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Why Real Estate Developers Are Ignoring the Middle Class

And why some industry leaders worry that ignoring the need for affordable housing will ‘come back to haunt us’

Posted on May 16 2017 by Geoff Dembicki

The real estate industry knows there’s huge demand for less expensive homes. It’s aware that millions of people in Canada and the U.S. don’t have the financial means for a million-dollar mortgage. It gets that this is a growing problem. But real estate developers aren’t that interested in solving it. Land in cities such as Vancouver and Toronto is expensive. Developers — and the industry at large — make much bigger profits building luxury homes for wealthy people than affordable homes for the rest of us. It’s why so few new developments are targeted towards average incomes.

But the real estate industry is not only making a financial calculation. It’s making a social calculation as well. Income inequality has been growing steadily for the past few decades. It’s now at levels not seen in over a century. The real estate industry predicts the gap between rich and poor will continue to widen. It’s aligning itself with our society’s wealthiest members. And it’s ignoring the middle class.

Those are some of the takeaways from Emerging Trends in Real Estate — United States and Canada 2017, a report produced by PwC and the Urban Land Institute. Its authors describe it as “one of the most highly regarded and widely read forecast reports in the real estate industry.” Its conclusions were drawn from a wide-ranging survey of investors, developers, advisers, consultants and other real estate industry leaders. “Researchers personally interviewed more than 500 individuals and survey responses were received from more than 1,500 individuals,” the report explains.

A shortage of “regular rents”

The report’s authors declined an interview. But many of the experts quoted in the report spoke candidly about the industry. Some of them are concerned about the direction it’s heading. “We’re not paying enough attention to affordable housing, and I don’t mean low-income or government-subsidized. Just regular rents. No new buildings are providing that kind of product,” said one CEO. “Time will tell if that’s going to come back to haunt us. Not everybody makes $75,000 to $100,000 a year.”

Housing has become so expensive in cities like Vancouver, San Francisco, and New York that the industry has amended its definition of “affordable.” There is now a “distinction between ‘big-A’ and ‘small-A’ affordability,” the report explains. Big-A affordable housing is what most of us are familiar with. It refers to housing for our society’s poorest members, often built with the support of governments. Small-A affordable housing refers to the needs of people earning $31,000 to $87,000 per year. “In many markets,” the report observes, “middle-income households... are housing stressed, spending more than a third of their income on housing costs.”

The industry knows that this is a problem. A society in which a majority of people can no longer afford your product is bad for business. Increasing numbers of real estate leaders seem to be paying attention. “Housing costs and availability were rated by Emerging Trends survey participants as being ‘considerably important’ issues,” the report reads, “increasing in importance this year when compared with the ‘moderate importance’ given to future home prices and affordable/workforce housing in our survey a year ago.” But acknowledging a problem is only the first step. The real estate industry doesn’t seem interested in actually addressing it.

Many industry leaders have opted to blame others instead. The reason housing is so expensive in cities like Vancouver, they believe, is because local communities are resistant to new development. “[These communities] are engaged in a rear-guard action, contrary to their own self-interest,” the report reads. And governments are also blamed: they must lift restrictions and approve projects faster. “Government needs to increase the supply [of new homes],” one respondent told the report’s authors. “If there was enough supply, there would be no affordability issue.”

Housing for the wealthy

But not everyone in the industry is convinced. “Supply constrained — really?” joked one investment manager. He was referring to huge amounts of new housing being built in ultra-expensive cities like New York and San Francisco. The real issue seems to be that most of this new housing is for rich people. The newest housing tower in Vancouver, for instance, is selling studio apartments for over $1 million. “A lot of construction is happening but a lot of the new projects don't seem to be affordable to locals,” Simon Fraser University professor Josh Gordon recently told the CBC.

Many leaders within the real-estate industry share the assessment. “New homes that are developed tend to be for a high-income market,” reads PwC’s Emerging Trends report. “Few builders are targeting middle-income buyers.” High land and labor costs are partly to blame. “We can’t afford not to develop apartments at the high end,” one respondent said. But so is the real estate industry’s business model. Because affordable homes tend to generate “incremental profits rather than large windfalls,” it reads, most “builders have been targeting more affluent buyers.”

Protesters in Vancouver, B.C., point to the disparity between wage increases and rent increases.

Yet the reasons for this aren’t only financial. They also reflect a social calculation. The real estate industry knows that income inequality is at record highs in Canada and the U.S. It believes this gap will continue to grow. One result of income disparity is to make our society’s top cities inaccessible to regular people. The report likened the experience of living in these cities to attending an invitation-only party. “At the entrance to fashionable nightclubs or red-carpet opening nights, access is controlled through use of velvet ropes on brass stanchions,” it observed. “Bouncers let only select individuals gain entry — the others have to stand and look in from the outside.”

The implication is clear. Cities like Vancouver have become exclusive hangouts for the wealthy. The rest of us are now passive observers of civic life, staring longingly from the periphery. “Just as the downtowns of cities ‘hollowed out’ in the second half of the last century, so too the middle class has been hollowing out,” the report reads. This is not just confined to places like Toronto, New York, and Los Angeles. Inequality is now spreading to secondary cities across the continent. “For these areas and many others, the velvet rope means increasing income segregation,” it reads. The real estate industry wants to be inside the velvet rope. It wants the company of rich people. And it’s abandoned the middle class on the sidelines.

Many leaders within the industry realize that this is a risky strategy. By focusing so heavily on affluent customers the industry is alienating big sections of our society. “Rents are hitting levels that are unaffordable to most of the younger workforce,” the report explains. And with affordability overall “on the decline,” it adds, “the related strain on the social fabric is getting high-level attention.” Real estate leaders know that if prices keep rising there will come a point when the majority of people can simply no longer afford them. “Affordable housing may be the real estate industry’s vulnerable flank,” it reads. But for now many developers are opting to ignore it.

Geoff Dembicki is a reporter for The Tyee, where this article was originally published. His book, Are We Screwed? How a New Generation Is Fighting to Survive Climate Change will be published later this year.


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  1. The Tyee

1.
May 16, 2017 7:35 AM ET

The authors left out a glaring piece of the puzzle.
by John Clark

Foreign investment.

Vancouver along with much of the major cities along the West Coast in general have been overwhelmed with real estate investors from overseas (primarily Asia). This foreign investment appears either in the form of a purchase or as a significant contribution to the down payment for a family member who already lives in the area. This is happening in Toronto and NYC as well but not to the same degree as the west coast. Toronto is mostly "new money" from Financial Services at least my friend whos a R/E Agent in Toronto has told me.

I also think that the "Middle Class" have also begin to re-evaluate their lifestyle and are more focused on quality of life issues vs having the largest house one can afford regardless of how far it is from work.

My two cents.


2.
May 16, 2017 7:49 AM ET

And the energy implication...
by Charlie Sullivan

Unfortunately, the energy implication of this is that middle income families are stuck in low-efficiency houses: old and/or poorly built ones. While the growing size of new houses for the affluent leads to higher energy consumption even when they are built well.

The supply of small or modest-size houses is also reduced every time a renovation includes an addition.


3.
May 16, 2017 8:26 AM ET

Edited May 16, 2017 8:27 AM ET.

Rising income inequality
by Martin Holladay

Author Geoff Dembicki accurately points to the problem of growing income and wealth inequality: "The real estate industry knows that income inequality is at record highs in Canada and the U.S. It believes this gap will continue to grow. One result of income disparity is to make our society’s top cities inaccessible to regular people."

But Dembicki appears to blame the real estate industry for "ignoring" the middle class. I'm not sure whether this is fair. Profits can be found by addressing the demands of the rich; so who can fault the real estate industry for chasing profits?

According to Dembicki's analysis, the development of high-end housing "is a risky strategy." But who knows if Dembicki's crystal ball is clear or cloudy? If Bernie Sanders leads a successful socialist revolution in the U.S. in 2020, then Dembicki's predictions may come true. But if current trends continue, the profit-heavy real estate industry will have the last laugh.


4.
May 16, 2017 8:47 AM ET

@ Charlie
by John Clark

I can't help but think that when considering embodied (sp?) energy staying in a poorly performing house is actually better for the environment.

I have a co-worker who has a family and they've extended their stay in their "starter" home for 10 years. Sure they've wanted to move, but in the end they're in a better position financially even though their current home is less efficient than what they could buy new.

My own situation. We've overstayed in our "starter home" by about 10-12 years as well, and yes it's drafty as hell because of out of square windows and doors, but our mortgage is so low that we couldn't rent an apartment for what we pay. It provides piece of mind in an uncertain job market.


5.
May 16, 2017 9:03 AM ET

Vancouver is a special case.@ John Clark
by Dana Dorsett

Favorable immigration policies in Canada made Vancouver the preferred (by far) safe plan-B for wealthy people in Hong Kong in the lead-up to the reunification with China 20 years ago, and with an established community of Chinese (both ex-pats and citizens) that trend has continued, at a far higher pace and in a different way than US west coast cities. Toronto was also a popular housing-investment destination with the Hong Kong elite during the 90s as well.

While the tech industry has drawn the educated Asians (and others) en masse to some west coast US locations, visa restrictions have limited that much more severely than in Canada. US immigration policy has also driven companies like Microsoft to set up new facilities in Vancouver (rather than their Seattle area home base) and those decisions have only been reinforced big-league by the expressed policies of the new US administration. It's simply a lot harder to immigrate into the US than in Canada. While the well educated & well off are certainly over represented, Canada doesn't insist on taking only the super-educated or super rich. This is in part how Punjabi has become the third most commonly spoken language in Canada, and not just in Vancouver & Toronto.


6.
May 16, 2017 9:17 AM ET

Sometimes is hard to qualify too
by Armando Cobo

A few months ago I talked to a young couple that wants to build a new house, but what they want they couldn’t afford at this time. Interestingly enough, they both drive $100K cars, dress like “Saks Fifth Ave.”, and at their large leased house, with swimming pool and theater, is furnished with a $17K living room set and a wine bar that would be the envy of a top connoisseur.
Oh, and they want to start a family soon… Ha! that must be cheap. You can’t imagine how bad I wanted to spill my thoughts to their bubble


7.
May 16, 2017 10:20 AM ET

Edited May 16, 2017 10:23 AM ET.

@Dana
by John Clark

It's not so much immigration as it is just holding property as a store of wealth . Vancouver (now Toronto) last year began to levy a "foreign buyer tax" on RE purchases. I have an associate who lives in Seattle and he's seen a lot of foreign investors who were pushed out of Vancouver because of the tax.

As for the US, over the years, I've seen many west coast homebuyers who were able place down payments of 40% or more via "gifts" from family located in mainland China. One would be amazed at the number of donor aunts, uncles, cousins, coming from China given their one-child policy over the past 30 years.


8.
May 16, 2017 12:03 PM ET

I understood the land-banking part regarding Vancouver @ #7
by Dana Dorsett

"It's not so much immigration as it is just holding property as a store of wealth "

I understood that part (ergo "plan-B" for many, eventually acted upon by some) but I wasn't aware of the foreign buyer tax. When did that go into effect? Is it retroactive?

While I have relatives in the residential real estate biz for decades in the Seattle area, but foreign buyer speculation/land-banking in that area hasn't come up in casual conversation. I'll ask them about it the next time I visit!


9.
May 16, 2017 12:45 PM ET

Edited May 16, 2017 12:46 PM ET.

@Dana. not sure.
by John Clark

I don't know if the tax is/isn't retroactive.


10.
May 16, 2017 3:22 PM ET

Foreign Investors Tax
by Malcolm Taylor

It wasn't retroactive. There was a race to complete deals before it came in and some lawsuits over deals that didn't make it. The effect was immediate. The market cooled, and the focus shifted to communities without the tax. Victoria saw huge a increase in house prices and a shortage of real estate inventory. Even out in the boonies where I live the market is red hot.


11.
May 16, 2017 3:30 PM ET

Serving the rich - ignoring the rest
by Brent Eubanks

There was a time when pursuit of profit was not considered a moral blank check for corporate behavior, decision-making, and priorities.

Comments like Martin's simply serve to further normalize the current prevailing philosophy: greed is good, and other considerations have no place in business.

This may be the way the world works now, but it has not always been this way, nor does it have to be this way.

This isn't (just) an appeal to altruism and decency. It's the difference between pursuing short-term profits and pursuing long-term success. In other words, it's the sustainability question.

Sooner or later the market will soften, and very possibly collapse for a period of time, business cycles being what they are. When that happens, all the developers who are still mid-project are going wind up holding the bag, while the rest of society gets to deal with a hangover of housing mismatched to its needs. The only people that win are the ones that get in, make their money, and get out.


12.
May 16, 2017 3:53 PM ET

It's because interest rates
by N/A N/A

It's because interest rates are artificially low. They are destroying the free market.


13.
May 16, 2017 3:58 PM ET

Response to Brent Eubanks
by Martin Holladay

Brent,
Our entire financial system is based on the "greed is good" premise. My comment doesn't endorse the system; it states a sad reality.

In a democracy, we have (in theory) the ability to vote for leaders who support policies that will reverse the current trend -- the disastrous concentration of wealth and income in the hands of the wealthiest 1% -- and to adopt a tax system that implements those policies. Unfortunately, there are some very powerful interests who control levers to undermine those goals, and demagogues are capable of fooling voters into thinking that the demagogues have their interests at heart (when these same demagogues are actually in favor of policies that will further concentrate wealth).

But you know that.


14.
May 16, 2017 8:43 PM ET

Edited May 16, 2017 9:22 PM ET.

My experience
by Malcolm Taylor

I've done a lot of small-scale development. When I moved to this area several decades ago lots were around 30 to 40k. Most were zoned for two attached units (called variously duplexes or semi-detached depending on where you are), but no one built them, instead concentrating on updated versions of the single family dwellings that were the dominant housing type in the town.

I found I could build two attached starter-units of around 1000sf and sell each side for 110k while making a good profit. After completing several projects, other builders began to buy lots and build duplexes too. They built units comparable in size to the single family houses they were familiar with, and sold them for around 160k. People holding land felt that it now represented too small a part of the development costs and upped the price of lots to around 100k. My business model no longer worked. I started doing other projects in other areas. When I look at what changed to make starter units no longer viable, I have a hard time taking anyone involved to task.

Maybe my experience isn't at all indicative of the larger economics of development, but I think at the least it has many things in common. When I look at doing a development my thought process is very simple. What can I buy land for? Since I have a good handle of sq ft cost to build, what do the various options allowed by the zoning leave me at the end of the project? It's a bit more complex than that but not much. There is a lot of risk involved. I've made a good profit on some projects, and I've also worked for a year on one that I sold for a loss when the market tanked.

I can't argue that there isn't a lot of greed in our economic model, but I struggle to lay that greed at the feet of builders. In general it's a pretty honest trade. There are a number of players, both private and government whose intervention could profoundly affect the housing market, making it more equitable and affordable. Builders by and large play the hands they are dealt by the system we have collectively chosen - or at least collectively put up with.


15.
May 17, 2017 4:31 AM ET

Response to Malcolm Taylor
by Martin Holladay

Malcolm,
Thanks for your comments. I agree with you that it makes little sense to blame developers -- that was the main point I was trying to make in Comment #3.

And I also agree that "There are a number of players, both private and government whose intervention could profoundly affect the housing market, making it more equitable and affordable" -- which was the main point I was trying to make in Comment #13.


16.
May 17, 2017 7:23 AM ET

@Malcolm
by John Clark

God forbid you make a profit fulfilling customer demand in spite of gov't regulations (i.e. zoning). The horror.


17.
May 17, 2017 11:35 AM ET

affordable housing stats
by Patrick Stuart

I meet 3 - 4 times/year with affordable housing advocates across the state of Ohio and the loss of low-income housing has been increasing across the board (not just in high-rent territory). There’s several underlying factors, much of which can be traced back to gentrification, former HUD properties opting out of renewing their contracts due to rising property values, growing income disparity and lack of political will. As others have commented, private developers can’t be faulted for wanting to make money. But politicians can provide incentives/pass legislation such as set-asides for low-income residents in multifamily development and increased support for Low Income Housing Tax Credits (LIHTC), which is currently a prime method for developing affordable housing. Some stats from a 2015 Harvard study:
• 300,000 affordable housing units disappear every year in the US.
• There’s decent affordable housing for only one out of four low-income renters.
• Half of all renters (across all income groups) spend roughly 30% of their income on rent.
• Since 2000, both overall rents and the number of low-income renters have increased.
• The majority of affordable housing was built prior to 1980 (i.e., before energy standards).
• Making current rentals 20% more efficient would save $8 billion per year nationally.

This is an issue that affects everyone and should be non-partisan (and in a lot of cases, there is support from all sides). Unfortunately, it often gets bogged down by clichés and misunderstandings that impede progress and only make a serious problem worse.


18.
May 18, 2017 1:26 PM ET

@ Patrick
by John Clark

A quick read regarding affordable housing (past/present).

Google: Government's War on Affordable Housing , Mises


19.
May 19, 2017 6:20 PM ET

Missing a Big Fact
by Jeff Towson

All discussions of affordable housing seem to leave out a huge fact. When the rich guy buys a new home, he does not bulldoze his old one. How many homes in your town were formerly considered wealthy or middle-class houses, but are now occupied by people somewhat lower on the economic scale? Unless you live in some millennial mecca, chances are just about every home that's on its third or more owner is as described. If you aspire for the green housing stock to increase in this country, then you build house for those people who can afford to buy well-built, energy efficient homes that will be standing and desirable a century from now, not upon so-called affordable housing with sketchy quality that are half occupied in three generations, but nonetheless will forever occupy land now unsuitable for farming or forests.

You may not like the way Adam Smith refers to us as the inferior or middling ranks, but what he says as follows still holds true today. "The houses, the furniture, the clothing of the rich, in a little time, become useful to the inferior and middling ranks of people. They are able to purchase them when their superiors grow weary of them; and the general accommodation of the whole people is thus gradually improved, when this mode of expense becomes universal among men of fortune. In countries which have long been rich, you will frequently find the inferior ranks of people in possession both of houses and furniture perfectly good and entire, but of which neither the one could have been built, nor the other have been made for their use." Adam Smith - The Wealth of Nations


20.
May 20, 2017 5:19 AM ET

Edited May 22, 2017 12:36 PM ET.

Response to Jeff Towson
by Martin Holladay

Jeff,
If my family is working class, and we can't find affordable housing near our jobs, I can't imagine why your analysis would comfort me. We're talking about a major problem in the U.S. (and parts of Canada) -- the lack of affordable housing. The problem is well documented.

How long will working class people have to wait until a few McMansions become available at affordable rents? In what possible universe is your analysis a helpful approach to the lack of affordable housing?


21.
May 22, 2017 3:05 AM ET

Response to Martin
by Jeff Towson

Thank you for your well-thought response to things I never stated. I now see the error of my ways.


22.
May 22, 2017 8:13 AM ET

Edited May 22, 2017 12:39 PM ET.

Response to Jeff Towson
by Martin Holladay

Jeff,
If I misinterpreted your comments, I apologize.

The author of this blog notes that a high percentage of new residential development focuses on luxury homes for wealthy buyers. This is occurring in cities with an acute shortage of low-income housing.

You note that after many years, some homes that were developed for the wealthy become available to middle-income buyers or even low-income buyers. (That only happens, by the way, if the neighborhood becomes undesirable or the buildings start falling apart due to deferred maintenance. But you're right -- it happens.)

Even if I concede your point, I don't understand how this observation is relevant to the crisis in housing for middle-class or lower-class familes that Geoff Dembicki is writing about.


23.
May 22, 2017 9:50 AM ET

Response to Jeff Towson
by Charlie Sullivan

Jeff's concept would work well if the wealthy all spent their money on upgrading to higher-quality construction buildings, maintaining the same size. When they moved to a 1800 sq ft house that met the latest energy code, they'd free up another 1800 sq ft house that met the previous energy code, and would be an upgrade for a less wealthy family. But it doesn't work that way because they are more often upgrading the size than the construction quality. It comes back to my point in comment number 2.

It is true that there are GBA readers who spend their money on building very high quality modestly sized or even small houses. Those houses will be windfalls for the families who move into them later.


24.
May 22, 2017 11:15 AM ET

Still
by Malcolm Taylor

It's hard to believe we are still devoting time to debating trickle-down economics as a serious theory.


25.
May 22, 2017 11:49 AM ET

Response to Martin
by Jeff Towson

"You note that after many years, some homes that were developed for the wealthy become available to middle-income buyers or even low-income buyers. (That only happens, by the way, if the neighborhood becomes undesirable or the buildings start falling apart due to deferred maintenance. But you're right -- it happens.)" No need to concede a point, because my point was that the person who bought the new luxury townhouse, home, etc. vacates their former residence, which was for some reason less desirable (didn't want a rancher, wanted bigger closets, or whatever) and houses in the former neighborhood become more in supply. And the person who bought their former home left another home as well and so on. The effect is almost immediate upon the entire market whether the town's newest home has bigger closets, better insulation, geothermal, or not.
"(That only happens, by the way, if the neighborhood becomes undesirable or the buildings start falling apart due to deferred maintenance. But you're right -- it happens.)" I disagree to some extent, depending upon what you mean by undesirable, peoples' taste change as we all know, maybe some people don't want to be around their new neighbors, but the house still functions if it was well-constructed. Then again, we're talking about building affordable homes, not guarantying people their neighbor is not dealing drugs. Deferred maintenance is usually a result of, not the cause of, a neighborhood not being as desirable. Unless, of course, the entire neighborhood was built in a poor manner (I'm sure we can all name one subdivision in our town that went from new middle class "starter homes" to money pits and then to slums in 30 years), which brings me full circle on why we should always err for construction being higher quality, not necessarily immediately affordable, because everyone benefits in both the short and the long-term.


26.
May 22, 2017 12:23 PM ET

Edited May 22, 2017 12:28 PM ET.

Response to Malcolm
by Jeff Towson

This is not "trickle down economics" but it is economics. And, since I'm not anti-science, I believe that if the science of economics were more often studied and not cast aside then we could have averted such disasters for the poor and working class as the largely abandoned concept of rent control and its resulting effect on housing supply. Politics wins in the short-run, [economics, biology, chemistry,...] wins in the long-run.


27.
May 22, 2017 12:31 PM ET

One more point in response to Jeff Towson
by Martin Holladay

Jeff,
You wrote that "the person who bought the new luxury townhouse, home, etc. vacates their former residence." An interesting idea -- but, alas, untrue.

In the cities where the phenomenon discussed in the article is most acute -- London, New York, and Vancouver -- the foreign buyers aren't vacating their former residences. These foreign buyers own two, three, or in some cases four residences -- so their purchases aren't freeing up any real estate for grateful peons eager to buy what their overlords release to the market.

Foreign buyers are creating empty neighborhoods in London. Here are a couple of articles on the phenomenon:

‘It’s like a ghost town’: lights go out as foreign owners desert London homes

Empty homes, foreign buyers fuel resentment in London


28.
May 22, 2017 12:49 PM ET

Edited May 22, 2017 12:54 PM ET.

Response to Martin
by Jeff Towson

"An interesting idea -- but, alas, untrue." Really? Okay, save London, New York, Vancouver where vacation home investors are competing with residents, someone is selling a house which is now available. Fortunately 90% of us are not living in or plan to move to those cities. Of course, we almost all live in towns, cities, or cow pastures that are rising or falling in popularity from year to year, and I have not aspired to solve all the world's problems (or fortunes). So, yes, demand is the other side of supply and that affects prices too.

Edited to add, but, yes, it does suck to be priced out of homes by people just looking to make a buck off of it or hide the money they stole from their corrupt third-world country. I wouldn't even want to consider the best ways to deal with that.


29.
May 22, 2017 1:19 PM ET

Edited May 22, 2017 1:20 PM ET.

Response to Martin, another, but hopefully final, thought
by Jeff Towson

It does; however, illustrate one of my points, but coming from a different side. These foreign investors, at least initially, were likely not buying $80k fixer-uppers, which as an investor doesn't give them much bang for their buck. The wealthy foreign investor very likely first priced out the surgeon, who could then only afford the Pediatrician's home, who could then only afford the attorney's home, who could then only afford the bookkeeper's home and so on until the day laborer gets priced out completely. So, new housing demand at any level can affect everyone, just as new housing supply at any level can affect everyone and very quickly.

Let's get back to happier ways of spending our time though. Polyiso versus XPS?


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