r Real Estate and Urban Economic Studies, 1971. 65 pp. Interview with Mr. Neumann of Block Bros. Realty Ltd. June, 1973. Interview with o f f i c i a l s of Canada Permanent Trust. 1973.  July 3,  166  Interview with the Building Inspector. Vancouver. July 6, 1973.  City of North  Interview with o f f i c i a l s of the Building Department. of Vancouver. July 9. 1973.  City  Interview with o f f i c i a l s of the Planning Department. of Surrey. July 10, 1973.  District  Interview with o f f i c i a l s of Metropolitan Trust Co. Ltd. July 3, 1973. Interview with o f f i c i a l s of North American L i f e Co. July 3, 1973.  Insurance  Interview with Mr. D. Facer of Wall and Redekop Corporation Ltd. June, 1973. Is There a Case f o r Rent Control. Background Papers and Proceedings of a Canadian Council on S o c i a l Development Seminar on Rent P o l i c y , 1973* 168 pp. Karp, A l l e n . "Rental Incomes Property or Business?" Canadian Tax Journal. 16 (May-June, 1968). pp. 191-197. Morgan, Shelagh E. Guide to Rent Control and the Increase of Rents. Londons Shaw and Sons Ltd. 1966. 200 pp. Nevitt, Adela A. The Nature of Rent C o n t r o l l i n g L e g i s l a t i o n i n the United Kingdom. Londons Centre f o r Environmental Studies, 1970. 23 pp. "New  York Eases Rent Controls." (February, 1972). p. 10.  Apartment Owners Journal  Papers on Real Estate and Income Tax. Don M i l l s , Ontarios The Real Estate Institute of Canada, 1972. 60 pp. "Processing Plans Through Government—It's a Nightmare Developers Live With." Canadian Building. 23(2) (February, 1973). PP. H' 2Q~. I  Real Estate I n s t i t u t e of B r i t i s h Columbia and Greater Vancouver Real Estate Board. Submission on "Proposals f o r Tax Reform." Presented to the Standing Committee of the House of Commons on Finance, Trade and Economic A f f a i r s , 1970. 14 pp. S t a t i s t i c s Canada. Census of Canada. P r i n t e r , 1966. Volume 1.  Ottawas  Queen's  S t a t i s t i c s Canada. Prices and Price Indexes. Ottawa: Queen's Printer, May, 1970; December, 1972; and February, 1973. "Vancouver Urban Renewal Study: Apartment D i s t r i c t s . " Technical Report No. 2. City of Vancouver, 1968. White, P h i l i p H. The Case Against Rent Control. Toronto Canadian Council on S o c i a l Development, 1972. 15 pp  

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