Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

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

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1974_A4_6 L49.pdf [ 8.96MB ]
Metadata
JSON: 831-1.0092959.json
JSON-LD: 831-1.0092959-ld.json
RDF/XML (Pretty): 831-1.0092959-rdf.xml
RDF/JSON: 831-1.0092959-rdf.json
Turtle: 831-1.0092959-turtle.txt
N-Triples: 831-1.0092959-rdf-ntriples.txt
Original Record: 831-1.0092959-source.json
Full Text
831-1.0092959-fulltext.txt
Citation
831-1.0092959.ris

Full Text

THE ECONOMIC REASONS FOR THE SHORTAGES OF RESIDENTIAL • RENTAL ACCOMMODATION IN GREATER VANCOUVER by ROBERT CALDERWOOD LEVINE B.Sc, University of British Columbia, 1971 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN BUSINESS ADMINISTRATION in the Faculty of Commerce and Business Administration We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA March, 1974 In p resent ing 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 f o r 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 t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e fo r reference and s t u d y . I f u r t h e r agree that permiss ion for e x t e n s i v e copying of t h i s t h e s i s fo 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 p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l ga in s h a l l not be a l lowed without my w r i t t e n p e r m i s s i o n . The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada Date i Abstract In the last three or four years a shortage of residential rental accommodation has been developing in Metropolitan Van-couver. This shortage has been brought about by a continuing decrease in the annual number of apartment completions since 1969. To determine the cause of this shortage, this thesis concentrated on defining the reasons for the continuing de-creases in the annual number of apartment completions since 1969. Information on apartment land costs, construction costs, financing costs and operating costs were collected for the period commencing in 1964 and ending in 1972. Annual per-centage increases for each of these costs were calculated and compared with annual percentage increases in apartment rents over the time period. It was found that the capital costs of producing apart-ment buildings (construction and land costs) have been i n -creasing at a faster rate than rents in most areas of Metro-politan Vancouver between 1964 and 1972. More rapid increases in capital costs than in rents reduce the yield that i s avail-able from apartment investment and thus reduce developers* incentive to produce new apartment rental units. An analysis of apartment operating costs indicated that they have been increasing at the same rate as rents for buildings of similar ages operating between 1964 and 1972. Thus, operating costs have not been responsible for the recent reduction in construction of apartment rental units. Investigations were also carried out to determine what effects the amendments to the Income Tax Act have had on the continuing production of apartment rental units. It 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 individual investor, who was largely responsible for the tremendous growth in apartment construc-tion during the 1960*8, from investing in new apartment buildings. An examination of the procedures, costs and the lengths of time required to obtain municipal approval of apartment development applications was carried out for the Cities of North Vancouver and Vancouver and the D i s t r i c t of Surrey. It was found that municipal regulations often substantially increased the costs of apartment development and delayed the i n i t i a t i o n of apartment construction for lengthy periods of time. This was found to be especially true where land use contracts were used. An analysis of the expected future demand for multi-family accommodation to the year 1991 was conducted. It was discovered that approximately 10,000 additional units per year w i l l have to be provided in Metropolitan Vancouver until 1991. With the present rate of apartment completions, this demand w i l l not be met. i i i Only i f rents rise high enough to make apartment invest-ment attractive relative to other forms of investment w i l l this demand be met. Increasing rents could cause governments to implement some form of rent control. A study of rent con-t r o l systems i n the United Kingdom and New York City indicated that they do l i t t l e to solve housing problems and aggravate the shortages that exist. iv Contents I Introduction . . 1 II Demand Forecasts For Multi-Family Rental Accommodation . . . . . . 1^ Population Analysis 1^ Residential Demand Analysis 19 Analysis of Future Apartment Shortages 25 Summary and Conclusions 27 III Rent Levels, Construction, Land and Financing Costs . . . . . . . . . 28 Rent Increases, 1964-1972 29 Land Costs 33 Construction Costs 4-1 Financing Costs ^7 Capital Costs, Financing Costs, Rents and Yields ^9 Summary and Conclusions 55 IV The Impact Of The New Federal Income Tax Act On The Residential Rental Market 56 The New Tax Regulations As They Affect Real Estate Transactions 56 The impact Of The Income Tax Act On Investment In Residential Rental Property 66 Summary and Conclusions 72 V The Processing Of Apartment Development Permits By Municipal Authorities 73 North Vancouver—Outright Use 7^ Land Use Contracts 79 North Vancouver—Land Use Contracts 81 City of Vancouver 83 D i s t r i c t of Surrey 86 Summary and Conclusions 90 VI Operating Costs 92 Operating Costs as Presented in Real Estate Trends 9^ Operating Costs Presented i n the Dale-Johnson Dissertation 96 Summary and Conclusions 102 VII Rent Controli Is It A Solution Or Aggravation Of Pricing Policies In The Housing Market? . . . . 103 The United Kingdom Experience 104 The New York Experience 108 The Case Against Rent Control 110 Summary and Conclusions 114 VIII A Study Of The Pr o f i t a b i l i t y Of Some Greater Vancouver Apartment Buildings 115 Method of Analysis 115 Limitations of the Sample 117 The Results of the Apartment Investment Analysis 118 Summary and Conclusions 130 IX Findings And Conclusions . . 133 Rents and Construction, Land and Financing Costs 133 The Income Tax Act 138 Municipal Approval for Apartment Developments l 4 l Operating Expenses 148 Future Demand for Apartment Units 149 Rent Control 150 A Comparison of the P r o f i t a b i l i t i e s of Some Vancouver Apartment Buildings 153 The Future of the Apartment Rental Market in Greater Vancouver 155 Footnotes 157 Bibliography 2.6k Tables 1. Multiple Family Completions In Selected Areas Of Metropolitan Vancouver, 1966-1972 3 2. Multiple Family Dwellings Registered As Strata Lots In Selected Areas of Metro-politan Vancouver, 1968-1972 4 3. Overall Vacancy Rates In Multiple Family Rental Accommodation In Metropolitan Vancouver, 1963-1972 6 4. Population Growth Trends, Metropolitan Vancouver And Selected Areas, 1966-1991 . . . . . . 15 5. Projected Population By Age Groups, Lower Mainland, 1971-1991 17 6. Average Household Size, 1951-1991 18 7. Income Distribution By Households, Metropolitan Vancouver 20 8. 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 Total Housing Required, 1965-1991. . . . 24 10. Average Percentage Rent Increases in Metro-politan 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 12. Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972 35 13. Percentage Changes In Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972 38 14. Apartment Completions As A Percentage Of Total Stock In Selected Areas Of Metropolitan Vancouver, 1966-1972 40 15. Residential Construction Price Indexes. . . . . . . 45 vii;J 16. Interest Rates On Conventional Mortgage Loans In Canada, 1964-1972 48 17. Average Annual Increases In Construction Costs, Financing Costs, Land Costs And Rents In Selected Areas of Metropolitan Vancouver, 1964-1972 51 18. Average Annual Increases In Capital Costs, Financing Costs And Rents In Selected Areas Of Metropolitan Vancouver, 1964-1972 52 19. Total Operating Costs As A Percentage Of Gross Income For Frame And Concrete Apartment Blocks In Metropolitan Vancouver, 1966-1972 . . . . 95 2 0 . 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 100 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 . . . . . 119 r i i i Figures 1. Apartment Site Values For Selected Areas In Metropolitan Vancouver, 1964-1972 37 2. Residential Construction Price Indexes . . . . . . . 44 Acknowledgements This thesis could never have been written without the aid I received from many members of the real estate industry in obtaining the information and formulating the ideas that are contained in the thesis. 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 Van-couver and the Dis t r i c t of Surrey. I would also like to thank Professor Stanley W. Hamilton for his suggestions and advice, much of which have been followed in the preparation of the manuscript; and my parents whose concern and support ensured the conclusion of the thesis. 1 CHAPTER I Introduction Between the years i 9 6 0 and 1972 there was a rapid expansion in the number of multiple family housing starts in Metropolitan Vancouver. During this period approximately 65 per cent of the current total multiple dwelling stock was constructed. This rapid expansion was brought about by in-creased demand for rental 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 partly by the migration of other Canadians and foreigners to B.C., and the Lower Mainland in particular} partly by the rising costs of land, construction and financing in the home ownership sector which squeezed some potential home buyers into the apart-ment marketj and partly by the increasing affluence of the population which allowed youngt single people to enter the apartment market and significantly 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 his per-sonal after-tax cash position 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 off a reduction in the return 2 on his investment for a large tax saving. The professional "brought about an expansion of the market because he was willing to accept a lower return and lower rents which re-sulted in a misallocation of resources towards apartment investment and away from other types of housing."'* Table 1 shows that the peak of apartment investment was reached in 1969 when 12,525 units were constructed. Since then the number of apartment completions have fallen off dramatically. The extent of the reduction in apartment i n -vestment since 1969 i s minimized in Table 1. Since 1966, when the Strata Titles Act was passed by the Legislature allowing ownership of individual units in multi-family dwellings among other things, the number of apartment units constructed for outright sale have increased dramatically. Table 1 does not differentiate between units constructed for ownership and units constructed for rental. It i s therefore necessary to refer to Table 2 which presents the number of units designed for ownership between 1968 and 1972. Sub-tracting the total units constructed per year in Table 2 from the corresponding totals i n Table 1 demonstrates that the drop-off in the supply of rental accommodation is more significant than appears from Table 1 alone. Assuming that a l l those units in Table 2 are new multi-family construc-tion, then the total amount of apartment units constructed for the rental market are 7.697 in 1970, 7»969 in 1971 and 5,512 in 1972. 3 Table 1 Multiple Family Completions* In Selected Areas Of Metropolitan Vancouver, 1966 to 1972 Location Number 1966 1967 of Dwelling Units Completed 1968 1969 1970 1971 1972 Vancouver City 2359 3649 4626 6106 1290 2716 1936 Burnaby 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 Port Coquitlam 4 59 130 231 140 426 64 Port Moody — 102 158 134 370 75 — Richmond 154 — 69 696 1424 845 996 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 Total 4673 7293 10032 12525 8601 9873 7808 * Includes both apartment and row housing. Source: Central Mortgage and Housing Corporation staff. 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 — — 38 222 793 Burnaby and Richmond 181 301 920 755 Coquitlam, Port 102 44 162 44 4 Coquitlam and Port Moody Delta, Surrey and White Rock — 295 211 451 233 New Westminster — — — 62 North Vancouver — 78 182 172 399 West Vancouver 10 $0 Total 102 598 904 1904 2296 Source* Mr. Ron Roberts (U.B.C.) unpublished information. 5 That the lack of investment i n rental accommodation i n recent years i s severely affecting the rental market i s illustrated by Table 3 which presents the vacancy rates for Metropolitan Vancouver between 1963 a n d 1972. Since 1970, except for a brief period in the summer of 1971» the vacancy rate has been f a l l i n g steadily to the record low of 0 .6 per cent in December, 1972. For a l l practical purposes six 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 rental accommodation in the next few years. One of the goals of this dissertation i s to examine those factors responsible for the large decline in the con-struction of rental accommodation since 1969. Greater land, construction and financing costs helped to curta i l the market since rents were dragging behind these increases. The in -creased costs reduced net return on investment so that many investors were unwise to continue in 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 yield on investment. Many purchasers were prepared to pay high prices for frame apartment buildings and many of them were built because they were profitable for 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. 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 SourceJ 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 their yield as investments. With the present level of rents i t i s no longer attractive to build such apartments i f they have to be sold on a yield basis. Obstacles placed before the apartment developer by muni-cipal authorities and tenant organizations have also contri-buted to the decline in the number of rental starts. The "red tape", delays and high municipal processing and other, charges involved in obtaining municipal approval for apart-ment 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 for the landlord to reduce his 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 legislation aimed at controlling rent levels. A l l of the above factors have contributed to the reduced activity in the construction of rental accommodation in re-cent years. The flow of funds i s being diverted into other forms of real property. The passage of the Strata Titles Act has aided the diversion of funds away from rental acco-modation. As Table 2 shows, the importance of condominiums in the market is increasing steadily. Condominiums are more attractive to developers because they can be sold at higher prices per unit since the purchasers are buying l i v i n g acco-modation not investments. Commercial and industrial properties, although faced with many of the same cost increases as in the 8 r e s i d e n t i a l sector, are more a t t r a c t i v e investments. There i s l i t t l e tenant activism, increased costs are more r e a d i l y passed on, and generally the relationship between landlord and tenant i s on a more business-like footing. Besides the examination of factors responsible f o r re-duced apartment construction, the paper concentrates on two other areas associated with the operation of the r e n t a l market• F i r s t l y , demand forecasts f o r r e n t a l accommodation to the year 1991 are presented i n order to give some dimensions to any shortage of ren t a l accommodation that may be expe-rienced i n the future. Secondly, an analysis of operating costs and y i e l d s of 48 apartment properties, o r i g i n a l l y researched by R. Dale-Johnson,^ was ca r r i e d out with the intention of i s o l a t i n g the reasons why some blocks were pr o f i t a b l e while others were not. Throughout t h i s study the author was continually hampered by h i s i n a b i l i t y to obtain correct and s u f f i c i e n t data on apartment construction, operation 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 to be that those deve-lopers, builders and lenders contacted (the majority of the larger operators i n Vancouver) considered the information requested to be c o n f i d e n t i a l and therefore not suitable f o r publication; unknown; or too d i f f i c u l t and time consuming to discover. Consequently, the observations and conclusions 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 belief of the author that they do indicate the general direction in 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 levels, published, most notably, by Central Mortgage and Housing Corporation, Statistics Canada, and the Greater Vancouver Real Estate Board. The following paragraphs give a brief outline of the topics covered in each chapter and the sources of data used. Chapter II presents demand forecasts for multiple family housing in Greater Vancouver. The forecasts are based on material published by Statistics Canada; an un-published consulting report prepared for a leading Vancouver developer by Acres Western Limited?-' and a report prepared by the Planning Department of the Dist r i c t of North Van-couver. The purpose of presenting this data i s to give some dimensions to the expected future shortages in rental accommodation. Chapter III, the f i r s t chapter to examine factors re-sponsible for reducedepartment construction, i n i t i a l l y i n -vestigates the average annual percentage increases in rents for bachelor, studio, one- and two-bedroom suites in 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 Statistics Q Canada. 10 Similar average annual percentage increases in con-struction, land and financing costs were calculated for the period 1964 to 1972. When researching these trends in costs, i t was originally planned to present a compilation of data obtained for specific apartment projects constructed during the time period in Metropolitan Vancouver. It was found, however, that not enough, sufficiently accurate data could be obtained to present informative results. Consequently, a Statistics Canada price index was used to convey the extent Q of increasing construction costs. Increases in land prices for 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 local data. Trends for changes in financing costs were established by using information drawn from quarterly reports of the Finan-11 12 c i a l Post and from Canadian Housing Statistics. Increases i n rents were compared with increases in con-struction, land and financing costs between 1964 and 1972. The purpose of this exercise was to demonstrate that one of the reasons for the recent slow down in the construction of rental accommodation was due to the fact that faster increases in capital 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 capital 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 amendments to the Income Tax Act, which became law in 1972, as they affect real estate transactions. Prior to 1972, i t was advantageous for professionals with high marginal tax rates to invest in r e s i -dential rental property because paper losses created by the use of capital 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 desirability of apartment investment for pro-fessionals has greatly diminished. Chapter V investigates a third group of important fac-tors which have been partly responsible for the reduction in the number of apartment starts 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 for apartment projects have had the effect of discouraging and/or increasing the cost to the investor of apartment investment. The chapter examines the procedures used in the Cities of North Vancouver and Vancouver and the D i s t r i c t of Surrey for 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 in reducing costs to the developer. Charges levied directly 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 apart-ment investment in the last few years in Metropolitan Van-couver, Average operating costs as a percentage of gross income that were presented in Real Estate Trends between 1964 and 1972 were analyzed to determine i f the ratio 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 origin-a l l y collected by Dale-Johnson for his thesis were examined.1 This data consisted of operating statements for 48 apartment buildings collected for 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 apart-ment investment has been affected by these costs. The dramatic decreases in apartment construction since 1969 in Metropolitan Vancouver have led to a shortage of rental accommodation as verified by Table 3« It i s expected that rents w i l l rise partly because of the shortage and partly because of the low returns that are now available from apartment investment. Already, some rent increases and 13 the current shortage of rental dwellings are beginning to stimulate tenant unrest and pressure i s being applied on local and Provincial governments to consider some form of rent control legislation. Chapter VII i s a study of rent control policies in New York City and the United Kingdom where controls have been in existence for many years. The purpose of the study i s to review the adverse effects that such policies have had on the rental housing market in the hope that the lessons learned w i l l discourage any form of rent control in B.C. Chapter VIII i s a study of the yields obtained by a sample of 48 apartment blocks located in various munici-pa l i t i e s of Metropolitan Vancouver. The sample was obtained and the yields calculated by Dale-Johnson and the results were presented i n his 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 10 .0 per cent and those having an average rate of return of more than 10 .0 per cent excluding capital gains or losses. Various physical, financial and operating characteristics of the two groups were then calculated and analyzed to determine the fundamental reasons for the d i f f e r -ences in 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 rental accommodation in Metropolitan Vancouver. 14 CHAPTER II Demand Forecasts For Multi-Family Rental Accommodation Population Analysis As was shown in Table 1 in the last chapter, the number of multiple family housing units being constructed in Metro-politan 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 in Table 3« To determine i f these shortages w i l l increase, remain the same or decrease in future years, i t i s helpful to predict the future demand for rental accommodation. Table 4 summarizes the population projections for selected areas of Metropolitan Vancouver. It i s conservatively estimated that the population of the Vancouver Metropolitan Area w i l l increase from 1 ,032,000 to 1 ,761,000 during the 1971 to 1991 time period. This projection is based on an annual growth rate of 2.7 per cent per annum. A less con-servative projection using historical rates of migration and survival indicates the population of the Vancouver Metropoli-tan Area w i l l increase to 2 ,126,000 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 525 ,600. The 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. 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 White Rock 7,787 9 ,500 10,300 11,400 12,500 13,600 Northern Burrard Pen. 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 Port Moody 7,021 11,400 14,400 17,400 21,400 25,400 Source« Statistics Canada, Census of Canada, 1966, Vol. 1 and Acres Western Ltd., Residential Market Opportunity Study, unpublished, 1971, pp. 6-7, 16 An attempt has been made to identify the characteristics of the anticipated future population. It i s on the basis of such considerations as age, households and income composition that the requirements for the various housing types can be determined. The future age composition of the Lower Mainland popula-tion i s presented in Table 5. which reveals the population i n relevant age groups for the period 19.71 to 1991. There w i l l be a major increase in the population between the ages 25 and 44 and decreases in the population between the ages 20 and 24 and over 65 by 1991. Despite decreasing family size, the larger number of families w i l l result in an increase in the 0 to 14 group. Average household sizes are expected to decline during the 1971 to 1991 period. Projected household sizes for Metropolitan Vancouver and various sub-areas are illustrated in Table 6. Although a l l major areas of "Metro" are expected to reflect the trend towards smaller families, not a l l w i l l experience this trend to the same extent. The average number of persons per household in Vancouver City w i l l decline from 2.8 in 1966 to 2.6 in 1991. while family size in 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 in 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 ^J6 % 1981 $ 1986 0-4 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 I 8 . 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 65- 9 .4 8.7 8.5 8.1 7.8 Source1 Statistics Canada, op. c i t . and Acres Western, op. c i t . , D . 8 . Table 6 Average Household Size 1951-1991 1951 I 9 6 I 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 Statistics Canada, op. c i t . and Acres Western, op. c i t . , p. 10. I—1 00 19 be compared to the overall decline in Metro from 3 .2 to 3 ,0 persons during the 1971 to 1991 period. The future income distribution pattern i s shown in Table 7. The Economic Council of Canada reports in i t s 17 Sixth Annual Review ' that the real growth rate was 2.7 per cent per annum for the years 1950 to 19^7. To reduce the possibility of over-estimating, Acres Western used an average annual increase in real income of 2.5 per cent. This growth rate w i l l also be used in this report. On this basis, 5 7 . 0 per cent of the Metropolitan Vancouver population w i l l have incomes i n the $10,000 to $14,999 group by 1991. Residential Demand Analysis During the 1951 "to 1966 time period, the total number of single-family dwellings increased from 114,510 to 182,575 units in 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 175 19 per cent. 7 Examination of these historical housing st a t i s t i c s shows the rapid growth of single-family accommodation i n suburban areas and the shift from single-family to multi-family housing that i s occurring in Vancouver City. Based on previously mentioned population projections, the projected decline i n average household size, and allowing for some replacement of existing housing, estimates of future housing requirements have been made for Metropolitan Vancouver Table 7 Income Distribution By Households* Metropolitan Vancouver 1951 1961 1971 1976 1981 1986 1991 Less than $ 3 , 0 0 0 $ 3 , 0 0 0 - $ 5 , 9 9 9 51.7 4 5 . 3 17.4) ) 42 .9) 40.5 30.6 20.7 10.8 0.9 $ 6 , 0 0 0 - $ 6 , 9 9 9 3 . 0 * * 12 .3 8.9 7.2 5.5 3.8 2 .0 $ 7 , 0 0 0 - $ 9 , 9 9 9 — 17.9 19.1 19.7 20.3 20.9 21.6 $ 1 0 , 0 0 0 - $ l 4 , 9 9 9 — 6.4 23.2 31.6 40.0 48.4 57 .0 $15,000+ — 3.1 8 . 3 10.9 13.5 16.1 18.5 * Real household income projected at 2.5 per cent per annum. ** Above $ 6 , 0 0 0 in annual income Sources Statistics Canada, op. c i t . and Acres Western, op. c i t . , p. 11. O 21 and various municipalities. It i s estimated that the total housing stock in Metro w i l l have to increase by approxi-mately 310100° units during the next 20 years. To translate expected future population size, age dis-tribution, average household size and income into generalized housing requirements, i t i s necessary to rely somewhat heavily on historical trends. This is an obvious weakness to the approach. In addition, i t i s d i f f i c u l t to assess accurately future changes in taste, and to ascertain the effects of changes in building costs, land costs and financing costs. As presented in Table 5».the percentage of people in the 25 to 44 year age groups are expected to increase signi-ficantly over the next 20 years. Since i t i s from these groups that the main demand for single-family housing occurs, i t would be expected that the predominance of this type of housing would increase. Correspondingly, the percentage of those in the 20 to 24 age group and the over 45 groups are expected to decrease considerably signalling a decrease in demand for multi-family housing. However, the reasoning i s not as simple as this would suggest. Increasing building costs, land costs and financing costs are placing greater pressure on the need for more e f f i -cient land use, that i s , multi-family housing instead of single-family. It i s therefore expected that the total housing stock w i l l more than ever in the future be made up of multi-family housing. 22 Table 8 presents estimates of future single-family and multi-family housing units required for growth and replace-ment. The division of total housing requirements into single-and multi-family housing needs is based on histor i c a l trends and the expectations that scarcity 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 historic rates of development w i l l con-tinue unaffected by future municipal development policy , . . 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 total housing units required. The South Shore municipalities (Richmond, Surrey, Delta, and White Rock) w i l l increase their share of total new housing starts from 21.4 per cent during the 1971 to 1976 period to 37 .0 per cent by the 1986 to 1991 period. Multi-family housing units w i l l increase from 27.1 per cent of additional new housing i n the 1971 to 1976 period to 52.6 per cent i n the 1986 to 1991 period. The North Burrard Pen-insula w i l l be called upon to supply at least 23,000 new units over the next 20 years, 39.7 per cent of those supplied in the 1971 to 1976 period being multi-family, rising to 63.6 per cent in the 1986 to 1991 period. The City of Vancouver w i l l require 80,000 to 100,000 new 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++ 1971-76 1976-81 1981-86*. 1986-91 S.F. M.F. S.F. M.F. S.F. M.F. S.F. M.F.' S.F. M.F. Vancouver City 3.398 22,009 1.900 17,000 1,600 17,400 1,400 18,800 1,100 20,400 North Burrard Peninsula 5.143 2,359 3.200 2,100 3,000 2,600 2,600 3,400 2,400 4,200 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 42 ,830 23,400 36,800 26,100 41,700 27,900 53,000 30,200 70,500 * Includes only single detached dwellings. ** Assumes an overall Metro. Vancouver population of l , ? 6 l , 0 0 0 by 1991. + Replacement rates J Vancouver City - % \ Metro. Vancouver - Jfo\ a l l other areas - 1%, ++ Covers 5£ year period (January, 1965 - June, 1970). Sourcei Acres Western, op. c i t . . p. 15. 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 % % % Vancouver City 86.7 90.0 91.6 93.1 94.9 North Burrard 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 ro 25 housing starts single-family detached dwellings in Vancouver w i l l decline from 10 .0 per cent between 1971 and 1976 to 5.1 per cent by 1991. The relative availability of land in Surrey, Richmond, and Delta w i l l permit these municipalities to provide the majority of single family detached dwellings constructed in the Metro area during the next two decades. It i s expected that these municipalities w i l l sustain a relatively balanced housing mix, but that they too w i l l feel the increasing pressure towards multi-unit housing developments in order to provide accommodation at reasonable prices. Analysis Of Future Apartment Shortages It i s expected that a total of 202,000 units of multi-family housing w i l l have to be constructed during the next twenty years to meet projected demand in Metropolitan Van-couver. Some of these units w i l l be for sale to homeowners, while the remainder w i l l be retained in the rental market. It i s d i f f i c u l t to divide the projected demand for multi-family units into those required for ownership and those required for rental. Generally, i t can be assumed that the higher income groups w i l l prefer ownership of their 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 statistics available on which to base such an estimate. Instead, an examination of the overall picture, that i s , of both condominium and rental 26 units demanded, w i l l be conducted. A demand for 202,000 multi-family units in twenty years requires that approximately 10,000 units must be constructed per year. Based on the number of completions of multi-family units in 1972 (Tables 1 and 2), this 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 flux in 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 in the peak year of 1969• In addition, an i n -creasing proportion of those completions were for sale to individual homeowners rather than for rental to tenants. 29.4 per cent of multi-family completions were registered as strata lots in 1972 as opposed to 20.0 per cent the previous year and only 5.0 per cent in 1969. It i s expected that the construction of multi-family units for rental purposes w i l l continue to decrease over the next few years u n t i l rents are at such a level as to make rental development profitable to the developer-investor. Correspondingly, the supply of multi-family condominium units should increase at a greater and greater rate. It i s foreseen that as long as present conditions con-tinue there w i l l be extensive shortages of units for rent. The beginning of the shortage i s already being seen, as the announced vacancy level of 0.6 per cent in Metropolitan 27 21 Vancouver for December, 1972 demonstrates. Many developers, at present, are discontinuing rental construction and con-centrating on condominium development where the profits are considerably greater. Condominium and rental development together, may meet the goals of 10,000 new units per year but, i f this 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 for individual ownership and a small proportion for rental. This w i l l lead to a shortage of rental 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 in 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 in total since expectations of an over-supply of condo-miniums and an under-supply of rental units are foreseen. The succeeding chapters examine the reasons for the unprofitable nature of rental units which are resulting in reduced construction and consequently, increasing shortages. 28 CHAPTER III Rent Levels, Construction, Land And Financing Costs It has been stated that because rents have been dragging behind increases in 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 declining. The purpose of this chapter i s to determine i f the statement i s true by comparing increases in rents with in-creases in construction, land and financing costs between 1964 and 1972. Before doing this, however, i t should be emphasized that larger increases in capital costs (land and construction costs) and financing costs than i n rental rates will,only reduce the yield on new apartment blocks coming into opera-tion for the f i r s t time and not on blocks that are already in existence, unless they are re-financed. Once a block i s constructed, i t s capital cost i s fixed at that point of time and i t does not matter how capital costs change subsequently, they w i l l not affect the yield of the existing block. Another point worth noting i s that several authorities 2-* have discovered that as a block gets older, operational costs increase faster than rents thus reducing profits and yields; the main reason for loss of p r o f i t a b i l i t y being increased 29 repairs and maintenance. However, t h i s section i s not con-cerned with how a property's p r o f i t margin declines as the block gets older but only with why the y i e l d on a block constructed, say, i n 1970 i s lower at a p a r t i c u l a r point i n time of i t s operation than a block constructed, say, i n 1966 at a s i m i l a r operational time point. A study of some apartment properties, the res u l t s of which are presented i n a l a t e r chapter, indicates that opera-t i o n a l costs as a percentage of gross income have remained f a i r l y constant f o r a given year of operation ( f i r s t year, second year, e$ cetera) regardless of when the block was constructed. For example, i t was found that blocks con-structed i n 1968, i n 1969 and i n 1970 a l l had s i m i l a r oper-ating costs during t h e i r f i r s t and second years of operation. Consequently, operational costs do not play a role i n t h i s section of the anal y s i s . Rent Increases. 1964 to 1972 Two sources of data were used to determine the average annual percentage increases i n rents i n Metropolitan Vancou-ver between 1964 and 1972. The f i r s t source i s from informa-?4 t i o n published by the Real Estate Board of Greater Vancouver and the second i s from the Residential Rent Index published by S t a t i s t i c s Canada. 2^ The Real Estate Board publishes l i s t s of t y p i c a l rents i n selected areas of Metropolitan Vancouver every second year. From 1966 onwards the rents published were f o r suites of 30 average quality in recently constructed, modern apartment buildings. The suites were on the third floor and of average size and quality for the area surveyed. No special premiums were attached for orientation or view and parking charges were not included. The 1964 rental survey, however, differed from that i n succeeding years. Instead of surveying suites on the third floor of modern buildings, the survey was conducted on second floor suites of buildings of a l l ages. Since older buildings tend to have lower rents because of reduced amenities, the typical rents reported i n 1964 tended to be deflated relative to rents reported in succeeding years. Also, second floor suites generally rent at lower rates than third floor ones because of the poorer views available. These two factors meant that the survey conducted in 1964 was not s t r i c t l y comparable with those done in later years. Thus, the large percentage rent increases reported in Table 10 for 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 1964-66 1966-68 1968-70 1970-72 J> Jo % % Bachelor 25.4 12.9 Studio — ~ — 9.4 One Bedroom 15.4 13.5 13.5 10.3 Two Bedroom 17.0 19.9 11.3 10.1 Average 19.3 15.^ 12.4 9 .9 Source 1 Real Estate Trends in Metropolitan Vancouver. Greater Vancouver Real Estate Board, 1964-1972. 31 Table 11 presents the average annual percentage increase in rents for selected areas of Metropolitan Vancouver by suite type between 1964 and 1972. The overall average annual rent increase in Metropolitan Vancouver, taken as a whole, was approximately 6 per cent. Bachelor suites led 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 New Westminster, with increases of 9.3» 9.6 and 9.0 per cent, respectively. Richmond had annual rent increases of 1.4 per cent, by far the lowest for Metro. Comparing the rent increases reported by Real Estate  Trends with those published by Statistics Canada in the Resi-dential Rent Index, i t i s found that the Index reports lower annual percentage increases than Trends. Between 1964 and 1971 the Residential Rent Index for Vancouver rose from 100.1 to 124.6. 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 differing sampling techniques used in the two surveys. The Index is compiled by sampling a broad but specific group of urban families and reflects the price 32 Table 11 Average Annual Percentage Increase In Rents For Selected Areas Of Metropolitan Vancouver By Suite Type, 1964-1972 Area Bach. Studio 1-Bdrm. 2-Bdrm. Average Vancouver City 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 Kitsilano frame 8 .5 4.4 7 .6 9 .5 7 .5 highrise — 2.0 5.8 6.8 4 .9 Kerrisdale 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 Average 8.7 * . 7 6.1 6.3 6 . 0 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 in size from two adults to two adults with four children. They have annual incomes ranging from $ 2 , 5 0 0 to $ 7 , 0 0 0 . Thus, the Index does not emphasize as much as Trends, increases in rents due to better and more amenities. The Index samples rental rates on a broad basis and does not differentiate between older buildings with fewer amenities and more modern blocks with more amenities. Trends, on the other hand, concentrates only on modern blocks (except in the 1964 survey) which usually rent at premium rates. For the forthcoming comparisons of rental increases with capital cost increases, i t w i l l be more appropriate to use the Trends survey as a basis because i t reflects rents on recently constructed blocks. Since this study i s only interested in contemporary trends in capital costs, the comparisons with modern rents w i l l be more effective. Land Costs Land costs for apartment projects have increased at a phenomenal rate in Metropolitan Vancouver over the last eight years, although there now appears to be a levelling off occurring. The data for this section of the study were obtained from average figures published in Real Estate Trends between 1964 and 1972. The apartment site values presented in Table 12 are extracted from Real Estate Trends. They were based on sales occurring in 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 for 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 for site 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 unit. This depends on the floor space ratio and the permitted maximum site coverage. The floor space ratio and maximum site 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 for one apartment unit i s less i n dollar terms than for other parts of Metropolitan Vancouver. In 1972 land was selling i n the West End for $13 .00 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 ; in Kitsilano the land cost per unit was $ 3 , 8 0 0 to $4 ,500, 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 Price Per Square Foot 1964 $ 1966 1968 1 ^ 0 12|2 Vancouver City 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 4.0- . 5 . 0 4.7- -6 .0 6.0-•7.5 East Hastings — — 4.0- •5.0 4.2- -5.0 4 .2- •5.0 New 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 — — 1.0- •1 .3 + — 2.0- • 2 . 2 + West Vancouver 2.0-•3.9 3 . 0 -•4.0 3.5- 4.7 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 Burnaby 1.0- •1.9 1.2- •2.0 1.8- •4.4 2.5- •4.2 2 . 5 - 5 . 0 * Land prices for sites 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 in Marpole was $3 ,500 to $4,000, with a cost per square foot of $6.00 to $7 .50; and in the East Hastings area land sold for "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 in the city. 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 in Burnaby, with a cost per unit of $2 ,500 to $ 3 , 3 0 0 ; in North Vancouver the cost per unit was $2,000 to $4 ,500, with a corresponding per square foot cost of $6.00 to $7 .50; 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; in Coquitlam the land component per unit was between $2,000 and $2 ,500, while the per square foot cost was $ 3 . 3 0 to $ 3 . 9 0 ; Surrey experienced the lowest land costs in 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 for sites. Looking at Figure 1 and Table 13, i t can be seen that within Vancouver City, the West End and Marpole have shown the greatest increases in land costs between 1964 and 1972. Land prices increased between 14.4 F I G U R E 1 I 4-.00 i z o o 4 J 0 - O O - t o -6 o u. UJ DC < HI a ax u o a. 8 0 0 + 6 . 0 0 + o 4 A P A R T d E M T 5ITE1 V A L U E S FOR I M M E T R O P O L I T A N V A N C O UVER S E L E C T E D 1 3 6 4 - 7 3 / N f 2 - E A S W E - S T £ K I D 5 O 0 T H G R A . K J V I L L E K I T 5 J L A N J 0 i ^ M A ^ R P O L E W / E S T V A N C O U V E R . N O R T H V A N / C O U V E R E A S T H A S T I N G S N£W W E S T M ? ^ STER. BUfcA/ABV 1964-5 0 U R C E ' , T A B L E 12, 4-1 9 6 6 4-Y E A R 1 9 7 0 1372. Table 13 Percentage Changes In Apartment Site Values In Selected Areas Of Metropolitan Vancouver, 1964-1972 1964-66 1966-68 1968-70 1970-72 Average Anni Change % % % % Vancouver City West End 23.1-35.8 27.3-50.0 0.0-35.7 16.7-36.8 14.4-27.6 South Granville 1.1-6.3 36.8-55.6 10.7-25.0 5.0-16.1 11.4-12.8 Kitsilano (10.8)-35.1 25.0-53.8 25.0-28.0 0.0 9.2-14.5 Marpole 13.2-17.6 66.7-100.0 17.5-20.0 25.0-27 .7 22.9-31.6 East Hastings — 0.0-3.8 0.0 0.0-1.0 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 West Vancouver 2.6-50.0 16.7-17.5 48.9-50.0 0.0 9.9-20.3 Coquitlam — — 110.7-200.0 2 . 7 - 8 . 3 29.1-56.3 Richmond — — 11.1-112.0 13.2-180.0 35.0-45.0 Burnaby 2.6-20.0 50.0-125.6 0.0-38.9 0.0-20.5 18.8-20.4 Average 11.5-38.0 42.2-80.5 21.4-51.0 7.4-33.5 19.6-22.6 Source 1 Based on Table 12. and 27.6 per cent in the West End during that time period, while in Marpole they increased between 22.9 and 31.6 per cent. The smallest increases in land costs were recorded in East Hastings ( 0 . 0 to 1.0 per cent) and in Kitsilano ( 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, 29 .1 to 56.3 per cent and 35 .0 to 4 5 . 0 per cent, respectively. The lowest price increases were recorded in 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 20.4 per cent, respectively. To correlate the increases in land costs with greater demand for sites relative to supply, i t i s worthwhile to examine Table 14 where the percentage increases in the total apartment stock between 1966 and 1972 are presented as an indication of demand for nine areas in Metropolitan Van-couver. Comparing the average percentage increases in total stock from 1966 to 1968, 1968 to 1970 and 1970 to 1972 with the average percentage increases in land prices for the same time periods, i t i s seen that in the 1966 to 1968 period, when the greatest percentage increases i n total stock were registered, there were correspondingly large increases in land prices. Similarly, in the 1970 to 1972 period when the percentage increases in total stock were at their smallest, land prices rose at their lowest rate. 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 City-West 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 Average 31.6 30.2 12.6 In the 1970 to 1972 time period land prices levelled off in four areas of Metropolitan Vancouver—Kitsilano, East Hastings, New Westminster and West Vancouver. For a l l of these areas except East Hastings, the levelling off i s readily explained by greatly reduced demand for sites as evidenced i n Table 14 by the reductions in the numbers of completions of apartment units. The East Hastings phenome-non, where completions continued at a steady pace, while land prices remained constant, i s best explained by a finding 41 from a 1968 survey 2^ which discovered that only 25 .0 per cent of the available apartment sites in that area were developed. Thus, despite the large percentage increase in the completion of apartment suites there was s t i l l a ready supply of sites which held land prices down. In the West End, South Granville and Marpole land prices continued to rise between 1966 and 1972 despite only marginal increases in demand. This peculiarity i s explained also by considering the supply of available sites. The 1968 survey-^0 reported that only 46.0 per cent of the apartment sites in the West End were unoccupied. In South Granville and Marpole only 3 5 . 0 and 37 .0 per cent, respectively, of the sites were unoccupied. Although the number of completions was small in these areas, the lack of apartment sites allowed the small demand to influence prices significantly. In North Vancouver and Burnaby the demand for sites was f a i r l y heavy between 1966 and 1972 and consequently, land prices rose unabated. Construction Costs Attempts to obtain construction costs for specific apart-ment projects in Metropolitan Vancouver resulted i n dismal failure. Over a three week period every major developer in Vancouver, twenty major construction firms and a variety of mortgage lending institutions were contacted in efforts 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 en-tangled with other factors that they were useless. One major developer who provides about 800 apartment units per year in Metro was unable to provide cost data because cost accounts did not exist for individual projects. Instead, accounts were set up by materials and labour used. For instance, they pur-chased $50,000 worth of glass in 1971 but they could not a l l o -cate costs to specific projects. Similar accounting problems were encountered with other firms, thus raising doubts in the author*s mind that developers themselves knew how profitable their projects were. It was found that the cost data that were obtained were often misleading and inaccurate. Problems were met where apartment projects differed drastically i n the quality of materials used and in the types of amenities supplied, both factors which affect costs significantly. In some projects for which data were obtained, construction strikes and bank-ruptcies during development severely affected costs. The end result was that many of these problems could not be re-solved and so a withdrawal to the use of national construction cost indexes had to be made. The use of Residential Construction Price Indexes-^1 i s unfortunate because data are only available at the national level and there are no allowances for local variations. The Indexes are also based on costs of materials and labour associated with a l l forms of residential construction and not just apartment units. They also have an unfavourable bias against highrise concrete structures mainly because the Building Materials Index does not apply as well to high-rises 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 con-crete i s only weighted 7 . 6 l per cent.^ 2 These proportions may be f a i r l y accurate for frame apartments and single family units but for highrises i t i s probable that the proportions of lumber and concrete would invert. Since, in 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 in construction costs are being overrated for highrise apartment blocks. Despite these weaknesses in the data i t was decided to u t i l i z e the Residential Price Indexes since they were the most reliable source of information and gave a f a i r indica-tion of how costs had increased in the last decade. Figure 2 and Table 15 present the Residential Price  Indexes between 1964 and 1972. The Building Materials Index is based on price movements of materials used in construction. Changes in Federal sales tax charges are reflected in the Index, Between 1964 and 1972 the Building Materials Index rose 51 .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) Year Materials Wage Rates* Fixed Weight Index** Implicit Index"*" 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 * Includes non-residential construction. ** Composite of Columns 1 and 2 . Materials weighted 62 .5 per cent and wage rates 37.5 per cent. + Adjusted by changes in profit margins and productivity for national accounts "Implicit Index for Business Gross Fixed Capital Formation". Source: Statistics Canada, Prices and Price Indexes. December 1972 and February 1973. trades in the building industry, rose 120 .9 per cent or at an annual average of 15 .1 per cent. The Wage Rate Index i s based on minimum rates given to workers on Federal Govern-ment construction contracts. Fringe benefit costs are not included and no adjustments are made to reflect the quantity and quality of work. The Fixed Weight Index combines price indexes for ma-terials used i n building construction with price indexes based on wage rates i n construction. The impact of changing profit margins and productivity are not reflected i n the Index movements and for this reason, i t i s thought to have an upward bias as an indicator of price changes in building construction. Between 1964 and 1972 the Fixed Weight Index rose 84.7 per cent, for an average annual increase of 10.6 per cent. The Implicit Index i s the most useful one for this analysis. Like the Fixed Weight Index i t i s a composite of material price and wage rates but unlike the Fixed Weight Index, i t accounts for changes in profit margins and produc-t i v i t y . It i s the most r e a l i s t i c index available that traces price movements in building construction and w i l l thus be the one used for the analysis of changing yields from apartment investment, that i s presented later in this chapter. Between 1964 and 1972 the Implicit Index rose 51.4 per cent which is equal to an annual average of 6.4 per cent. 47 Construction costs, unlike land costs increased at a modest rate between 1964 and 1972. 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 22.6 per cent per annum. Financing Costs Since the 1964 to 1965 period mortgage rates have risen rapidly i n Canada, This has been mainly due to economic expansion and increased consumer borrowing. Higher capital investment and increased consumption have had an inflationary effect on borrowing rates for a l l purposes, especially the financing of real 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 policy 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 institutions indicated that generally most soundly constructed apartment projects were able to obtain the prime conventional mortgage rate. It was also discovered that prime conventional rates in British Columbia differ only slightly from those prevailing i n the rest of Canada. Accordingly, Table 16 presents average prime conventional mortgage rates in Canada between 1964 and 1972 and also 48 Table 16 Interest Rates On Conventional Mortgage Loans* In Canada, 1964-1972 Year Mortgage Rate Percentage Increase Of Mortgage Rates Per Period % 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 is 3.77 per cent. * Average of prime conventional mortgage interest rates. Source* Central Mortgage and Housing Corporation, Canadian  Housing Statistics, 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 . 1 2 , 12.40 and 8.49 per cent, respectively. Since 1970 lending rates have decreased by about 12 .0 per cent. Between 1964 and 1972 prime conventional mortgage rates increased at an average of 3*77 per cent per annum. Capital Costs, Financing Costs, Rents And Yields If rents increase at a slower rate than construction, land and financing costs, then the yield that an investor can expect to obtain from apartment investment w i l l be re-duced assuming that the purchase price he pays reflects the increased capital c o s t s . ^ In the preceding sections i t has been assumed that con-struction costs have increased at the same rate regardless of location in Metropolitan Vancouver. This i s also true 37 for financing costs or interest rates. ' Land costs and rents, in contrast, rise at different rates in different locations. Thus, although increased construction costs and increased financing costs w i l l have similar effects on yields in any location, increases in land costs and rents, which dif f e r from location to location, w i l l have the effect of rendering some apartment di s t r i c t s more profitable than others, everything else being equal. It i s assumed in the following analysis that the yield obtained from an apartment investment i s equal to total revenues minus interest charges on debt and divided by the capital cost of the investment. It is also assumed that the loan to value ratio has remained constant for new apartment buildings over time. With these assumptions the result of greater increases in capital costs and financing costs than in rents i s that yields w i l l decline. Normally, to determine yield one must know what the operating expenses, depreciation charges, debt amortization, and investor's equity are for the investment. Since there has been a lack of suitable data to analyze how yields have actually changed over time for new apartment projects, i t has been assumed that these factors do not have a role in determining yields. Thus, the definition of yield used in this analysis will.only give an indication of how the pro-f i t a b i l i t i e s of apartment investment in the various areas of Metropolitan Vancouver have declined relative to one another. Table 17 which is a summary of the findings of this section presents the average annual percentage increases in construction, land and financing costs and rents in eleven areas of Metropolitan Vancouver. To aid i n the comparison of increases in capital costs with increases in rents, con-struction costs and land costs have been combined in Table 18 to produce an overall rate of increase for capital 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 Area Average Construction Costs Annual Increase In: Financing Land Costs Costs Rent! % % Vancouver City 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 Average 6.4 3.77 19.6-22.6 6.6 * The data i s for highrise buildings only. Table 18 Average Annual Increases In Capital Costs, Financing Costs And Rents In Selected Areas Of Metropolitan Vancouver, 1964-1972 Area Capital Costs"*" Financing Costs Rent: % % i Vancouver City 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 Marpole 10.5-12.7 3.77 6.2 East Hastings 4.8-5.1 3.77 9 . 3 New Westminster 9 . 0 - 1 0 . 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 1 0 . 0 - 1 3 . 4 3.77 4 . 2 Richmond 11 .0-12.6 3.77 1.4 Burnaby 8.4-8.6 3.77 9.6 For an explanation of how capital cost increases are computed see accompanying text. * The data i s for highrise buildings only. land cost data supplied by various developers and contractors indicates that for apartment blocks constructed in 1964, the land component as a percentage of total cost was approxi-mately 25.0 per cent within Vancouver City for frame apart-ment buildings; for highrise blocks, land made up about 15.0 per cent of total cost. In the suburban municipalities in 1964 the land cost represented about 16.0 per cent of total costs for frame dwellings and about 14.0 per cent for the concrete ones in West Vancouver. Using these weights for land costs and construction costs, i t i s possible to deter-mine by how much overall capital costs of apartment pro-perties 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 yield on investment of a l l the areas studied. Richmond was followed closely by Coquitlam as one of the more unprofitable areas. In Coquitlam capital costs rose at an annual average of 10.0 to 13.4 per cent, while rents only rose 4.2 per cent between 1964 and 1972. Apart-ment buildings coming into operation in Richmond and Coquit-lam during the late sixties and early seventies would be con-siderably less profitable than their counterparts commencing operation in the early sixties. Marpole and North Vancouver had similar increases in capital costs as Richmond and Coquitlam, but f a i r l y high 5^ annual increases in rents of 6 .2 and 8 .4 per cent, respec-tively, served to reduce the erosion of yields to some extent. In the West End, West Vancouver and South Granville intermediate annual increases in capital costs of 7.6 to 9 .6 per cent, 6.9 to 8 .3 per cent and 7.7 to 8 . 0 per cent, res-pectively, helped to make these areas relatively more pro-fitable than some others. However, the annual rent increases were not high enough to&offset the higher capital cost i n -creases and thus a small loss in p r o f i t a b i l i t y probably occurred. The high annual rent increases of 7.5 per cent in K i t s i -lano, 9 . 0 per cent in New Westminster and 9.6 per cent in Burnaby helped to maintain yields from apartment investment in these areas at a f a i r l y stable level. East Hastings is the only apartment d i s t r i c t in Metro-politan Vancouver which may have experienced an increase in yields through the 1964 to 1972 period. This i s because the annual increases in capital costs were lower than the annual increases in rents, 4 . 8 to 5 .1 per cent as opposed to 9 . 3 per cent. In Metropolitan Vancouver between 1964 and 1972 i t appeared as though the yields from new apartment investment have been steadily declining, as evidenced by greater i n -creases in capital costs and financing costs than in rents. This i s believed to be one of the major reasons why the number of apartment starts for rental have declined since 1969. To support this conclusion, i t would be worthwhile to attempt an in-depth study of yields from actual apartment projects constructed over the 1964 to 1972 time period. For this author that study was not possible owing to the limited amount of suitable data that could be obtained. Summary and Conclusions Average annual increases in rents, construction costs, land costs and financing costs were calculated for the 1964 to 1972 period i n selected areas of Metropolitan Vancouver. Comparisons of rent increases with cost increases indicated that in most areas of Metro yields on new apartment invest-ment have been declining since 1964. Yields have been de-clining because rent levels have not been keeping pace with the costs of apartment investment. The areas apparently suffering the greatest declines in yields were the suburban municipalities of Richmond and Coquitlam. East Hastings was the only area studied where yields may have increased since 1964. Reduced yields from apartment investment are thought to be one of the major reasons why new apartment construction for rental purposes has been declining over the last three years 1 another major reason, the changes in the Federal In-come Tax Act, w i l l be studied in 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 real estate market has been changed. This chapter proposes f i r s t l y , to outline and compare the more important amend-ments brought in by the new Act, which affect real 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 in residential rental property. The New Tax Regulations As They  Affect Real Estate Transactions The new Income Tax Act introduced two major amendments affecting capital cost allowances (CCA.) on real estate which destroyed most of the advantages that many doctors, lawyers and other individuals with high professional incomes had obtained from investing in real estate. These amendments 38 are: J 1. Losses created by capital cost allowance on rental property cannot be deducted from non-rental income. 2. Each rental building costing $50,000 or more must be placed in a separate capital cost allowance class. The f i r s t amendment ends the practice used by many indi-vidual investors whereby a property producing a positive cash flow but a tax loss (through deducting CCA.) 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 this point: Suppose an investor owns a concrete apartment building with an undepreciated capital cost of $100,000, an annual gross income of $20,000 and expenses of $17,000. The tax treatment under the old and new legislation i s : Old System New System Rental Income $20,000 $20,000 Expenses 17,000 17,000 C C A . (5%) 5.000 5.000 Taxable Income $(2,000) NIL Under the old Act the investor could apply the $2,000 loss to other income thus reducing his tax. The new Act only allows the capital cost allowance claim to be used to the extent that i t reduces rental 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. If there i s an overall loss from a l l rental properties, the loss cannot be deducted from other income but must be capi-talized in effect, by reducing the claim for C C A . Corporations, whose principal business involves the rental, development or sale of real estate, can use losses 58 created by deducting C C A . from rental income to reduce other income from operations that do not involve the rental of real estate. The second amendment to the Income Tax Act, which applies to both corporate and individual investors, i s that "pooling" of properties in the same depreciation class is no longer allowed. Each building acquired after 1971 and worth $50,000 or more must be put in a separate depreciation class for tax purposes. This means that the recapture of depreciation can no longer be postponed. Under the old tax system recapture of depreciation could be postponed indefi-nitely by "pooling". For example, suppose an investor sold an apartment block for $50,000 more than the undepreciated capital cost. If, within the same taxation year, he pur-chased another building in the same depreciation class for $ 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. If the investor continued this practice of "pooling" throughout his lifetime, 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 selling price exceeds depreciation de-ducted up to the original cost i s brought into income. This 59 i s called recapture of depreciation and i s f u l l y taxable. Suppose, for example, an investor purchased an improvement at a capital cost of $100,000 which is depreciated to $75,000 by the time of sale. If the selling price i s $ 1 0 0 , 0 0 0 , then the recapture of depreciation w i l l be $25,000 and w i l l be taxable at f u l l rates. Another major amendment to the Income Tax Act i s that capital gains received on the disposition of property w i l l be subject to taxation after December Jl, 1971 (V-Day). A capital gain is defined as the excess of proceeds over the greater of original capital cost of the property or V-Day value. Capital gains which accrued before December 31 » 1971 go untaxed. Capital gains are taxed at half the normal rate. To il l u s t r a t e how the new tax rules concerning capital gains and recovery of depreciation function, consider the case of an investor who purchases an improvement valued at $100,000 in 1972 and which he depreciates to $75,000 before selling for $ 1 2 5 , 0 0 0 . Capital Cost Undepreciated Capital Cost Recovery of Depreciation Taxable Amount Due to Recovery of Depreciation Selling Price Original Cost Capital Gain Taxable Amount Due to Capital Gain Old System $100,000 75,000 $25,000 New System $100,000 7 5 t o o o $25,000 $125,000 100.000 $25,000 $25,000 $125,000 100,000 $25,000 $12,500 60 Although capital gains are taxable, there are few oppor-tunities to obtain capital losses except perhaps on the sale of undeveloped land. Under the terms of the new Act capital losses are not available on the disposition of depreciable property. In order to obtain a deductible loss from the sale of depreciable property, there must be a "terminal" loss. A terminal loss arises when a depreciable asset i s sold for an amount less than i t s undepreciated capital cost. For the individual investor a terminal loss on one property i s f i r s t applied to capital gains realized on other properties sold within the same taxation year? half of any loss remaining thereafter i s deductible from other income to a maximum amount of $1,000 per taxation year. Any residual loss re-maining, after deducting the maximum amount from other i n -come, can be carried back one year or forward indefinitely u n t i l used up. Under the old Act terminal losses were not deductible. A corporation can deduct a l l terminal losses accrued from other income within the taxation year. The capital gains tax rate only exists for those i n d i v i -duals and corporations who are not considered to be "traders" in the f i e l d . Where an individual or company's activity i n-volves the frequent buying and selling of real property, capital gains are taxed at f u l l rates. The new Income Tax Act has provided two methods for determining capital gains on disposition of assets; either method may be used by the individual but the corporation 61 must use the second method. The two alternatives are: i 1. The election method. The capital gain i s the excess of net proceeds of disposition over V-Day value. 2. The tax free zone method. The capital gain i s the excess of net proceeds over a certain amount. This certain amount i s the middle value of original 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 election 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 after V-Day, If assets are worth less on V-Day than the original cost, then the tax free zone method should be used. Otherwise the investor w i l l pay tax on any gains in value achieved after V-Day. The new Act prevents end-of-the-year tax selling which often occurs in 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 fallen in value to record the loss for tax purposes and immediately thereafter buy them back again at the beginning of the next taxation year. There must be a thirty day time lapse between the selling of an asset and re-buying i t , - " There are special rules in the new Income Tax Act for determining proceeds of disposition of investments where the investor dies; gives the property as a gift? sells in 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 for deemed dispositions are adequately explained in several publications, and so, ex-cept for deemed dispositions 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 deprecia-tion. The heir received the property at f a i r market value and could start depreciating from that value. If, as was frequently the case, f a i r market value was substantially higher than undepreciated capital cost, this gave the heir an attractive "step up" in capital cost. The regulations in the new Act now allow for recapture of depreciation and capital 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 capital cost and f a i r market value at time of death. The beneficiary is considered to have acquired the property at the same amount. If the sale-purchase price arrived at by this method i s less than the deceased originally paid for the property, the beneficiary's original 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 owner in previous years. The capital gain is considered to be the difference between the deemed proceeds and the original cost. Where the property i s willed to the deceased's spouse, a tax-free rollover occurs. To ease the effect of double taxation which the new Income Tax Act and provincial death taxes create, i t i s thought that recapture of depreciation and capital gains tax w i l l be subtracted from the net value of the properties be-fore computations are made for provincial death taxes. Before leaving this section i t might be suitable to discuss the tax status of small private companies set up by individuals to hold their real estate. The new low rate of 25 per cent for small Canadian-controlled private corpora-tions applies only to income received from an "active busi-ness" and only on the f i r s t $50,000 of active business i n -come earned each year, until the aggregate exceeds $400,000. Otherwise, income is taxed at the basic corporate rate of 50 per cent in 1972. Although the Act contains no definition of "active business", i t appears from the National Revenue's Interpretation Bulletin;IT - 7 2 that rental income would not l i k e l y qualify 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 half 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 real estate directly as an individual. If the shareholder's tax rate i s greater than 50 per cent, more tax can be saved by holding the real estate through a privately owned corporation. These points are illustrated by the following example which compares the tax treatments for corporations and individuals at d i f f e r -ent rates. Property held directly  by individual: Net income from property Tax payable After-tax income Property held through  corporation: Net income from property Tax payable (50%) After-tax income Dividends paid to shareholders Tax Rate of Individual HI IM $40,000 $40,000 $40,000 16,000 20,000 24.000 $24,000 $20,000 $16,000 $40,000 $40,000 $40,000 20,000 20,000 20,000 $20,000 $20,000 $20,000 $20,000 $20,000 §20,000 Tax refund to corporation (50%) $10,000 $10,000 $10,000 Dividends received by shareholder $20,000 $20,000 $20,000 Tax payable 8 ,000 10,000 112^000 After-tax income $12,000 $10,000 $ 8 , 0 0 0 $10,000 $10,000 $10,000 8,000 Income retained by corporation Income retained by shareholder Total after-tax income retained by corporation & shareholder Advantage in holding property directly through individual 12.000 10,000 $22,000 $20,000 $18,000 $2,000 $(2,000) The individual investor must be wary of holding real estate through a corporation because of the risk of double-taxation of capital gains after his death. If the property has increased i n value, the value of the deceased's shares in 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 half of the gain accrued by his shares. Ultimately, when the corporation disposes of the real estate, i t w i l l also be subject to a tax on the capital gain accrued by the property. The new Act provides for r e l i e f from this double taxation i f the estate sells the corporation's assets within twelve months of the individual's death. The stripping of the cor-porate assets w i l l effectively reduce the value of the shares to zero. The Act provides that the capital loss that i s sustained when the worthless shares are disposed of, can be offset against the capital gain that i s deemed to be realized 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 real estate through a corporation i s that when the shareholder dies, his estate loses the advantage of the deemed realization rule which applies to depreciable property, whereby the assets are deemed to be disposed of at an undepreciated capital 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 in Residential Rental Property Of the major amendments to the Income Tax Act, the loss of the tax shelter which allowed rental losses to be deducted from other income and the introduction of separate C C A . classes for each apartment building w i l l have the greatest impact in re-shaping the investment nature of the residential rental f i e l d . Throughout the 1960's much of the tremendous growth in apartment starts was due to the influx of investment funds into the market from doctors, lawyers and others with high professional incomes. Their interest in acquiring residen-t i a l rental property was not so much to increase their total income but rather to achieve paper losses from C.CA.'s which could be applied to their 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 for tax pur-poses. This type of investment v/as usually a small- to medium-sized frame apartment block. Frame properties with a maximum C C A . 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 pro-perties were willing to take a lower than normal rate of return and were desirous to obtain a tax shelter, they pur-chased apartment blocks at a higher price than that justified by yield and rented them at lower rates than normal, since they were usually only concerned with meeting mortgage pay-ments and expenses. Now that the new tax regulations are in effect and the tax shelter no longer exists, apartment buildings have to s e l l s t r i c t l y on the basis of yield as investments. With the present level of rents i t i s no longer attractive to build such apartments i f they have to be sold on a yield basis. This i s quite apparent from the number of multi-family completions constructed in Metropolitan Vancouver since 1969. This opinion was borne out by interviews with two of Vancouver's leading developers. In the past these developers have built many frame apartment buildings which were immediately sold at high prices to professionals as tax shelters. However, they are now finding that with the re-moval of the tax shelter that they cannot s e l l buildings for as high a price, nor can they rent them out at economical rents because of the higher capital and financing costs and thus, they have ceased to develop apartments for the rental f i e l d . This reduction in construction has checked the trend of rising land prices to some extent (Table 1 3 ) . As the shortage of rental units increases, i t i s expected that rents w i l l increase u n t i l apartment values and yields are restored to an economic level; only then w i l l construc-tion resume i n rental accommodation. When this happens, i t is 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 real estate companies rather than sold to individual investors. This i s because corporations receive a more favourable tax treatment under the new regulations than individuals. To demonstrate how the capital gains tax and the regu-lations governing capital cost allowances can affect the re-turn from apartment investment consider the following example. Assume the following conditions! 1. Original cost of apartment block Land $100,000 Improvements $ 1 , 0 0 0 , 0 0 0 Total $ 1 , 1 0 0 , 0 0 0 2. Original mortgage $700,000 for 25 years at 10.0%. 3 . Original equity $400,000. 4 . Capital cost allowance 5 .0%. 5 . Property sold at end of the 5 th year for $ 1 , 6 0 0 , 0 0 0 . 6. Outstanding mortgage at the end of the 5"th year i s $ 6 6 7 , 0 6 4 . 7. Assumed tax rate for the investor 50.0%. 8 . The investor has other professional income in excess of the loss on the property. 9. Funds are assumed to be reinvested in a similar property i n year of the sale. The tax and net cash flow calculations are shown belowi 69 Tax Calculation Year 1 Year 2 Year 3 Year 4 Year 5 Net operating income $85,000 $85,000 $85,000 $85,000 $85,000 XJ6 S S iivfc©!*© si* on mortgage 71,750 71,200 70,593 69,924 69,187 Less C C A . 50.000 47.500 45.125 42,869 40,725 Taxable income $(36,750) $(33,700) $(30,718) $(27 ,055) $(24,912) Tax saving (50#) $18,375 $16,850 $15,359 $13,528 $12,456 Net Cash Flow Calculation Year 1 Year 2 Year 3 Year 4 Year 5 Net operating income $85,000 $85,000 $85,000 $85,000 $85,000 Less principal and interest 77.118 77.118 77,118 77.118 77.118 Cash flow $7,882 $7,882 $7,882 $7,882 $7,882 Plus tax saving 18,375 16,850 15.359 13.528 12,456 Net cash flow 18,375 16,850 15.359 13.528 12,456 $26,257 $24,732 $ 2 3 , 2 4 l $ 2 1 , 4 l 0 $20,338 Rates of return: 1. Rate of return for 5 years under old tax regulations: Annual net cash flow - see above Residual cash value: Sales Price $ 1 , 6 0 0 , 0 0 0 Outstanding mortgage 66?,064 Available to re-invest $932,936 Average rate of return on equity including capital gain 29.5$ 2. Rate of return for 5 years under new tax regulations: Annual net cash flow - $7,882* Residual cash value: Sales price $ 1 , 6 0 0 , 0 0 0 Outstanding mortgage 667,064 Tax on capital 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 capital gain 18,1% * No tax saving. The result of the new regulations has been a reduction in the returns on apartment investment. In this example, the average rate of return on equity has been reduced from the 29 .5 per cent that could be obtained under the old tax legislation to 18.1 per cent under the new regulations. To regain the return on equity that was possible under the old legislation, either rents w i l l have to increase, or equity (selling price) w i l l have to decrease, A further effect of the new legislation i s that i t may reduce the liqui d i t y of the capital 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 $50,000 and has depreciated the building to $ 1 6 0 , 0 0 0 . If the investor sells the property for $ 2 1 0 , 0 0 0 , he w i l l receive net proceeds, after taxation of capital gains and recovery of depreciation, of $ 3 7 , 5 0 0 . This i s less than the equity of $50,000 which he had esta-blished i n the property. Thus, i f he sold his property at the stage described, the investor would see an erosion of his capital through taxation. The new tax laws raise a new problem for the investor. He now not only has to worry about a return "on" his capital but also a return "of" the sum invested. The f i r s t i s a pay-ment of interest or yield and the second i s a repayment of his equity. If and when the equity i s returned and i t i s reduced in value measured in constant dollars through i n f l a -tion and taxation, then part of the yield must be set aside as a sinking fund to make up the difference so that, at term, the capital sum i s constant. The residual, after allowance for the sinking fund, i s the true yield. Thus, the new Income Tax Act may not only reduce yields by taxing the income stream but also by taxing the capital as well. The overall effects of the amendments to the Income Tax Act are thus, a decrease in construction of rental units and a reduced mobility of capital within the market. Construction has been reduced because those with professional incomes no longer find i t advantageous to invest in apartments and be-cause landlords are finding that an economical return cannot be obtained from renting. The dangers of the taxation of capital has or w i l l result in a decrease in apartment sales and a freezing of investments within the market. The combined effects of the tax changes, plus the rapid increase i n capital costs seen in 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 rental housing to an economical footing. In the meantime developers are turning away from the rental market to the development of condominiums, commercial and office space where the profits are considerably greater than in rental housing. Summary and Conclusions This chapter was the second to consider factors affecting the reduced construction of rental housing in Metropolitan Vancouver since 1969. A general outline of the new Income Tax Act was presented and a brief discussion of the effects of the new regulations on apartment investment was conducted. It was concluded that the new Act w i l l force professionals out of the rental f i e l d because of the loss of the tax shelter. In addition, yields may be reduced due to taxation of capital gains and recovery of depreciation. The reduction in yields caused by taxation, combined with increased capi-t a l and financing costs, w i l l keep additional supplies of rental units at a low level u n t i l rents increase to a point high enough to produce economic returns. The following chapter considers the municipal bureau-cracy and costs involved in 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 partly responsible for discouraging developers from supplying new apartment rental units. 73 CHAPTER V The Processing of Apartment Development Permits by Municipal Authorities In recent years much criticism has been levelled at municipal authorities for the time delays and red tape i n -volved in processing the plans and documents that are re-quired prior to the granting of development permits. In addition, the increasing popularity of land use contracts with their necessary public hearings has l e f t the feasi-b i l i t y of many apartment projects to the whims of the public and their elected representatives. These factors have had the effect of discouraging apartment development, especially since they are one of the less desirable real estate invest-ments. The purpose of this chapter i s to examine the procedures used in several municipalities for processing development applications to determine the extent of the bureaucracy i n -volved and the time required to complete processing. I t i s hoped that this methodology w i l l throw light on ways pro-cessing can be speeded up and so reduce the costs that deve-lopers have while holding land awaiting for municipal appro-val to construct. These costs include optioning land, interim financing and future higher construction costs. Besides the costs associated with delays created at the municipal level, developers also have to pay directly to the municipality monies for processing documents, impost charges 74 and other levies imposed by municipal authorities. In some municipalities these costs have been approaching astrono-mical levels in recent years. An outline of the charges in three municipalities w i l l also be included in this discussion. The Dis t r i c t of Surrey and the Cities of Vancouver and North Vancouver were selected for examination in the above context. These areas were chosen because in the past few years almost 50 per cent of a l l apartment completions have taken place within their boundaries and thus, their policies regarding apartment development w i l l have a significant impact on the whole residential rental f i e l d . 46 North Vancouver—Outright Use North Vancouver City 1s procedure for processing plans for building permits is probably the most efficient of the three areas studied. Until f a i r l y recently a l l developments were carried out under existing zoning and building by-laws but in June, 1972 Council passed a resolution which provided that a l l develop-ments costing $600,000 or more or occupying more than one acre of land would only be given approval via the use of 47 land use contracts. ' The procedures for obtaining land use contracts w i l l be examined later, f i r s t l y , the processing of building permit applications under existing by-laws w i l l be inspected. Before making an o f f i c i a l application for a building 48 permit, a developer may elect to submit preliminary drawings to the Gity o f f i c i a l s for examination to check i f they are in accordance with existing zoning by-laws. This i s a good procedure because i f the use proposed f a i l s to meet the by-law standards» the plan can be rejected before any expensive detailed site drawings are prepared and before any monies are expended for processing. To make an o f f i c i a l application for a building permit, the applicant must f i r s t request, i n writing, building grades and services information from the City Engineering Department. He then must submit two complete building plans plus three site and drainage plans and f i l l out a building permit appli-cation. The site and drainage plans must show a l l building grades and distances involved and the location and grades of a l l existing and proposed service lines and the direction of flow. Once these plans have been f i l e d , a quick review i s made by the City o f f i c i a l s to see i f they are adequate. The applicant i s notified at this time i f they are not. At the time of application two copies of the site and drainage plans are passed to the City Engineering Department. The plans are checked for compliance with the building, zoning and plumbing regulations by the Building Inspector and a l i s t i s made of by-law infractions. The Engineering Depart-ment also l i s t s any by-law infractions they detect and pass these along to the Building Inspector. A l l infractions 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 Engin-eering Department keeps one copy of the site 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 Fire Warden is asked to examine them to see i f they meet f i r e safety regulations. If the plans are in order, he signs them, i f not the developer i s asked to rectify the fault. Where any City streets or lanes must be occupied during construction, a Street Occupancy Permit is needed. Permits are also needed for plumbing, ele 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 two to three weeks i f a l l plans and drawings are in order. Where the plans are not correct, the processing, of course, i s longer; i t pays in time and money for 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 City of North Vancouver's processing procedures for development plans are the most efficient of any municipality studied. The efficiencies appear to be due 77 to the fact that the Building Department and the City Engin-eering Department, the two departments where the majority of processing occurs, examine and process the plans simultane-ously. 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 is done in a chain-type manner, that i s , through one department and on to the next. This i s an inferior 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 in 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 de-partment in a chain-type process suggests changes to the plans and has to refer them back through those departments that have already completed processing. In North Vancouver the Building Inspector is responsible for the overall supervision of processing in a l l departments. He i s aware of a l l problems in the development plans and i s thus able to communicate the problems to the developer and the municipal departments concerned in an effective manner. Fees in the City of North Vancouver for 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 is 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 $1,000 and $15,000 $ 3 . 0 0 For each additional $1 ,000 or part between $15,000 and $50,000 $ 2 . 5 0 For each additional $1 ,000 or part between $50,000 and $100,000 $ 2 . 0 0 For each additional $1 ,000 or part over $100,000 $ 1 . 5 0 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 for Street Occupancy Permits and permits re-quired for the connection of water, sewer, ele c t r i c i t y , et cetera. Any off-site works?required by the development must be paid for by the developer. These include a l l service con-nections and any additional charges that may be levied for construction of off-site works. Normally any off-site con-struction is 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 for processing and inspection. The procedure used in North Vancouver is one which could be better followed by other municipalities. Land Use Contracts One of the reasons why so many municipalities are turn-ing to the application of land use contracts for development purposes, is that i t is thought that major developments have a significant impact upon the community and consequently, the inhabitants should be allowedcto express their views and opinions of any such developments. They have this oppor-tunity at public hearings which must be held prior to the conclusion of any agreement between the municipality and the developer. Land use contracts, although admirable in principle, do not work as well in practice. Often a development w i l l be cancelled because a few p o l i t i c a l activists, with more power than their numbers justify, create strong opposition to the proposed use. It 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 in obtaining municipal approval for construc-tion. The developer faces costs of presentations of the proposed development to the public: costs of holding land; 80 costs of interim financing; future higher construction costs attributed to the much longer period of time required f o r municipal approval; costs of concessions to the municipality, such as deeding of recreational land, expansion or provision of public f a c i l i t i e s , et cetera; and l e g a l costs attributed to the drawing up of the actual contract. These factors are pa r t l y responsible f o r reducing the d e s i r a b i l i t y of develop-ment from an entrepreneurial 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 point of view land use contracts are very c o s t l y , somewhat of a gamble and should not be entered into unless there i s a considerable gain to be made. For apartment re n t a l units t h i s gainfdoes not e x i s t . The costs associated with land use contracts can run into the hundreds of thousand d o l l a r s , e s p e c i a l l y where land must be deeded to the municipality. The gamble i s great because there i s a substantial p o s s i b i l i t y that the proposal w i l l be rejected at some point along the approval process or that the concessions the Council requires w i l l be too burdensome to allow f o r an economic development. This gamble i s i n -creasingly being recognized by developers; where the out-ri g h t purchase of a s i t e was once the common method, options are now sought as an insurance against project r e j e c t i o n . 81 North Vancouver—Land Use Contracts^ 1 In the City 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 outlining 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 application and report their recommendations to Council. If Council accepts the application, i t authorizes the pre-paration of a land use contract and designates the site as a development area. The Planning Consultant obtains comments from the City staff, 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-tiates with the developer to arrive at an acceptable contract and development plan. If during this process major changes to the development are made, they must be re-submitted to the various advisory groups for approval. The draft contract i s then submitted to Council for review. A date i s set for a public hearing i f Council accepts the application. No public hearing i s held i f the Council rejects the application. If the public hearing i s favourable to the development, Coun-c i l signs the contract and has i t registered in the Land Registry Office. The developer now follows the normal pro-cedure for obtaining a building permit. 82 The time taken from the date of i n i t i a l application un 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 prior to entering into the contract. In addition, the absence of guide-lines to aid in the preparation of the contract leaves much room for negotia-tion 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 in a continuous fashion through i t s formulation. This results in 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 in a generalized form in the previous section. The specific costs he must bear in North Vancouver are the application fee and the Building Permit Fee. The application fee i s $300 for developments on sites up to one acre and an addi-tional $100 per acre or part above one acre.-*2 The Building Permit Fee i s the same as that outlined for outright uses. In North Vancouver i t would greatly aid the developer i f guidelines could be established which indicated the pro-bable terms and conditions which would be incorporated in a land use contract. In this way, before the developer f i n a l -ized a development scheme, he would have some idea of the costs involved in obtaining a land use contract. In addition, 83 time limits should be set up within which the various advi-sory bodies must make their recommendations. To give the community a voice in the approval of pro-posed developments, there seems to be no other way than through a public hearing. Council, however, should be on the lookout for those groups who have a greater influence than that justif i e d by their numbers and ensure that no segment of the community i s over-represented. City of Vancouver-*^ In Vancouver land use contracts are not used, however, a special type of zoning, called Comprehensive Development Zoning, serves the same purpose. Since this zoning i s rarely used for apartment developments, i t need not be considered. Only the procedures for processing apartment development plans that meet existing zoning by-laws w i l l be referred to. To apply for building and development permits in Van-couver, site plans, elevation plans, floor plans and roof plans must be submitted in t r i p l i c a t e to the Building Depart-ment. This Department checks for completeness of the plans. The plans are then sent to the Engineering Department. This Department examines the plans as they affect sewers, water, street crossings, a i r pollution control and highways. If the Department approves them, they are returned to the Build-ing Department. Generally approval takes two to three weeks but can be much longer. 84 The Building Department re-routes the plans to the Plan-ning Department where i t i s ensured that the proposed deve-lopment i s not in an area required for schools, parks or highways or i s under consideration for rezoning, re-subdi-viding or re-development. If in such an area the plans are l e f t for clearance. In some cases where matters of design of the structure are involved, the plans are referred to the advisory Design Panel for approval. Otherwise, the Planning Department approves the plans. This stage of the processing procedure may take between two days and several weeks. Once Planning Department approval is obtained, the plans return to the Building Department where they are checked in detail for compliance with the Zoning and Development By-Law and with the various building by-laws. This may take from one hour to several weeks. In the majority of cases, the plans do not wholly comply with the by-laws and the developer is required to alter them. Considerable time i s spent i n explaining and discussing the various items and also in checking any amendments to the plans. When the plans are approved by a l l the departments con-cerned, the building and development permits are issued. Where a proposed use does not and cannot meet existing building and zoning and development by-laws, the plans are referred to the Technical Planning Board for approval. The Technical Planning Board may refuse approval i f the develop-ment 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 amend-ment to the Zoning and Development By-Law which is under consideration by Council. If Technical Planning Board ap-proval is 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 for an apart-ment use processed, a non-refundable fee of $18 on the f i r s t 5,000 square feet of gross floor area to be constructed is charged. $ 1 . 5 0 for each additional 1,000 square feet is added u n t i l the maximum processing fee of $300 i s reached.-^" The Building Permit Fee i s $160 per $100,000 of works to be constructed.^^ Any off-site works that the developer re-quires w i l l be constructed by the City at the expense of the developer. In Vancouver processing can take a few days or several months, often the latter. The time necessary to approve a set of development plans and issue a building permit, i s generally longer in Vancouver than in North Vancouver, The reason for this appears to be in the different organizational structure of the departments involved in processing in the two c i t i e s . Plans are processed in Vancouver in 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 staff of that department. 86 Even assuming that a chain-type processing procedure is the most efficient, i t would seem that the order in which departments study plans is inefficient. Before i t i s even known i f the proposed use would comply with building and zoning and development by-laws, a relatively simple thing to confirm, the Engineering Department has to process the plans. This Department has to study the plans in considerable de-t a i l to determine i f such things as the location of sewer and water lines 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 by-laws. The proposal would then have to be re-designed and the Engineering Department would have to re-examine the amended plans. It would be more logical and efficient i f departments such as Planning and Building who have a more general and less time-consuming function in the processing procedure were to examine the plans i n i t i a l l y . In this way Engineering's time would not be wasted in examining plans that don't meet zoning requirements. Dist r i c t of Surrey-^ In June, 1973 "the District of Surrey adopted a new muni-cipal development policy which requires that a l l apartment developments be carried 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 result that the developer's costs increase 87 significantly. The processing procedure in the Di 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 for including a study of Surrey i s that their new development policy specifies exactly what the terms of any land use contract for apartment development w i l l be. The terms are heavily biased in favour of the District and in-crease the cost of development considerably. To apply for 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 location and use of the nearest buildings on adjacent land; 2. a perspective drawing indicating landscaping and the general appearance of buildings, parking lots, et cetera; and 3. a brief description of the project with an indication of the number and mixture of suites, and an outline of the amenities fprovided. The application and plans must be submitted 16 days prior to the meeting of the Advisory Planning Commission, to be considered at that meeting. The Advisory Planning Com-mission studies the plans for the proposed development and makes recommendations to Council. Council may or may not decide to hold a public hearing depending on whether they reject the proposal immediately or decide to let the commu-nity express i t s views. The development cannot be granted permission to proceed without a public hearing. As a result 88 of this public hearing Council may or may not decide to pass the necessary by-law. If approval i n principle i s given by Council after the public hearing, plans must then be submitted for examination to the Planning Department and the Advisory Design Panel. Once the development plans are approved, based on Council policy and by-law requirements, engineering design drawings are submitted to the Engineering and Building Departments for study and approval. Once this i s done development can proceed. The Dis t r i c t of Surrey's municipal development policy, which became effective in June, 1973• states that the follow-ing impost charges w i l l be an integral part of any land use contract» 1. $650 for 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 for each apartment unit constructed for the upgrading of a l l municipal highways;58 3. $300 per apartment unit constructed for the improvement of municipal drainage f a c i l i t i e s 4. $150 for each apartment unit constructed for the improvement of the waterworks system; and°0 5. $1,295 Iter apartment unit constructed for the acquisition of lands for public use.°l The impost charges that a developer has to pay amount to $2,595 per unit. In today's market the construction cost of building one unit in a frame apartment block varies between $ 8 , 0 0 0 and $14,000!°^ adding these impost charges to the cost would raise this level to between $10,600 and $ 1 6 , 6 0 0 . This means that impost charges represent between 15.7 and 24.5 per cent of the total cost of development excluding land and financing costs. This i s an enormous and unreasonable cost of development and i t i s expected that the charges w i l l se-verely reduce the number of apartment units constructed in the D i s t r i c t . In addition to the impost charges, the developer i s re-sponsible for the installation of a l l water, and sanitary and storm sewers needed to connect his development to existing works.^ He i s also responsible for placing a l l existing and proposed u t i l i t y wires underground both on roads abutting 64 the development and on site. On top of this, 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, is extracted from the developer for administration, engineering, 65 legal and inspection services. J The Dis t r i c t of Surrey has surely helped to discourage apartment development for rental purposes, as much as the increases i n capital 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 attractive-ness of investment i n that area. Developers should be charged certain costs for improving municipal services since their developments are the partial cause of the need for 90 such improvements, but to levy charges to the extent that the District of Surrey has determined, must be looked upon as an excessive use of their delegated powers. Summary and Conclusions It has been demonstrated in previous chapters that the changes in the Income Tax Act and the higher costs of con-struction, land and financing have reduced the desirability of apartment investment. This chapter continues the inquiry into those factors which are causing reduced levels of con-struction of rental units. The factors examined in this case are the delays encountered at the municipal level in pro-cessing proposed development plans and the costs of such delays. Municipal levies on proposed developments are also considered as a factor in discouraging development of apart-ments. Ways are examined by which municipal processing time can be lessened. It was discovered that the processing procedures in the City of North Vancouver were the most efficient. This was because a l l the municipal departments involved in the appro-val process simultaneously received the plans to determine i f they were appropriate. In Vancouver the processing was carried out in 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 pro-cedure was much more complicated and time consuming and the costs of such contracts to the developer were much greater. It i s advised that developers do their utmost to avoid land use contracts because they are more expensive in time and money and are more uncertain than an outright approval pro-cedure , The Di s t r i c t of Surrey has l a i d down policies which w i l l give i t the maximum advantage in 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 in that municipality. It i s hoped that municipalities w i l l try and simplify the processing procedure for apartment development plans so that developers may be given approval in 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 for rental. A major step that would simplify processing would be to scrap the land use contract concept and the need for separate negotiations for each development and provide guidelines by which a l l developments would be judged, so far as levies and concessions to the municipality are concerned. The succeeding chapter analyzes the role that apartment operating costs have played in reducing the desirability of new apartment investment. 92 CHAPTER VI Operating Costs Previous chapters have discussed the major reasons for the reduction in the number of apartment starts in Greater Vancouver in recent years. No mention, however, has yet been made of the role operating costs have taken in affecting 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 repairs, administration and property taxes. A major study of the Vancouver apartment market con-ducted by Dale-Johnson indicated that one of the reasons why new apartment construction was f a l l i n g off was because in-flationary pressures were forcing operating costs up at a 66 faster rate than rents. The purpose of this chapter i s to test the validity of this statement by analyzing operating expense statements for apartment blocks. Dataiswere obtained 67 from Real Estate Trends in Metropolitan Vancouver ' and from 68 the Dale-Johnson dissertation. When i t i s said that greater increases in operating costs than in rents have adversely affected the provision of new apartment units, the statement does not mean that the inevitable increases in operating costs that occur as a building becomes older are the reasons for the decline in apartment construction. What is meant i s that, i f operating expenses as a percentage of gross income are higher on newer buildings than on older ones at similar timepoints i n their lifecycles, then the p r o f i t a b i l i t y of the more recently con-structed 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 their decisions to construct new apartment buildings. Assume, for example, that most blocks constructed in, say, 1965 had operating costs as a percentage of gross i n -come during their f i r s t , second and third years of operation of 30t 32 and 35 per cent, respectively. If most apartment blocks constructed, say, in 1970 also had operating costs of 30» 32 and 35 per cent during the same periods of opera-tion, then investors contemplating construction of new blocks would not have their decisions unduly influenced by the level of operating costs, anymore than investors did in 1965. If, however, the trend was to have operating costs of 40, 42 and 44 per cent during the f i r s t , second and third years of operation of 1970 apartment blocks, then to-day's investor would possibly cancel any plans for the con-struction of a new apartment building because his profit would be lower than what he could have obtained in 1965. This chapter hopes to discover i f profits have been reduced by increased operating costs in newer apartment buildings compared to those built several years ago. 94 To test the validity of Dale-Johnson1s reasoning that operating cost increases are part i a l l y responsible for the reduction i n the number of apartment starts in recent years, i t has to be demonstrated that operating costs as a percent-age of gross income are higher on newer apartment blocks than on older ones during similar periods of operation. Operating Costs as Presented  in Real Estate Trends The Greater Vancouver Real Estate Board publishes aver-age annual operating costs as a percentage of gross income for frame and concrete apartment blocks. Statements are 6 9 published every two years. 7 Operating statements from 1966 to 1972 were analyzed. The statements present a range of costs for newer buildings and thus, represent operating costs during earlier years of operation. The buildings analyzed offer contemporary ame-nities and are located in the more central regions of Greater Vancouver. Since the statements were not s t r i c t l y comparable be-tween years, estimates of certain expenses had to be made to make them more uniform. The 1970 operating cost statements did not include a provision for management expenses which a l l the other years analyzed hadj therefore, 5 per cent of gross income was added to the total percentage operating costs presented. The 1968 statements included a provision for replacement reserves. Since no other years 1 statements had this provision, i t was deducted from the 1968 statements. Table 19 presents the summary of total operating costs as a percentage of gross income, for frame and concrete apartment buildings located in 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 H p M O 1972 % % fo % Frame Apartments Range — 34.9- — 35.0-4?.3 46.0 Median of Range 40.0 41.1 39.0 40.5 Concrete Apartments Range — 32.9- — 34.5-46.1 44.0 Median of Range 39.0 39.5 ^0.0 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 their ear-l i e r years of operation between 1966 and 1972. This i s sig-nificant because i f the Real Estate Trends' data i s repre-sentative of the apartment market as a whole, then operating costs cannot have had any meaningful effect on the profita-b i l i t y of apartment investment. If this i s the case, then the reduction in apartment construction in recent years can-not be tied to inflationary increases in operating costs. 96 Operating Costs Presented in the  Dale-Johnson Dissertation To further test the conclusion reached above, an ana-lysi s of operating expense statements of several dozen apart-ment blocks was conducted. The data were f i r s t presented in 7 0 an appendix to the Dale-Johnson study. They have some severe limitations. 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 confidential and are unwilling to donate i t for 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 willing to supply them. The result was that a high proportion of the apartment blocks studied were owned by professional men and thus, may not represent normal in-vestments in real estate. The apartment blocks sampled were primarily held as tax shelters rather than as long-term investments. Secondly, operating expense statements are only avail-able for the years 1968 to 1970. It would have been desirable to have statements for a greater number of years in order to produce a more effective test of whether operating expenses are increasing enough to discourage apartment construction. Thirdly, not enough data are available to analyze apartment cost increases for each area in Greater Vancouver. Operating costs as a percentage of gross income are a function of the rents being charged amongst other things. 7 1 The rents 97 in the outlying municipalities are lower than in the more central parts of the City of Vancouver and thus, these apart-ments have higher operating costs as a percentage of gross income. It was thus necessary to eliminate those apartment blocks whose rents varied considerably from the majority of apartment blocks in the sample. This excluded most frame apartment blocks in the more central regions of Vancouver, It also excluded a l l concrete apartment buildings, for their rents were found to be too diverse to properly compare them. Finally, not enough data were available to analyze operating costs by size of apartment block. If a l l the available data were lumped into one group, the analysis would produce misleading results because apartment blocks with a relatively large number of suites generally have lower operating costs as a percentage of gross income than smaller ones. It was necessary to either analyze the apart-ment blocks in groups, according to the number of suites each had, or to eliminate the extremes in size and analyze the remainder as one group. Not enough data were available to accomplish the former and so the latter approach was followed. Those apartment blocks remaining that were older than eight years in 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 for a total of 63 years of opera-tion, or an average of 1,6 years of operation per apartment block. Tables 20 and 21 present the characteristics of the sample•regarding location and size. Table 20 Location Of Frame Apartment Blocks In The Sample Location Number of Blocks East Hastings 5 Burnaby 8 New Westminster 20 Surrey 2 Coquitlam 1 North Vancouver 3 Table 21 Size Of Frame Apartment Blocks In The Sample Number of Suites Number of Blocks 18 - 37 14 38 - 57 17 58-89 8 The nature of the apartment blocks constituting the sample i s relatively uniform as Tables 20 and 21 test i f y . Rents do not dif f e r appreciably among the six areas from which the sample was drawn. Accordingly, operating expenses as a percentage of gross income are not unduly influenced by the location of the buildings. Apartment building sizes encountered in the sample appear to be uniform enough to make sure that no buildings have significant operating economies of scale relative to other buildings. For the analysis each annual operating expense state-ment was categorized according to the calendar year in which i t occurred. The statements were further subdivided for each calendar year into three groups, according to whether they occurred in the f i r s t and second years, third and fourth years, or f i f t h to eighth years of the building's operation to which they refer. By categorizing operating statements in this manner, increasing operating costs with building age are taken into consideration. Optimally, this table should have further been subdivided by area and by size of property, however, there were not enough data available to do this and s t i l l retain categories with enough members to analyze. If, 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 in each sub-category of each calendar year should be equal to the corresponding sub-category in every other calendar year. For instance, the average operating costs as a percentage of gross income for the third and fourth years of operation in 1968 should be equal to the average operating costs as a percentage of gross income for the third and fourth years in 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 3rd and 4th 5 th to 8th Years of Operation Years of Operation Years of Operation 1968 . 1 9 6 9 1970 1968 1969 1970 1968 1969 1970 Number of operating expense statements in each category 7 17 16 2 6 9 1 1 4 Average operating expenses per category (%) 37.3 38.2 36.9 40.4 40.9 39.6 40.1 43 .7 40.7 101 The table shows that frame apartment buildings, oper-ating during t h e i r f i r s t and second years, had operating costs as a percentage of gross income of 37.3» 38.2 and 36.9 per cent. Those apartment buildings, operating i n t h e i r t h i r d and fourth years, had average operating costs as a percentage of gross income i n 1968, 1969 and 1970 of 40.4, 40.9 and 39•6 per cent respectively. Buildings i n t h e i r f i f t h to eighth years of operation, had average oper-ating costs as a percentage of gross income of 40.1 per cent i n 1968, 43.7 per cent i n 1969 and 40.? per cent i n 1970. These figures tend to support the conclusion reached from the Real Estate Trends*data that operating costs as a percentage of gross income have not increased over the l a s t few years. Dale-Johnson*s statement that i n f l a t i o n a r y pressures were forcing operating costs up at a f a s t e r rate than rents appears to be incorrect. Operating costs as a percentage of gross income would increase within each period of operation with time, i f operating costs were increasing f a s t e r than rents. The f a c t that these increases did not take place indicates that rents have been increasing as f a s t as operating costs. Therefore, the reduction i n the number of apartment starts cannot be a t t r i b u t e d to increased 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 to determine i f oper-ating costs have been increasing f a s t e r than rents over the 102 past few years, enough to discourage new apartment construc-tion. Operating expense data obtained from Real Estate  Trends were analyzed for 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 for frame apartment buildings which were originally 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 in the past few years, indi-cates that operating expenses have not beenrresponsible for the reduction in new apartment construction. The present shortage of rental accommodation i n Greater Vancouver w i l l remain un t i l rents increase enough to make apartment construction and investment a more economical pro-position. Increases in rents w i l l probably stimulate tenant unrest and could result in pressure being applied on the Provincial Governments to implement some form of rent con-t r o l . The implications of rent control are the subject of the next chapter. 103 CHAPTER VII Rent Control: Is It A Solution Or Aggravation Of Pricing Policies In The Housing Market? The combined effects of high capital costs, financing costs, low rents, changes in the Income Tax Act, and the costs and time delays associated with obtaining municipal approval for proposed apartment dwellings, are reducing the number of multi-family rental units completed each year. The small number of rental units supplied coupled with the high demand for such units w i l l result 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 attractive enough to stimulate increased con-struction. Increasing rents generally create tenant unrest and demands are made to government authorities to stop the i n -creases. Although, for the present, the B.C. Provincial Government has ruled out any attempt at controlling rents, i t i s expected that as rents continue to rise 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 controlling legislation. This chapter's purpose i s to study rent control policies in two areas where controls have been i n existence for many years, the United Kingdom and New York City, in the hope that the lessons learned there w i l l serve to discourage any form of rent control in B.C. 104 7 2 The United Kingdom Experience' In response to the severe housing shortages and result-ant rent increases i n the United Kingdom during World War One, Parliament placed controls on rents by passing the Rent  and Mortgage Interest Restriction Act of 1915. This Act fixed rents on the cheaper housing types that were rented unfurnished? provided security against eviction! and halted rising mortgage interest rates. At the time of i t s concep-tion, the Act was considered to be a temporary measure which would be abolished with the return of peace. Unfortunately, this was not the case and rents have been controlled to a greater or lesser extent ever since. Since the 1915 Act rent control in Great Britain has been an entanglement of contradictory social and economic policies. In some periods the legislation was aimed at reducing the range of controls» while i n others i t i n -creased them. Constantly changing rent controlling laws have created severe inadequacies in the British housing market. The 1915 Act was extended in 1920 to include "middle" class dwellings; however, in 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 voluntarily moved. The same year a Committee was set up to study the rent control system. No conclusive results were produced by this Committee and another was organized in 1931* In the meantime, annual legislation between 1924 and 1933 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 con-t r o l . This was given approval by Parliament in 1933 and again in 1938. The 1938 legislation, although i t allowed the decontrol of more expensive residential units, tightened the controls on the cheaper ones. The beginning of the Second World War in 1939 created the necessity for extending rent controls over a larger range of properties. Between 1939 and 1954 rent control policies remained static. In 1954 the levels of controlled rents were increased to try and encourage landlords to better maintain the housing. This legislation was unsuccessful in achieving i t s goals. Accordingly, i n 195? the Rent Act was passed which freed those dwellings with higher rateable values in London and Scotland from rent control. The reason for choosing these areas for p a r t i a l decontrol was that there was a c r i t i c a l housing shortage and i t was hoped that this action would stimulate new investment i n housing. At the same time rent ceilings were raised on a l l controlled stock remaining, to try and further encourage better main-tenance. The 1957 Act was unsuccessful in achieving better main-tenance and more investment. In 1963 a Committee of Inquiry was established to revamp the whole rent controlling 106 legislation. Their report resulted in a new Rent Act in 1965. This Act was meant to be so designed that i t would encourage investment in rental housing. It was revolution-ary in that i t did 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. Fair rent was basically considered to be the re-venue a landlord would obtain from his dwelling i f the scarcity of housing was discounted so that i t would not be taken into account. Once f a i r rent was determined, i t would be registered for three years and could not be altered. The 1965 Rent Act extended some forms of rent control over a large part of the f i e l d of private rental housing. Dwellings brought under the provisions of the new Act had their rents determined by the f a i r rent approach and were called "regulated tenancies". Those dwellings which were subject to control under previous Acts remained in that status and were called "controlled tenancies". Once they became vacant, they would be evaluated as regulated ten-ancies. The 1965 Act was the f i r s t legislation which did not f i x rents according to a s t r i c t formula but i t did pre-serve the security of tenure that tenants enjoyed under previous Acts. In order to further shift tenancies from controlled to regulated status, the Housing Act was passed in 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 shifted into regulated tenancies subject to f a i r rents. Also, in 1969 another Committee, commonly known as the Francis Committee, was organized to evaluate the effects 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 in providing a large enough return for landlords to encour-age them to continue renting. 7-^ They also communicated that there was a large amount of transferring of tenancies from unfurnished (controlled or regulated) to furnished (non-controlled) uses. The reasons for this, according to the Committee, werei' 1. Mortgagees w i l l not permit their 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 their investment; and 3. It i s easier for 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 control. In 1972 the Housing Finance Act was passed to implement some of these recommendations. One of the major changes, which the new Act introduced, was that tenants, who could not afford to rent in a free market, be subsidized directly by the Government, instead of using the old procedure of controlled rents and indirectly forcing the landlord to subsidize the tenant. The Act also specified 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 history of British rent control experiences i s that fixing of rents, below the level that would exist i n the free market, dis-courages new investment in housing and may dissuade land-lords 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 City the restrictions were abolished soon after the War's end. In New York there are rent controls on most lower class dwellings. These include a l l accommodation built 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 April 30, 1962 and any increase above the base had to be approved by the Office. 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 in the number of occupants in a, dwelling unit; where the landlord's annual net return f e l l below six 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 for a reduction in services and where the base rent was judged to be higher than that for comparable housing. These measures were found to distort the rental housing market in a serious manner. There was a c r i t i c a l housing shortage, too rapid deterioration of existing dwellings and very high rents in the uncontrolled sector. It was e s t i -mated that the number of multi-family units which were structurally sound but had been abandoned because of poor returns were approaching 30»000 per year, 7^ A new procedure was initiated in 1969 which was designed to make rental housing a more economic venture for landlords and increase new investment in housing. This procedure established a system of rent control in which building rents (called maximum base rents) reflect the costs of properly operating, maintaining and financing buildings. It applied to a much broader range of accommodation than previously covered by rent control. Rent increases, to a maximum of 7.5 per cent per annum, were allowed. 110 New York, like Great Britain, has found that r i g i d forms of rent control do not work to alleviate housing problems. In New York the trend has been to move away from rent control per se into a more flexible system which allows the landlord to recover some profit from his invest-ment and to have a greater incentive to maintain his buildings. The Case Against Rent Control Rent control i s a statutory limit on the amount of rent which can be charged, with the result that controlled rents are less than the rents which could be obtained in the free 77 market. Governments embark on systems of rent control when housing i s in short supply and there i s a danger that low income groups may be priced out of the market. Rent control results in tenants being subsidized by landlords. It i s intended to secure to low income families a larger proportion of the total housing stock than they would be able to command in a free market. Rent controls are introduced at times of housing short-ages and rising rents. Rent control, however, i s no solution to these problems. It can be nothing more than a short-term partial solution to the problem of soaring rents. It i s detrimental to housing production because developers are unlikely to enter a f i e l d i n which their profits are certain to be limited. Furthermore, i t could give landlords an excuse to neglect maintenance and repairs in order to offset I l l their limited profits. D i f f i c u l t y in establishing c r i t e r i a for f a i r rent or f a i r profit, 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 certain classes and types. Experience has shown that, with the passage of time, the number of controlled premises diminish as landlords convert to non-controlled uses. This has been found in Great Britain where many landlords converted from unfurnished to furnished, as premises became vacant. Controls aggravate the housing shortage i n areas where the statutory rent limits apply. Lack of controlled housing reduces the mobility of tenants since they are reluctant to move i f the possibility of finding another controlled dwelling i s small. A survey carried out in Greater London for the Francis Committee demonstrated that 60 per cent of tenants of fur-nished (uncontrolled) accommodation moved in an 18 month period while only 17 per cent of tenants in unfurnished (controlled) accommodation moved in the same period. Fur-thermore, the people l i v i n g in unfurnished premises, who had lived i n London since birth, exceeded those who had lived in London since birth in furnished tenancies, by more than four to one. When tenant mobility i s reduced, the use of the housing stock declines in efficiency. Older tenants continue to 112 occupy accommodation larger than they require because the rent is not associated to the amount of use and because i t is d i f f i c u l t to find smaller premises in the controlled sector. The survey conducted for 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 six to seven per cent of tenants in furnished accommodation were over 60, as opposed to 22 per cent in 79 unfurnished accommodation.'7 Where rent controls exist, black markets often develop for rent controlled premises. Unscrupulous landlords have been known to charge "key" money to new tenants seeking controlled accommodation. This i s an "under the table" pay-ment to the landlord over and above the controlled rent, for the privilege of receiving a key to enter the premises. It i s often the poor and uneducated who are the victims of black marketeering, the very group for whom rent controls are designed to help. Prices and rents in the uncontrolled sector often rise to levels considerably higher than would have been the case i f rent controls had not been introduced. This i s because virtua l l y a l l of the new demand is directed to this part of 80 the market and exceeds supply. When rent controls are introduced in selected segments of the housing market, tenants in uncontrolled housing are discriminated against. They are not given the benefit of reduced rents which their counterparts in the controlled sector enjoy and, in fact, they may find rents increasing at a faster rate than would otherwise have been the case in a free market. Landlords of controlled premises are also discriminated against because they, i n effect, are ordered to subsidize their tenants and accept lower returns than 8 1 those landlords i n the uncontrolled sector. Experience has shown that governments that embark on systems of rent control find i t d i f f i c u l t to abandon the practice. This is illustrated in both New York and the United Kingdom. Rent controls were introduced as temporary wartime measures yet they are s t i l l i n existence in a modi-fied form today. In present day society, there w i l l always be some people who cannot afford 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 find their own levels in the mar-ket place and those that cannot bear the burden should be subsidized by society. At the present time in the Lower Mainland of British Columbia, the supply of rental accommodation is small rela-tive to the demand. Previous chapters i n this critique have 114 attempted to explain why the shortage exists. The most effective way to overcome the shortage i s to allow rents to rise to a level that w i l l justify new investment in rental housing. If 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 for further rental housing development and further increase the shortage situation. If the B.C. Government feels that rising rents w i l l hurt certain segments of society economically, i t should subsidize the rents of those groups and leave the free mar-ket rents to find their own level. Summary and Conclusions The chapter concentrated on examining the history of rent control in two areas—New York and Great B r i t a i n — i n order to determine what effects government interference has had on the operations of the housing market. The case his-tories illustrated that rent controls increased the shortage of housing by discouraging new investment; they reduced maintenance of existing dwellings; opened the door for black market operations; reduced mobility of tenants; and increased the prices in the uncontrolled sectors of the housing market. Subsidization of the rents of the needy i s preferred to broad, sweeping policies that control rents in large segments of the market place. 115 CHAPTER VIII A Study Of The Pr o f i t a b i l i t y Of Some Greater Vancouver Apartment Buildings Up un t i l thisppoint, this dissertation has concentrated on examining those factors which have contributed to the reduction in construction of new apartment units in recent years. This chapter moves away from the study of supply and investigates those physical, operating and financial characteristics 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 this study i s to ill u s t r a t e why some apartment buildings produce profitable returns for their owners while others do not. Method of Analysis The sample used for 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 in the Appendix of the Dale-Johnson work. Dale-Johnson calcu-lated the return on investment for several dozen Greater Vancouver apartment buildings. He used two parameters to measure return—the average rate of return excluding capi-t a l gains or losses and the internal rate of return includ-ing gains or losses. The average rate of return i s , for any given year of operation, the total cash flow of that year as a percentage of the original equity. Where average rates of 116 return were available for more than one year of operation, the mean of these returns was calculated and used in the analysis. The internal rate of return i s the return in any one year based upon the equity in that year summed with the re-turns in other years based upon the equity positions in each of the corresponding years. Each year's component is then compounded by a per cent factor to arrive at a value equiva-lent to the equity value at the sale date or date of valua-tion. To calculate the internal rate of return including capi-t a l gains and losses. Dale-Johnson, in many cases, had to predict hypothetical sale values. To arrive at his predic-tion, he considered the rate of capitalization the market demands for apartment properties: the condition of the block with respect to quality and repairj the rental demand; gross income; the level of expenses; the interest rates on mort-QL gages; and personal judgement. For the analysis that i s to be conducted in this chapter, the actual and hypothetical capital gains and losses are not important because the primary emphasis w i l l be on the re-turns on investment obtained excluding gains and losses. Whether a capital gain or loss did or might occur was, how-ever, noted for each apartment block in the sample. The apartment buildings for which Dale-Johnson calcu-lated average rates of return excluding gains or losses were divided into two groups for the analysis; the f i r s t group was made up of those apartment blocks that achieved an average rate of return excluding capital gains or losses of less 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 financial character-i s t i c s of the two groups of apartment buildings were exa-mined to determine what factors appeared to influence the levels of p r o f i t a b i l i t y that were being obtained by both groups. Before presenting the results of the analysis, the limitations of the sample w i l l be discussed. Limitations of the Sample A major limitation of the Dale-Johnson data was that approximately 58 per cent of the apartment buildings ana-86 lyzed were owned by professional men. As has been men-tioned before, professionals tended to buy into apartment buildings for tax reasons rather than for pure investment reasons. They were willing to trade off a reduction in re-turns for tax savings. Thus, the returns on investment achieved by apartment buildings in this sample were probably lower than would be found in a proper s t a t i s t i c a l sample. Another problem with the sample obtained from Dale-Johnson's work was that returns on investment were only available up to 19?0. Since 1970 several factors, which have been discussed i n previous chapters, have altered the level of returns that can be obtained. Among these, are the 118 amendments to the Income Tax Act and rising construction, land and financing costs. Despite the fact that the two groups of apartment buildings studied do not reflect current investment returns, they are s t i l l useful in that comparisons of certain charac-t e r i s t i c s demonstrated by the two groups shed some light on the factors that affect their p r o f i t a b i l i t y . The Results of the Apartment Investment Analysis Various physical, financial and operating character-i s t i c s of the two groups of apartment buildings are presented in Table 23. The f i r s t point to note i s that only three properties out of the seventeen analyzed in the group having average returns on investment of less than 10.0 per cent sold or would s e l l for a capital 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 for a capital gain. This i s not a surprising result for a rational purchaser would consider the ratio of expenses to income, the amount of debt service, the level of rentals, the location and quality of the block and other factors to arrive at a capitalization rate to determine value. Since these components also determine average return on invest-ment, i f they are detrimental to the successful financial operation of an apartment building, they w i l l produce a low average return on investment, a high capitalization 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 Capital Gains or Losses Item No. Less than 10.0% Greater than 10.0% 1. Number of properties in sample 17 31 2. Number of properties that sold or would s e l l for a capital gain 3 26 3. Number of suites per propertyW 11 (40) 89 11 (4?) 154 4. Property age in 1970 1 (3.3) 17 1 (7.5) 45 5. Median property age in years 2 5 6. Operating expenses as a percentage of gross income 30.1 (39.7) 46.2 28.8 (36.4) 46.2 7. Percentage of pro-perties in high rent areas(°) 17.6 16.1 8. Percentage of pro-perties in average rent areas* 0) 41.2 29.0 9. Percentage of pro-perties in low rent areas(c) 41.2 54.9 10. Percentage of pro-perties judged to be renting at below mar-ket rent given their location and condition* 0) 25.0 24.0 11. Debt service (prin-cipal and interest) as a percentage of gross income 42.6 (57.6) 72.5 28.8 (51.7) 64.3 12. Loan/value ratio* d) 68.3 (?4.0) 91.5 40.4 (76.2) 99.9 13. Term ofi , * - f i r s t mortgage^,' 20.0 (23.4) 30.0 20.0 (a4.3) 50.0 - second mortgage**3) 2.0 (14.3) 20.0 5.0 (14.7) 20.0 120 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 Buildingsv a) Item No. 14. 15. 16. Weighted i n t e r e s t ^ rate on a l l mort-gages Percentage of pro-perties having more than one mortgage Purchase price per suite Average Rate of Return Excluding Capital Gains or Losses Less than 10,0% Greater than 10.( 8.50 (9.46) 12.45 7.00 (8.44) 9.88 82.4 $8,545 ($11,237) $13,442 66.7 $6,95? ($10,113) $15,547 A a^Based on data presented i n R. Dale-Johnson, Returns On  Apartment Properties (University of British Columbia: Master's thesis, 1972). ^)where three numbers are presented alongside an Item, the number within the brackets i s the average for the group and the numbers on either side represent the lowest and highest values in the range. ^ S e e text for explanations. ^^The loan amount i s a l l financing received by the blocks. It includes mortgages and agreements for sale. (e) v 'The term of mortgages i s the period of years over which the mortgage i s amortized. (f) v 'The weighted mortgage interest rate was calculated by multiplying the interest rate of each mortgage charged against an apartment building by the ratio of the original amount of funds borrowed under that mortgage agreement to the amount of funds borrowed through a l l the mortgage agreements on the building. The resulting interest rate factor was added to the interest rate factors for a l l the other mortgages on the building. Agreements for sale were included i n these calcu-lations. 121 and consequently, a possible capital loss. Item 3 in Table 23 demonstrates that the less profit-able apartment blocks (those with an average return of under 10.0 per cent) had fewer suites on the average than the more profitable ones (those with an average return of greater than 10.0 per cent). The average property age (Item 4) and the median pro-perty age (Item 5) for 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 in age of each group. Those buildings with average rates of return of under 10,0 per cent were newer than those with average re-turns of over 10,0 per centj a median age of two in 1970 for the "under 10,0 per cent" group, as opposed to a median age of five in 1970 for the "over 10,0 per cent" group. Item 6 presents the average operating expenses as a percentage of gross income for each group of apartment buildings. The less profitable 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 in the less profitable group of apartment buildings than in the more profitable 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 less profitable buildings had a fewer number of suites per block than the more profitable 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 in s i z e . ^ How-ever, Dale-Johnson also found that operating costs as a per-centage of gross income tended to increase with building 8.8 age. Table 23 illustrates that, despite the more profit-able class of buildings being older than the less profitable class, they had a lower ratio of operating costs to gross income. From studying Dale-Johnson's results 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 profitable group had over the less profitable group, would be enough to out-weigh the effects of increasing building age on operating 89 cost ratios. 7 For this reason i t i s concluded that the major cause for the less profitable group of apartment buildings having a higher operating cost ratio than the more profitable group, must l i e i n the efficiency of management of the buildings. It would appear that the less profitable group were having serious mismanagement problems. Since the level 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 ratio of expenses, demonstrated 123 by the less profitable group of apartment buildings, was due to the fact that lower rents were being charged by them, relative to those being charged in the more profitable group. To determine i f this was the case, a l l the apartment build-ings comprising each group were categorized according to location 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 in the South Granville area, Kerrisdale, the West End and West Vancouver were considered to be in 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, their rents were examined to see i f they were below market value for the areas i n which they were located. It was found that 25.0 per cent of those buildings in the "less than 10.0 per cent return" group were renting at levels be-low the market rent for 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 levels (Item 10, Table 2 3 ) . Since approximately the same percentages of apartment buildings i n each group were renting at below market levels for their locations, the effects of low rents on operating cost ratios w i l l be similar for each group and can thus be ignored. 124 Table 23 illustrates in Items 7 to 9 the categoriza-tion of the apartment buildings into high, average and low rent areas, respectively. There were approximately the same percentages of apartment buildings having returns of less 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 less profitable group of apartment buildings were i n average rent areas, while only 29.0 per cent of the more profitable group were in such areas. 41.2 per cent of the less profitable group of build-ings were located in low rent areas, as opposed to 54.9 per cent of the more profitable group. These results demonstrate that lower rents were not being charged i n the less profitable group of apartment buildings than i n the more profitable group and thus, the high ratio of operating costs experienced by the former group were not due to lower rents. In fact, as Item 9 ill u s t r a t e s , i t would appear that rents were generally lower in the more profitable group than in the less profitable one. Every-thing else being equal, i t would be expected that the more profitable group would have higher expense ratios because of this factor. The fact that they did not, reinforces the idea that the less profitable group were experiencing i n -efficiencies i n management. To continue with the search for factors influencing the pr o f i t a b i l i t y of apartment investment, Item 11 in 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 their gross income toward repayment of the principal 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 in combined prin-cipal and interest payments. Referring back to the previous discussion on the effects of rent levels on operating cost ratios, i t was concluded that rents were lower in those buildings with average returns of greater than 10.0 per cent. Because of this factor, i t is l i k e l y that the debt service ratio for those buildings i s exaggerated relative to the debt service ratio for the buildings with average returns of less than 10.0 per cent. Item 12 i n Table 23 presents the average loan to value ratios for the two groups of apartment buildings. The less profitable group of apartment buildings had a slightly lower loan to value ratio than the more profitable group, 74,9 per cent as opposed to 76.2 per cent. The average length of the terms for f i r s t and second mortgages in the less profitable group of apartment buildings were 23.4 and 14,3 years, respectively. For the more pro 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 approxi-mately the same loan to value ratios when purchased and 126 similar lengths of terms for f i r s t and second mortgages, i t i s clear that the reason for the less profitable group of apartment buildings having to pay a higher percentage of gross income towards principal and interest payments than the more profitable group, is because of higher interest rates on their mortgage loans, higher purchase prices paid, or a combination of both of these factors. The average weighted mortgage interest rate for each group of apartment buildings i s presented in Table 23 as Item 14, It can be seen that those buildings having a re-turn of less 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 per cent had an average weighted interest rate of 8.44 per cent. It thus appears that another reason for the less profitable group<aof buildings being in that financial condition i s because of higher financing costs on mortgage loans. A p a r t i a l reason for the less profitable group of apartment buildings having higher financing costs than the more profitable group i s that they were of more recent con-struction (see Item 5). From 1965 to 1970 interest rates on mortgage loans had climbed steadily. Since the less pro-fitable buildings were newer than the more profitable ones, they were faced with higher borrowing costs. Increased borrowing costs for the less profitable 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 this group had more than one mortgage while only 66.7 per cent of the group, made up of more profitable buildings, had more than one mortgage (Item 15). Despite the fact that a much smaller percentage of the apartment blocks i n the more profitable group than in the less profitable group had more than one mortgage, the two groups had similar loan to value ratios. This indicates that lenders have been becoming more reluctant to give high ratio f i r s t mortgages than they have been in the past. As was mentioned previously, the higher average debt service ratio experienced by that group of apartment build-ings having average returns of less than 10.0 per cent was partially due to higher interest rates on mortgage loans. It was also due to the fact that that group had paid higher purchase prices per suite than the group having average returns of more than 10.0 per cent. The average purchase price per suite for the less profitable group of buildings was $11,273 andffor the more profitable group, $10,113 (Item 16). Since the loan to value ratios for both the more pro-fitable and less profitable groups of apartment buildings were approximately the same and since the lengths of the terms for the f i r s t and second mortgages in both groups were also similar, then the higher purchase prices per suite paid 128 by the less profitable group meant that larger mortgage loans had to be obtained by the group. These larger loans required greater periodic payments of principal and interest 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 for the less profitable group of apartment buildings being bought for higher purchase prices per suite than the more profitable group. Purchase price i s dependent on many factors including the location of the property; the time purchase was made; the age, quality 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 pur-chase prices for both groups of apartment buildings. To conduct a proper comparison, i t would be necessary to have enough data to classify the buildings into various sub-groups according to the myriad of characteristics which they possessed that affected the purchase prices paid for them. Since the sample size was so small, such a classification here could not readily 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 profitable and more profitable groups which had similar characteristics and thus, allowed a reasonable comparison of their purchase prices. 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 pur-chased i n 1968 for an average of $10,080 per suite. A similar building of 21 suites with an average return of greater than 10,0 per cent was purchased i n the same year for an average of $9,790 per suite. In New Westminster two frame buildings from the less profitable group were purchased in 1968 for $11,548 per suite and $10,759 per suite. The building to which the former purchase price refers, had 42 suites and the latter had 29 suites. Three similar buildings from the more profitable group were bought i n 1968 in the same area for $10,160 per suite (25 suites), $10,692 per suite (26 suites), and $11,111 per suite (63 suites). From these results i t would appear that those buildings in the less profitable group were purchased at higher prices than similar buildings i n the more profitable group. This indicates that a possible reason for 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 for 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 re-search that the unprofitability of some apartment buildings was pa r t i a l l y due to investors paying more for them than they were worth. It i s , however, quite possible that this was the case, for many apartment blocks purchased prior to 1970 130 were used as tax shelters rather than as long-term economic investments. Premiums were often paid for the tax shelter benefits.^ 0 Summary and Conclusions The purpose of this chapter was to determine the rea-sons for 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 in the Appendix to the Dale-Johnson disser-tation. The sample was divided into those buildings with average returns excluding capital gains or losses of less than 10.0 per cent (the less profitable group) and into those buildings with average returns excluding gains or losses of more than 10.0 per cent (the more profitable group). Physical, operating and financial characteristics of the two groups of apartment buildings were calculated and compared. These characteristics threw light on the reasons for low returns on investment i n some apartment blocks and higher returns i n other blocks. Return on investment excluding capital gains or losses is a function of several variables. It i s dependent on the cash flow obtained from the operations of the building; the amount of principal repaid; and the i n i t i a l amount of equity. A comparison of the average purchase prices paid per suite for each group of buildings, demonstrated that the less profitable group of apartment buildings generally had 131 paid a higher purchase price than the more profitable group. Since the loan to value ratios of both groups of apartment buildings were approximately the same, higher purchase prices in the less profitable group meant that the equity require-ments for that group were also higher than in the more pro-fitable group. Everything else being equal, higher equity positions result in lower average returns. Higher purchase prices i n the less profitable group of apartment buildings than i n the more profitable group also meant that a greater amount of interest was paid on mortgage loans by the former group compared to the latter. Calcula-tions also showed that interest rateseon the mortgage loans received by the less profitable group were higher than those received by the more profitable group. This was partly attributable to the greater amount of secondary financing obtained by the less profitable group and partly due to the newness of these buildings. Between 1964 and 1970 interest rates had climbed steadily, so that the newer a building, the higher the interest rates on loans. Since interest pay-ments are deducted from cash flow prior to rate of return calculations, the larger the amount of interest paid, the smaller the cash flow and the lower the return oniinvestment. Preliminary analysis indicated that the higher purchase prices paid for apartment buildings in the less profitable group than in the more profitable group were due to investor ignorance. Too much money was paid for some apartment blocks given their physical and economic conditions. 132 Comparisons of operating cost ratios in each group demonstrated that the less profitable group were paying a higher proportion of gross income in operating expenses than the more profitable group. Operating costs are deducted from gross income before calculating cash flows. Therefore, higher costs in the less profitable group lowered the level of cash flows and thus the return on equity. Despite the facts that the less profitable group of apartment blocks had higher rents and were newer than the more profitable group, their operating cost ratios were also higher. This indicated that the less profitable group of buildings were being managed ine f f i c i e n t l y . To conclude, the major reasons for low returnseon investment on some apartment buildings were due toi 1 . High purchasepprices; 2. High interest payments on mortgage loans; and 3 . High operating costs. 133 CHAPTER IX Findings And Conclusions Since i 9 6 0 Metropolitan Vancouver has experienced a rapid expansion in i t s stock of multiple dwelling units. The expansion reached i t s peak in 1969 when 1 2 , 5 2 5 units were completed. Between 1969 and 1972 the number of addi-tional units constructed declined annually so that by 1972, fewer were completed than at any time after 1966. One of the main goals of the dissertation was to ex-plain the reasons for the decline inaapartment construction after 1 9 6 9 . These reasons f e l l into three main groups 1 1 . Larger increases in construction, land and financing costs than in rents; 2 . Amendments to the Income Tax Act which destroyed many advantages that real estate investments had over other forms • of investment; and 3 . Obstacles placed before developers by municipal authorities and the costs of such barriers to developers. Rents and Construction, Land  and Financing Costs In Metropolitan Vancouver, rents increased at an aver-age 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 It was assumed that the yield from apartment investment was equal to total rent minus interest charges on mortgage loans, divided by the capital cost of the investment, and i t was further assumed that loan to value ratios were the same for a l l areas of Metropolitan Vancouver, and had not changed over time. These assumptions meant that greater increases in capital costs (construction and land costs) than in rents would result in yields being less on newly constructed buildings than on older apartment buildings at any given point in time. For these assumptions on yield calculations, only inter-est charges and not operating expenses were deducted from total rent. This was because further research whose results were presented in Chapter VI of this thesis, demonstrated that operating expenses expressed as a percentagesof gross income had remained constant for new buildings in the last few years, thus indicating that they had been increasing at the same rate as rents. In Table 18 in Chapter III, average annual increases in capital costs and financing costs were compared with average annual increases in rents between 1964 and 1972 for selected areas of Metropolitan Vancouver. On the basis of the above assumptions for yield calculations i t appeared that new buildings i n Richmond and Coquitlam had suffered the greatest erosion in yields because of greater increases in capital and financing costs than in rents. In East Hastings and Burnaby where rents often increased faster than capital costs and financing costs, yields 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 il l u s t r a t e with a hypothetical example how the level of yields have been affected by changing costs and rents, consider the following data for apartment buildings con-structed in Richmond and the East Hastings area of Vancouver* Buildings.1A and 2A were completed and operating in 1964} Buildings IB and 2B were completed and operating in 1965. Rents, capital costs and financing costs are assumed to have increased between 1964 and 1965 at the average annual rates calculated for Richmond and East Hastings and presented in Table 18. Since the annual change in capital costs has been presented as a range of values, the median of this range w i l l be used for this example. The loan to value ratio i s assumed to remain constant in Richmond and East Hastings in 1964 and in 1965} i t is assumed to be 50 per cent. The mortgage interest rate i s assumed to be 10.0 per cent in Richmond and East Hastings in 1964. In 1965» this would have increased to 10.377 per cent i f i t increased at the average annual rate of 3.77 per cent presented in Table 18. 136 With these assumptions, the following changes in yield would occurs Richmond East Hastings Bldg. 1A Bldg. IB Bldg. 2A Bldg. 2B Capital cost of buildings $1,000.00 $1,118.00 $1,000.00 $1,050.00 Gross rent $100.00 $101.40 $100.00 $109.30 less interest 50.00 58.01 50.00 54.48 Net income $50.00 $43.39 $50.00 $54.82 Yield 5.0# 3.9# 5.0$ 5.: 7o In the hypothetical case for Richmond the apartment building going into operation in 1965 would achieve a 1.1 per cent lower yield than i t s counterpart which began oper-ating in 1964. This decline in yield i s due to the fact that capital costs were increasing faster than rents. In East Hastings yield on the building which began oper-ating in 1965 increased by 0,2 per cent over i t s counterpart building operating i n 1964, The reason for this was due to the fact that rents increased at a greater rate than capital and financing costs. If these examples were calculated on for more periods, yields from Richmond apartment buildings would continue to decline, while yields from East Hastings buildings would increase. In 1966, yield from new apartment buildings in Richmond would f a l l to 3*1 per cent; in 1967, they would f a l l to 2,1 per cent. Similarly, in East Hastings yields would increase to 5*6 per cent in 1966 and 5.8 per cent in 1967. In reality, however, changes in construction, land and financing costs and rents do not affect yields in the direct manner that was assumed i n the above illustrations, except in the case of the developer of the apartment property who also becomes the long-term investor. More common, especially prior to the amendments to the Income Tax Act, i s the case of the developer who builds an apartment block and then sells to an investor. The investor normally pays the f a i r market value for an apartment building and this i s usually determined by a capi-talization of the income obtainable from the property. The capitalization rate chosen is not affected by increases in construction and land costs and should be the same for two buildings in the same physical and economic conditions regardless of the cost of constructing them. With a capitalization rate which is independent of the capital cost of an apartment building, i t i s found that in a time when capital costs are increasing at a faster rate than rents that the capitalization rate of the investor w i l l not change proportionately to the capital costs of the developer. The result i s that the developer cannot s e l l his apartment building at a price high enough to cover his capital costs, development costs and pr o f i t margin. Conse-quently, he ceases to construct apartment buildings. No matter whether an apartment building i s constructed and operated by a developer or constructedfeby a developer 138 and sold to an investor, the results of greater increases in construction, land and financing costs than in rents have the effect of reducing new apartment construction "by reducing the yields either directly or indirectly. As the data in Chapter III demonstrated, this i s what has happened in Metropolitan Vancouver between 1964 and 1972. In addition to the rapid increases in construction and land costs, the passing of the Strata Titles Act in 1966, which allowed individual ownership of apartment units, has encouraged developers to move away from the construction of rental units into the condominium market. Tables 1 and 2 i n Chapter I illustrated the construction trends in the rental and condominium markets. Condominiums remain economical ventures for developers because they can pass a l l their 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 role in discouraging apartment construction, amendments to the In-Come Tax Act have also had considerable effects. Prior to the amendments of the Income Tax Act which became law i n 1972, many apartment investors were charac-terized by having high incomes and high marginal tax rates. These investors were prepared to trade off a reduction in return on apartmentxinvestment for a large tax saving. This 139 philosophy resulted in a rapid expansion of the rental housing market throughout the 1960's, particularly for three storey wood frame blocks. The amendments to the Income Tax Act destroyed the possibility for many investors of obtaining large tax savings from apartment buildings. This was mainly due to two amendments« 1. Losses created by capital cost allowances on rental property cannot be deducted from non-rental income; and 2. Each rental building costing $50,000 or more must be placed i n a separate capital cost allowance group. Return on apartment investment was reduced by these amendments. The f i r s t amendment reduced the annual cash flow that was available to those with high professional i n -comes who investediin apartment buildings, by disallowing the deducting of rental losses from other income and thus, decreasing tax savings to zero. The second amendment in -creased the taxation that occurred upon the saleoof the apartment building by taxing at f u l l rates a l l depreciation that was recovered. A third amendment to the Tax Act allowed for the taxa-tion at half normal rates of a l l capital gains that were forthcoming upon the sale of the investment. This further reduced the investor's after-tax return. In addition to the reduction in the return on invest-ment by taxation of recovery of depreciation and capital 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 establish a sinking fund to maintain the level of his equity throughout the l i f e of his investment. When an investor sells his apartment building, taxation of recovery of depreciation and capital gains can reduce his after-tax equity to a level which is lower than that which he had when he f i r s t purchased the building. To prevent this, the investor must contribute to a sinking fund each year to be used for maintaining his equity at a constant level. Since contributions to this fund are similar to other expenses, they reduce income and hence return on investment. Before the introduction of the new Income Tax Act, the nature of the rental market was such that many investors in apartment buildings were, in effect, subsidizing their ten-ants* rents by seeking tax losses from their apartment buildings in order to offset their other income. In striving for these losses, rents were often set at uneconomic levels to the benefit of the tenants. Now that the new Income Tax Act i s in effect, apartment investments have to be economic ventures in themselves because they cannot provide any bene-f i t s to other income. This means that rents w i l l have to 141 rise 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 in residential rental pro-perty. It i s expected that professional men, who heavily invested in apartment properties for 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 in the rental market because they can deduct rental losses from other income. New apartment buildings w i l l probably be of a larger, more economic size than many that exist today. Frame apart-ment buildings which offer an advantageous C C A . w i l l de-cline in importance because the benefit of their C C A . rate is less important and because they are more uneconomic to operate relative to concrete buildings. Municipal Approval for Apartment Developments The third major set of factors which have interfered with the provision of new apartment buildings for rental purposes are the long and costly delays involved in obtaining municipal approval for apartment developments. The increasing use of land use contracts by municipalities i s also increasing the risk that developers have to face in i n i t i a t i n g a project and trying 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 muni-cipal approval are, of course, faced by every developer no matter whether he is going to produce an apartment block, office tower or industrial park. However, the return on investment available from non-residential rental projects usually far exceeds that which can be obtained from r e s i -dential rental uses. Thus, developers are willing to take the time, costs and risks to obtain approval for these other uses but they find that the return from apartment investment does not warrant the trouble. In this dissertation, three municipalities were studied to determine the procedures followed in granting approval of apartment developments under existing 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 efficient and least time-consuming process for approval under existing by-laws of apartment developments. It appeared that the reasons for the efficiency were due to two factors. F i r s t l y , only one body had responsibility for guiding development proposals through the processing pro-cedure—this was the Building Inspector. Secondly, a l l the departments concerned in the approval simultaneously pro-cessed the documents. This avoided time delays since each department did not have to wait for approval by the previous department before processing could begin. 143 The organization of the City of North Vancouver was established i n such a manner that processing for a building permit could be accomplished in 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 in the City of Vancouver was much more complex and time-consuming than in North Vancouver. This was partly due to a larger number of municipal depart-ments involved i n the approval process; partly due to the apparent lack of an overall authority to guide the deve-loper's application through the bureaucratic procedures; and partly due to the organization of the approval process. Unlike North Vancouver, the City 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 latter time period being quite prevalent. This added significant costs to the development by increasing the developer's holding costs, interim financing and future con-struction costs. The time delays involved in obtaining municipal approval for developments were not entirely the fault of civic o f f i c i a l s , ILL however. It was often the case that those who were applying for approval were not familiar enough with city by-laws to ensure that their developments complied with zoning by-laws and building codes. Also, the plans and sketches submitted with the development proposal were sometimes not of s u f f i -cient detail nor contained a l l the required information that was necessary to grant approval. The actual processing fees and fees for development and building permits were a reasonable amount in North Vancouver and Vancouver, and added l i t t l e to development costs. More and more today, municipal governments are regu-lating the development of land by land use contracts rather than by zoning by-laws. I n i t i a l l y , the reason for employing land use contracts was that some development concepts could not be approved under existing by-laws because they encom-passed a multiple use of land which r i g i d zoning by-laws did not legally allow. Today, the increasing popularity of land use contracts for the regulation of development is primarily due to three reasons: 1. The municipal government i s able to gauge the reactions of the community to a proposed develop-ment at public hearings which must be held prior to the granting of a land use contract. 2. The public i s given a voice i n the approval of a proposed development. 145 3. The municipality can extract concessions, such as the deeding of land, from developers which i t cannot do under existing by-laws. The procedures, time required and some of the costs to the developer involved in processing development applica-tions under land use contracts in the City of North Vancouver and the Dist r i c t of Surrey were examined in this dissertation. In the City of North Vancouver, land use contracts must be used for a l l developments costing $600,000 or more or occupying more than one acre. It was found that a much longer period of time was required for approval where land use contracts were involved than where development could proceed under existing by-laws. It could often take a year or longer from the i n i t i a l date of the developer's applica-tion for a land use contract u n t i l permission was f i n a l l y granted. There were several reasons for the much longer period of time required to obtain municipal approval with land use contracts than with existing City by-laws. F i r s t l y , several additional bodies were involved in the approval process where land use contracts were used than where development approval was authorized by existing zoning by-laws. These bodies were the Planning Consultant, the Advisory Planning Commission, City Council and the public. A l l of these groups act in an advisory capacity to the proposed develop-ment with Council having the f i n a l decision on the approval of the project. 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 in the land use contract, the negotiations could often be very lengthy and time-consuming. 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 after the public hearing had been held, especially i f the views of the community were not clear. The considerable amount of time expended in processing development applications where land use contracts were i n -volved was directly attributable to the nature of such contracts. It was necessary for a l l the various advisory boards on land use and City Council to become involved i n the approval process because only they could decide i f a proposed development which did not come under existing zoning by-laws would be beneficial for the community. It was also necessary under the Municipal Act for the public to be allowed a hearing before approval was given. Thus, much of the delay in obtaining approval was directly related to 14? the nature of land use contracts rather than to i n e f f i -ciencies within the municipal government. However, in the City of North Vancouver, some changes could be made to speed up the approval process. Much of the delay in obtaining municipal approval centered around the negotiations between the Planning Con-sultant 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 risk 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 costly. It would ease the developer's risk and speed up the negotiating of land use contracts i f there were some pub-lished guidelines outlining the basic policies to be followed during negotiations and the probable costs of the policies. In the District of Surrey, land use contracts must be used for a l l apartment developments. The procedure for obtaining development approval was much the same as in North Vancouver. However, Surrey Council had introduced a development policy which specifically 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 integral part of a l l land use contracts and amounted to $2,595 for each apartment unit. 148 The developer who wanted to build in Surrey, unlike his counterpart in 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 inefficiencies of municipal processing procedures on new apartment construction, a fourth factor was also examined. This was the effect of operating expenses on apartment pro-f i t a b i l i t y . It has been stated in several publications that oper-ating costs have been increasing faster than rents. An ana-lysis of data presented in Real Estate Trends and in the Dale-Johnson thesis demonstrated that while operating costs do increase as a percentage of gross income as a building increases in age, they have been remaining relatively constant for buildings of the same age when compared in different years. For example, a comparison of buildings between one and two years old in 1968, one and two years old in 1969, and one and two years old in 1970 showed that a l l groups of build-ings in the same age bracket had similar operating expenses as a percentage of gross income, regardless of the year in 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 in operating expenses than in rents relative to older apartment buildings. Future Demand for Apartment Units While the supply of additional apartment units for rental is gradually dwindling, demand i s continuing unabated. Demand i s growing partly because of the migration of families into B.C.; partly because of the increasing affluence of people in their late teens and early twenties who are able to leave home at an earlier age and compete for shelter in the rental market; and partly because of rising costs of land, construction and financing in the home ownership sec-tor which are squeezing some potential home buyers into the apartment market. It 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 for the existing stock of dwellings, i t i s calculated that there w i l l be a need for an additional 310,000 units of single and multi-family dwellings by 1991. Using historical rates of growth for single and multi-family units, i t would appear that 202,000 units w i l l be needed to accommodate the multi-family 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 have the number of completions exceeded 10,000 units. Thus, while demand is increasing the provi-sion of additional supplies of multi-family units has been declining, with the result that the shortage of apartment housing w i l l increase. Only when rents rise to a level high enough to provide investors with a sufficient return on investment w i l l apart-ment 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 Provincial Government to consider some form of legislation to control rental increases, or halt them a l -together. Rent Control Studies of rent control systems in the United Kingdom and in New York City indicated that rent controls aggravated housing shortages by reducing developers* and investors* incentive to provide new rental dwellings. This was because construction costs, land costs, financing costs and operating expenses continued to increase while rents were held constant. The result was that the investor's return continued to de-cline and new construction became increasingly unprofitable. Rent controls also discouraged the proper maintenance of existing buildings because operating costs continued to increase and reduced the margin of p r o f i t a b i l i t y for the 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 profita-b i l i t y became very low. Experiences in both New York City and the United Kingdom demonstrated that the following consequences were f e l t when rent controls were introduced« 1. Housing construction for rental purposes was reduced partly because landlords could not obtain a sufficient return on investment and partly because mortgagees were reluctant to finance rental projects where they would f a l l under the jurisdiction of rent control. 2. Maintenance of existing controlled dwellings declined. 3. The mobility of tenants was reduced because the demand for controlled tenancies usually far outweighed the supply and thus the tenant who vacated a controlled premise had much di f f i c u l t y in locating in another. 4. Those tenants in the uncontrolled sector were discriminated against because they did not receive the benefit of lower rents that those in the controlled sector enjoyed and because a l l new demand for rental housing was channelled into the uncontrolled sector forcing 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 tried to convert those premises that were controlled into un-controlled dwellings. 6. The efficiency of the housing stock was de-creased because tenants in 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 in finding 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 find c r i t e r i a for establishing f a i r rents or profits and thus rents were set at a level which was unrealistic when compared to those that would prevail in the free market with the result that serious inadequacies were introduced into the market. In both New York and the United Kingdom the consequences of rent controls have been realized and major efforts are now being made to abolish s t r i c t rent controls and intro-duce systems whereby those who cannot compete in 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 rental pro-perty. Only i f rents are allowed to increase freely 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 for this dissertation was an analysis of the physical, financial and operating character-i s t i c s of some apartment buildings operating in 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 capital 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 profitable group of apart-ment buildings (those with a return of more than 10.0 per cent) had a higher median age in 1970 than the less profit-able group, 5 years old for the former and 2 for the latter. The more profitable group of apartment buildings used a lower percentage of gross income to pay principal and interest on mortgage loans than the less profitable group despite both groups having similar loan to value ratios. This was due to two factors. F i r s t l y , the weighted interest rate on mortgages of the more profitable group was almost 1.0 per cent lower than for the less profitable group. The difference in interest rates was due to the differing ages of the two groups and due to the higher percentage of buildings in the less 154 profitable group having high interest second mortgages. Since the buildings in the more profitable group were older, they obtained financing earlier and thus at lower interest rates than the less profitable group. Secondly, higher purchase prices per suite were paid for buildings in the less profitable group than in the more profitable group. This meant that the amounts borrowed by the less profitable group were larger than the amounts borrowed by the more profitable group since the loan to value ratios were approximately the same for the two groups. These two factors tend to indicate that investors who owned buildings in the less profitable group were generally misinformed in the purchasing and financing of their apart-ment buildings. As was mentioned, the less profitable group of buildings had a higher percentage of i t s members carrying second mortgages than the more profitable group and yet the loan to value ratios in the two groups were similar. An examination of the data in Dale-Johnson*s thesis did not indicate any valid reasons for this and therefore i t could only be concluded that some investors were not aware of the amount of financing that might be obtained with f i r s t mort-gages or that mortgagees were less willing to give high ratio f i r s t mortgages. Relative to those investors who purchased apartment buildings which belong to the more profitable group, the investors in the less profitable group paid too much for 155 their buildings given the level of rents and operating expenses of their purchases. This was 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 in the less profitable group were poorly educated in the ways of the apartment investment market. It was found that the less profitable group of buildings had higher operating expenses as a per-centage of gross income than the more profitable group des-pite the facts that they were newer and in higher rental areas. This indicated that buildings in the less profitable group were being mismanaged. The Future of the Apartment Rental  Market in Greater Vancouver As has been shown, rents i n Metropolitan Vancouver have not been increasing as fast as construction, land and f i n -ancing costs and thus, yields from apartment investment have fallen i n recent years. The amendments to the Income Tax Act have further reduced yields by taxing capital gains and recovery of depreciation and outlawing tax shelters i n rental property. Municipal bureaucracy has slowed down the pro-cessing of development proposals and the increasing popu-l a r i t y of land use contracts has increased the costs and risks of development. To offset these factors and reduce current and future shortages of rental accommodation, rents must increase substantially in 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 their implementa-tion i s to be successful, landlords must go out of their 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 their counter-parts i n recent years. Increasingly, landlords w i l l become larger companies specializing i n the rental of residential real estate; projects w i l l become larger and more economic to operate. Public involvement in the planning process i s certain to increase with the result that land use contracts and public hearings w i l l become more frequent. Developers, therefore, w i l l have to design their projects so that they are more amicable to the community and w i l l have to communi-cate more effectively at public hearings i f their projects are to succeed in gaining approval. Governments should be prepared to step into the rental market and subsidize those tenants who cannot compete i n the market of increased rentals. Legislation should also be pro-duced to limit the time allowed for municipal approval of development proposals and to limit the powers of munici-pali t i e s in the negotiating of land use contracts. 157 FOOTNOTES Chapter I •^R. Dale-Johnson, Returns On Apartment Properties (University of British 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 in Table 2 were created by the conversion of existing rental accommodation into condominiums rather than being newly constructed. CMHC staff 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, Statistics Canada, Census of Canada (Ottawa: Queen's Printer, 1966) , Vol. 1. ^Acres Western, Ltd., Residential Market Opportunity Study (Unpublished, 1971). Corporation of the District of North Vancouver, Planning Department, Apartment Report (May, 1968) . . "^Greater Vancouver Real Estate Board, Real Estate Trends  in Metropolitan Vancouver, 1964-1972. Q Statistics Canada, "Residential Rent Index," Prices And  Price Indexes (Ottawa: Queen's Printer, Dec, 1972), p. 4 9 . ^Statistics Canada, Prices and Price Indexes (Ottawa: Queen's Printer, Dec, 1972 and Feb., 1973). P. 73 and p. 75. 1 0Greater Vancouver Real Estate Board, op. c i t . ^ F i n a n c i a l Post (Toronto: MacLean-Hunter Ltd., 1964-19727: 12 Central Mortgage and Housing Corporation, Canadian  Housing Statistics (Ottawa: Queen's Printer, 1972), p. 6 2 . "•"^Greater Vancouver Real Estate Board, op. c i t . 14 Dale-Johnson, op. c i t . , Appendix. 1 5 I b i d . 158 Chapter II 1^Acres Western, Ltd., Residential Market Opportunity  Study (Unpublished, 1971), p. 5 . 1 7Economic Council of Canada, Sixth Annual Review (Ottawa: Queen's Pr i n t e r , 1969), p. 22. i f i Acres Western, Ltd., op. c i t . , p. 9. "^Greater Vancouver Real Estate Board, Real Estate Trends  i n Metropolitan 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 of land which may mean that h i s t o r i c rates of development w i l l no longer continue. The major impact of the l e g i s l a t i o n i s that the rate of trans-formation of a g r i c u l t u r a l land into urban land w i l l decrease, es 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 . This means that land w i l l not be available to accommodate a l l the new demand f o r single-family dwellings. The excess demand w i l l be channelled into a d d i t i o n a l demand f o r multi-family housing with the r e s u l t that the projections i n Table 8 f o r multi-family housing may be underestimated. 21 Central Mortgage and Housing Corporation, Apartment  Vacancy Survey, Metropolitan Vancouver, D e c , 1972. i, ft Chapter III 22 "Future Apartment Development," Apartment Owners Journal, (August, 1972), p. 8. 2^Most notably R, Dale-Johnson, Returns on Apartment  Properties (University of B r i t i s h Columbia: Master's thesis, 1972), p. 40. 24 Greater Vancouver Real Estate Board, Real Estate Trends  i n Metropolitan Vancouver (1964-1972). 2< ^ S t a t i s t i c s Canada, "Residential Rent Index," Prices and  Price Indexes (Ottawa: Queen's P r i n t e r , D e c , 1972). 26 S t a t i s t i c s Canada, op. c i t . 2 7 G r e a t e r Vancouver Real Estate Board, op. c i t . . (1972), p. B-3. 28 I t was mentioned previously that land costs must be examined i n the l i g h t of the applicable zoning regulations as they r e f e r to 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 in F.S.R. in the various Greater Vancouver munici-p a l i t i e s . Consequently, comparisons of land cost increases on a square foot basis among the various municipalities i s f a i r l y valid since the land cost per apartment unit has been unchanged by zoning regulations. The exception to this generality occurs in the West End where new multiple dwelling densities were imposed in 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 affect the analysis presented here, as i t i s very recent. 2 9 7"Vancouver Urban Renewal Study: Apartment Districts," 3°Ibid. 31 J Statistics Canada, op. c i t . » P. 73. 3 2 S t a t i s t i c s Canada, op. c i t . (May, 1970), p. X. •^Statistics Canada, op. c i t . (Feb., 1973). P . 73. 3 4 J Central Mortgage and Housing Corporation, Canadian  Housing Statistics (Ottawa: Queen's Printer, 1971), pp. 35-36. -^This information was obtained from officers of the following firms on July 3, 1973» Metropolitan Trust Co. Ltd.! Canada Permanent Trust; and North American Life Insurance Co. -^This i s , in practice, an unrealistic assumption because in the apartment market properties s e l l on the basis of yield and not on the basis of capital costs. Since yields are not increasing as fast as capital costs, developers of apartment buildings cannot s e l l their apartments to investors at a high enough price to cover the increasing capital 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 in 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 project. Since Metropolitan Vancouver i s such a small area, i t i s assumed that construction and financing costs are uniform regardless of location. 160 Chapter IV 38Benjamin Swirsky, "The Income Tax Treatment of Depre-ciable Property," Papers on Real Estate and Income Tax (The Real Estate Institute of Canada, 1972), p. 13. -^Bernard shinder, "Capital Gains and Real Estate Trans-actions," Papers on Real Estate and Income Tax (The Real Estate Institute of Canada, 1972), p. 3. ^See especially Swirsky, op. c i t . . pp. 11-18 and Shinder, op. c i t . , pp. 1-10. i n David A. Ward, "Forms of Ownership of Real Estate," Papers on Real Estate and Income Tax (The Real Estate Institute of Canada, 1972), p. 22. k 2 Department of National Revenue, Taxation, Interpreta-tion Bulletin 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. in June, 1973. r"Future Apartment Development," Apartment Owners  Journal (August, 1972), p. 8. Chapter V ^Much of the information presented in this section was obtained from theiiBuilding Inspector for the City of North Vancouver at an interview on July 6, 1973* ^ 7 C i t y of North Vancouver, Resolution of Council (June 12, 1972). ha Development permits are not required in 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. -* 2City of North Vancouver, Resolution of Council, op. c i t . 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 in July, 1973. ^ C i t y of Vancouver, Zoning and Development Fee By-Law  No, 4188 (September, 1965). 5 5 I b i d . -^Most of the information concerning processing procedures was obtained from the Planning Department in the District of Surrey i n July, 1973. ^ D i s t r i c t of Surrey, Municipal Development Policy (June, 1973), P. 3. 58, 5 9 I b i d . , p. 4. 'Ibid., p. 3. 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 efforts to obtain construction cost data. ^ D i s t r i c t of Surrey, op. c i t . , p. 14. 6 4 I b i d . , p. 14. 6^Ibid., p. 10. Chapter VI 66 R. Dale-Johnson, Returns on Apartment Properties (University of British Columbia: Master's thesis, 1972), p. 18. ^Greater Vancouver Real Estate Board, Real Estate Trends  in Metropolitan Vancouver, 1966-1972. 68 Dale-Johnson, op. c i t . , Appendix. 69 ^Greater Vancouver Real Estate Board, op. c i t . 7 0 Dale-Johnson, op. c i t . . Appendix. 7 1 I b i d . . p. 57. 162 Chapter VII 7 2The British history of rent control has largely been drawn from Adela A. Nevitt, The Nature of Rent Controlling  Legislation in the United Kingdom (Londont Centre for Environmental Studies, 1970), 22 pp. and Michael Audain and C. Bradshaw, "Rent Regulation," Is There a Case For Rent  Control (Canadian Council on Social Development, 1973), PP. 13-37. 7 % . M. S. 0 . , Report of the Committee on the Rent Acts, Cmnd. 4609 (1971) . P. 82. 7 4 I b i d . , p. 8 3 . 7-*Michael Audain and C. Bradshaw, op. ^  c i t . , pp. 13-37 was a valuable source of information for this section. 7^"New York Eases Rent Controls," Apartment Owners Journal (February, 1972), p. 10. 7 7 P h i l i p H. White, The Case Against Rent Control (Torontot Canadian Council on Social Development, 1972) , p. 1. 78, 'H. M. S. 0 . , op. edit" P* 1 3 2 ,  7 9 I b i d . , p. 131. 8 0White, op. c i t . , p. 7 . 8 1 I b i d . , pp. 6 - 9 . Chapter VIII ftp R. Dale-Johnson, Returns on Apartment Properties (University of British Columbiaj Master's thesis, 1972), Appendix. 8 3 I b i d . , pp. 71-72. 84 The data was drawn from Dale-Johnson and i s summarized in that work in Table 14, p. 66; Table 15, p. 74; and Table 16, p. 77. 8-*Many of the limitations were previously discussed in Chapter VI. 86 Dale-Johnson, op. c i t . . p. i i i . 8 7 I b i d . , p. 48. 163 u u I b i d . , pp. 39-42. 89 ^The results of Dale-Johnson's analysis of operating cost ratios i n relation to number of suites are presented in Table 6 of his thesis. Those results show a weak correla-tion between decreasing operating cost ratios and increasing building size. For this reason, i t i s doubtful that an apartment building with seven more apartment suites than another building would have a significantly lower operating cost ratio. Table 5, however, i n Dale-Johnson's thesis shows a clear relationship between increasing operating costs and building age. The fact that the more profitable group of buildings are older and have lower operating cost ratios than the less profitable graph must indicate some management problems in the latter group. 90 Dale-Johnson, op. c i t . , pp. 8-11, 164 BIBLIOGRAPHY Acres Western, Ltd. Residential Market Opportunity Study. Unpublished report prepared for 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 in Canada. Ottawai The Canadian Council on Social Development. 1971. 49 pp. Central Mortgage and Housing Corporation. Canadian Housing  Statistics 1972. Ottawat Queen's Printer, 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. 1972. City of North Vancouver. Resolution of Council. June 12, 1972. City 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 Policies Concerning Residential  Condominium Development in British Columbia. Unpublished Master's thesis: University of British Columbia, 1971. 214 pp. Corporation of the Di 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 thesis: University of British Columbia, 1972. 3^5vPP« Department of National Revenue, Taxation. Interpretation Bulletin 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 Printer, undated"!! 6 pp. Distr i c t of Surrey. Municipal Development Policy. June, 1973. 16 pp. Economic Council of Canada. Sixth Annual Review. Ottawa: Queen's Printer, 1969. Parish, W. G. The Shortage of Residential Mortgage Market  Funds i n Canada. Vancouver: The Real Estate Institute of British Columbia, April, 1968. 23 pp. Financial Post. Toronto: MacLean-Hunter, Ltd., January, 1964-December, 1972. Flaum, T. K. and Salzman, E. C. The Tenants' Rights Movement. Chicago: Urban Research Corporation, 1969. 5? PP. "Future Apartment Development." Apartment Owners Journal. (August, 1972). p. 8. Giesler, J. A. "The Condominium—Canada's Newest Concept in Housing." Canadian Realtor, 16 (May, 1970). pp. 10-19. Greater Vancouver Apartment Owners' Association. Brief On  White Paper Proposals. Unpublished, 1970. 40 pp. Greater Vancouver Real Estate Board. Real Estate Trends in Metropolitan Vancouver. 1964-1972. Hamilton, Stanley W., Davis, I., and Lowden, J. Condominium  Development in Metropolitan Vancouver. Vancouver: The Real Estate Council of British 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 for 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. July 3, 1973. 166 Interview with the Building Inspector. City of North Vancouver. July 6, 1973. Interview with o f f i c i a l s of the Building Department. City of Vancouver. July 9. 1973. Interview with o f f i c i a l s of the Planning Department. Dis t r i c t of Surrey. July 10, 1973. 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 Life Insurance Co. July 3, 1973. Interview with Mr. D. Facer of Wall and Redekop Corporation Ltd. June, 1973. Is There a Case for Rent Control. Background Papers and Proceedings of a Canadian Council on Social Development Seminar on Rent Policy, 1973* 168 pp. Karp, Allen. "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 Controlling Legislation  in the United Kingdom. Londons Centre for Environ-mental Studies, 1970. 23 pp. "New York Eases Rent Controls." Apartment Owners Journal (February, 1972). p. 10. Papers on Real Estate and Income Tax. Don Mills, 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' I2Q~. Real Estate Institute of British Columbia and Greater Van-couver Real Estate Board. Submission on "Proposals for  Tax Reform." Presented to the Standing Committee of the House of Commons on Finance, Trade and Economic Affairs, 1970. 14 pp. Statistics Canada. Census of Canada. Ottawas Queen's Printer, 1966. Volume 1. Statistics Canada. Prices and Price Indexes. Ottawa: Queen's Printer, May, 1970; December, 1972; and February, 1973. "Vancouver Urban Renewal Study: Apartment Districts." Technical Report No. 2. City of Vancouver, 1968. White, Philip H. The Case Against Rent Control. Toronto Canadian Council on Social Development, 1972. 15 pp 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0092959/manifest

Comment

Related Items