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Why Developers Only Seem to Build McMansions · The Missing Middle Podcast

• 0:00
  SPEAKER_01: If you drive through some of the most populated parts of Canada, like southern Ontario around the GTA, you start to notice a trend.
• 0:06
  SPEAKER_01: It's hard to find a single detached home built in the last, say, 15 years that isn't absolutely massive.
• 0:12
  SPEAKER_01: Now, you will see smaller homes like townhomes, and we all know how many two box condos popped up in the last couple of decades, but there's a real absence of small detached homes.
• 0:21
  SPEAKER_01: Classonomics, hosted by Sabrina Maddow and Mike Moffat.
• 0:26
  SPEAKER_01: So, Mike, the obvious question, are we just imagining this or have small detached homes really gone extinct?
• 0:32
  SPEAKER_00: You're not imagining it at all.
• 0:34
  SPEAKER_00: Now, there are parts of the country where you still see a fair bit of size diversity when it comes to what I call ground-oriented homes.
• 0:42
  SPEAKER_00: So that's your single-dached, your semi-detached, your town homes, things like that.
• 0:45
  SPEAKER_00: There's a big diversity.
• 0:47
  SPEAKER_00: But in much of southern Ontario, these homes, these small detached homes, they've gone extinct.
• 0:54
  SPEAKER_00: And that really didn't happen all that long ago.
• 0:56
  SPEAKER_00: That it really has been in the last, say, 15 years or so that we've stopped building them.
• 1:02
  SPEAKER_01: Right.
• 1:02
  SPEAKER_01: It's a bit strange on the surface, though, given how much flation is going on in our economy today and how high-rise condo units keep getting smaller and smaller.
• 1:10
  SPEAKER_01: But that when it comes to detached homes, they're mostly massive and haven't shrunk down at all.
• 1:15
  SPEAKER_00: Yeah, it really is counterintuitive.
• 1:17
  SPEAKER_00: Like everything else in our economy gets smaller and smaller and smaller.
• 1:20
  SPEAKER_00: But when we look at detached homes, they seem to get larger and larger and larger.
• 1:23
  SPEAKER_00: Though I would say most of what's going on is not so much that the small detached homes have become big detached homes, but rather that we've continued to build the big ones like we've always built.
• 1:34
  SPEAKER_00: But those small detached homes, they've either been replaced by town homes, by high-rise condo units, or in many cases, nothing.
• 1:43
  SPEAKER_00: So it's not so much that things are going up in size, but those small detached homes have actually shrunk in size to the point at which they're actually no longer detached homes.
• 1:53
  SPEAKER_01: That leads to another obvious question.
• 1:55
  SPEAKER_01: Why don't developers build those homes anymore?
• 1:57
  SPEAKER_01: I mean, clearly people want them.
• 1:58
  SPEAKER_01: There's a market for them, but developers simply aren't building them.
• 2:02
  SPEAKER_01: Why?
• 2:02
  SPEAKER_00: Yeah, and it really isn't a lack of demand.
• 2:04
  SPEAKER_00: I know so many young middle-class people who would kill for one of those homes, but they're not being made.
• 2:10
  SPEAKER_00: And that seems like a bit of a paradox.
• 2:13
  SPEAKER_00: And the short answer here is that the project economics for small detached homes just doesn't work in much of the country anymore.
• 2:20
  SPEAKER_00: When it comes to building a detached home, there's a lot of costs that are largely fixed.
• 2:25
  SPEAKER_00: So they don't vary with the size of the home.
• 2:27
  SPEAKER_00: It's the same cost if it's a small detached or big detached home.
• 2:31
  SPEAKER_00: Or they really just don't grow proportionally.
• 2:34
  SPEAKER_00: So that's your short answer that the project economics don't make sense.
• 2:38
  SPEAKER_00: That if you're going to build a detached home, you're much better off building a really big one than a small one.
• 2:44
  SPEAKER_00: Uh, but to give you the long answer, we've got to look into the data and examine each individual cost.
• 2:50
  SPEAKER_01: And the missing middle has been doing a fair bit of work lately, drilling down on the cost of home building.
• 2:55
  SPEAKER_01: And it does differ by housing type and community.
• 2:58
  SPEAKER_01: And you've got an example for us today.
• 3:00
  SPEAKER_00: Yeah, so here at MMI, we have a fair bit of cost data on building family-sized homes in smaller communities near Ottawa.
• 3:08
  SPEAKER_00: So not within the city itself, but just nearby.
• 3:10
  SPEAKER_00: And we've got like really detailed information, you know, down to the price of roofing shingles.
• 3:14
  SPEAKER_00: So for a variety of home types from town homes to detached, both small and large.
• 3:21
  SPEAKER_00: And, you know, for the next uh few minutes or so, you and I will use this data to show why it's hard to build a small detached home.
• 3:28
  SPEAKER_00: And to be clear, the Ottawa market is still a place where it's somewhat feasible to do, but even in a somewhat affordable market like Ottawa, it's really tough to build a small detached home.
• 3:40
  SPEAKER_00: You try and do it uh in the broken housing economics of the GTA, it's not, it's just not viable.
• 3:47
  SPEAKER_00: But we can kind of show even why in the city or around the city of Ottawa, it's difficult to build a small detached home.
• 3:54
  SPEAKER_01: So, what do these homes look like and how much do they cost?
• 3:58
  SPEAKER_00: Yeah, so as a warning, this is gonna be an episode where we throw a lot of numbers at you folks.
• 4:04
  SPEAKER_00: Uh, you know, I wish that wasn't necessary, but it really is unavoidable.
• 4:08
  SPEAKER_00: But we're gonna limit this as much as possible and really try and focus on the big picture.
• 4:13
  SPEAKER_00: So when we look at this Ottawa area data, it includes all kinds of family homes, you know, town homes, duplexes, and detached homes, including uh single detached under like 1,500 square feet, which really aren't getting built in much of southern Ontario.
• 4:27
  SPEAKER_00: So a wide variety of uh homes.
• 4:31
  SPEAKER_00: Uh price-wise, we're talking about uh detached homes in the market of about$600,000 on the low end to 1.1 million on the high end.
• 4:40
  SPEAKER_00: The size were ranging from about 1,200 square feet to about 3,000 square feet.
• 4:45
  SPEAKER_00: And the profit margin here right now in the current market, you know, is just large enough so that a bank will actually give a builder a construction loan.
• 4:54
  SPEAKER_00: So the builders and developers here, they're they're making money, but they're not making money hand over fist because it's not a great market right now.
• 5:00
  SPEAKER_00: But even the fact that it's not a great market right now, you know, we're still talking$600,000 for a detached home.
• 5:07
  SPEAKER_00: So it's hard for even, you know, young middle-class families to get into the market.
• 5:12
  SPEAKER_00: So to understand, you know, why these homes cost so much and why it we are cost advantaging large homes, we're gonna have to break down the cost of home building one by one.
• 5:22
  SPEAKER_00: So, Sabrina, I'm gonna let you take the take the lead on this.
• 5:26
  SPEAKER_01: Badly.
• 5:27
  SPEAKER_01: So the first thing you need to build a single family home is the land, obviously.
• 5:30
  SPEAKER_01: Now, for a fully serviced lot outside of Ottawa, the ballpark figure is 6,000 bucks for every foot wide the lot is.
• 5:37
  SPEAKER_01: So that means a 30-foot wide lot would cost around 180 grand, although obviously actual price would vary greatly based on market condition and where that land is located.
• 5:47
  SPEAKER_00: Yeah, and you used a really important term there, that fully serviced lot.
• 5:51
  SPEAKER_00: That's important.
• 5:52
  SPEAKER_00: So it's not just the raw cost of the land.
• 5:54
  SPEAKER_00: It's not just like, okay, what we paid some farmer for the land, but it's also the cost to get that land to have direct access to utilities, the road leading up to it, access to sewer and electrical, you know, lampposts, whatever.
• 6:06
  SPEAKER_00: And both the cost of the land and the cost of the servicing is proportional to the size of the lot, not the size of the house.
• 6:13
  SPEAKER_00: So, you know, at that 6,000 bucks per foot lot width, you know, you're looking at 240 grand for a 40-foot lot, you know, 180 grand, as you mentioned, for a 30-foot lot, and so on.
• 6:24
  SPEAKER_00: And this is actually one of the reasons why townhomes have become so popular because they're side by side.
• 6:29
  SPEAKER_00: So the lot for any individual house is a lot narrower.
• 6:33
  SPEAKER_00: So you can shrink that land footprint town to like 20 feet or so.
• 6:36
  SPEAKER_00: You know, you're saving just right there, you're saving about 100 grand relative to what it would cost to build a tash home.
• 6:44
  SPEAKER_00: And, you know, that's a lot of money, and that can make the difference between, you know, whether or not somebody could qualify for a mortgage.
• 6:49
  SPEAKER_01: Yeah, I mean, 180 grand feels really expensive given it's just the land, and we haven't even put a shovel into the ground yet.
• 6:57
  SPEAKER_00: Yeah, it really is expensive.
• 6:59
  SPEAKER_00: And to you know, put that into context, 180 grand is more than I paid for my entire home 20 years ago on a 30-foot lot.
• 7:06
  SPEAKER_00: So, you know, think about that.
• 7:08
  SPEAKER_00: You know, back in 2004, I got the 30-foot lot, the house, the servicing, everything under 180 grand.
• 7:15
  SPEAKER_00: Today, all you get is the service lot.
• 7:18
  SPEAKER_00: Now, some of that growth is obviously inflation, you know, prices and incomes are higher than they were in 2004.
• 7:24
  SPEAKER_00: Some of that is infrastructure costs increasing faster than inflation.
• 7:28
  SPEAKER_00: But a lot of the increase here is just the fact that land prices have gone up so much.
• 7:33
  SPEAKER_01: A bigger detached house is going to require more land, though, than a smaller one.
• 7:37
  SPEAKER_01: So land getting more expensive shouldn't necessarily give a cost advantage to building McMansions, or should it?
• 7:43
  SPEAKER_00: Yeah, well, that's the kind of conventional wisdom that, you know, it's like, okay, bigger house, bigger land, so it all should even out.
• 7:50
  SPEAKER_00: But that's not entirely true.
• 7:52
  SPEAKER_00: Uh, first, because in many municipalities, there are minimum lot width rules for detached homes.
• 7:57
  SPEAKER_00: So even if your design only needs 25 feet, you might be required to use something larger than that.
• 8:03
  SPEAKER_00: So you're kind of required to pay for land that you don't necessarily need.
• 8:06
  SPEAKER_00: Now, you still get to use it.
• 8:07
  SPEAKER_00: You know, kids can run around that land and so on.
• 8:10
  SPEAKER_00: Uh, but you can't, you know, in many places you can't build a really small home on a really small lot.
• 8:15
  SPEAKER_00: That's just not allowed.
• 8:17
  SPEAKER_00: But the more important issue is side setbacks, and that's the basically the area between the edge of the house uh and the edge of the lot.
• 8:26
  SPEAKER_00: Uh let's say, and that's just gonna differ from municipality to municipality, but let's say you live at a place where you need kind of five feet on on either side uh between the the house and the lot.
• 8:36
  SPEAKER_00: So really that's kind of 10 feet of width that you can't build on.
• 8:40
  SPEAKER_00: Well, if you think about it, if you have a 30-foot wide lot, you've got 20 feet of usable space uh to to build the home because the the rest is taken up uh by uh by setbacks.
• 8:51
  SPEAKER_00: So you can basically use two-thirds of the space you have for home building from a width point of view.
• 8:57
  SPEAKER_00: But if you have a 40-foot lot, you can build 30 feet on it.
• 9:00
  SPEAKER_00: So now you've gone from being able to use two-thirds of the space to three-quarters of the space.
• 9:05
  SPEAKER_00: So you're getting more bang for your buck on land costs, but I don't think people really care that much how wide you know the the side of their uh their lot is.
• 9:14
  SPEAKER_00: You might use the front yard, the backyard, you're not you know spending too much time on the side yard of your house.
• 9:20
  SPEAKER_00: So when land prices are really expensive like they are now, this dynamic starts to matter because you'd rather be able to use, you know, three-quarters of the width than two-thirds of the width.
• 9:30
  SPEAKER_01: Okay, so then how do we get the price of serviced land back down?
• 9:33
  SPEAKER_00: So most of it has to do with creating more competition for development land.
• 9:37
  SPEAKER_00: It's about being realistic about urban growth boundaries and population growth so that there's competition for land, so land prices don't skyrocket.
• 9:46
  SPEAKER_00: But it's also for allowing more options on existing land so we can build multiplexes or build residential on top of commercial, that kind of thing.
• 9:54
  SPEAKER_00: You know, it really does just boil down to the supply and demand for land.
• 9:58
  SPEAKER_00: And governments have the ability to impact both sides of that equation.
• 10:01
  SPEAKER_00: And for the last 20 years, they've really done a lot to, you know, limit the supply of that land while increasing the demand.
• 10:08
  SPEAKER_00: So it's no wonder that land prices have gone through the roof.
• 10:12
  SPEAKER_01: Okay, so let's get back to adding up the costs here.
• 10:14
  SPEAKER_01: Next, you've got soft costs and site overhead costs.
• 10:17
  SPEAKER_01: These include our favorite topic, development charges, but also costs like legal fees associated with closing and engineering fees, down to portable toilets and office salaries.
• 10:27
  SPEAKER_01: Your data shows these add anywhere from 100 to 130 grand to the cost of a detached home outside of Ottawa.
• 10:34
  SPEAKER_01: Is that right?
• 10:35
  SPEAKER_00: Yeah, that's that's about it.
• 10:36
  SPEAKER_00: And again, this is really going to vary.
• 10:38
  SPEAKER_00: And most of that cost or the the uh biggest cost component there is that development charge side.
• 10:43
  SPEAKER_00: And this data is before the recent federal provincial agreement uh on to lower development charges.
• 10:49
  SPEAKER_00: So, you know, this is uh past data.
• 10:52
  SPEAKER_00: So governments are already acting on this, but before that action, you know, depending on what community you were looking at outside of Ottawa, you you know, you could be looking at 40 grand in one and 65 grand in another for development charges.
• 11:04
  SPEAKER_00: And really all that gets you is just the permission to build a house.
• 11:08
  SPEAKER_00: And, you know, those fees are for detached, they're gonna differ.
• 11:11
  SPEAKER_00: Uh, you know, if you're building town homes, they're they're smaller and so on.
• 11:15
  SPEAKER_00: But the really important thing here is that cost does not change regardless of the size of a detached home.
• 11:23
  SPEAKER_00: You know, you could build a very small 1,000 square foot detached home, or you could build a 10,000 square foot McMansion.
• 11:32
  SPEAKER_00: Either way, the development charge is 65 grand.
• 11:35
  SPEAKER_00: It doesn't change at all.
• 11:36
  SPEAKER_00: So your house can be 10 times as large.
• 11:39
  SPEAKER_00: The development charge doesn't change.
• 11:41
  SPEAKER_01: So that obviously seems to encourage building a larger home.
• 11:44
  SPEAKER_01: Why wouldn't you if you can grow the home, get more money for it, but your development charges don't change?
• 11:49
  SPEAKER_00: Yeah, exactly right.
• 11:51
  SPEAKER_00: The tax doesn't grow proportionally to the size of the home.
• 11:53
  SPEAKER_00: So, like, imagine if we tax other things that way.
• 11:55
  SPEAKER_00: Like, imagine if the sales tax on cars is treated the same way that would go, okay, the HST on a new car is$5,000, regardless of what it is.
• 12:03
  SPEAKER_00: So you could buy a Rolls-Royce, uh Hyundai Elantra, doesn't matter, it's$5,000.
• 12:09
  SPEAKER_00: Well, obviously that's gonna encourage car buyers to spend a bit more money, buy something a little bit nicer because they're not having to pay any more tax when they do it.
• 12:18
  SPEAKER_01: Yeah, and it'd be super regressive as cars catering to middle class families would actually pay a higher percentage of tax on their purchase than the rich.
• 12:25
  SPEAKER_01: So, what about the other costs in this category?
• 12:27
  SPEAKER_01: Do those change much depending on the size of the home?
• 12:30
  SPEAKER_00: Yeah, they really don't.
• 12:31
  SPEAKER_00: Like the closing costs are the same.
• 12:33
  SPEAKER_00: The architecture costs are roughly the same.
• 12:36
  SPEAKER_00: You know, there are communities where building permits are charged by the square foot.
• 12:40
  SPEAKER_00: So they do go up as homes get larger, but even there, we're only talking about a few hundred dollars.
• 12:44
  SPEAKER_00: So for the most part, it's it's a fixed cost.
• 12:46
  SPEAKER_00: It really doesn't grow proportionally with the size of the home.
• 12:50
  SPEAKER_01: So soft costs also favor building with mansions.
• 12:52
  SPEAKER_01: How do we fix that?
• 12:54
  SPEAKER_00: Well, the obvious place to start is by addressing development charges.
• 12:57
  SPEAKER_00: And we put out so much research and content on ways to reduce those.
• 13:01
  SPEAKER_00: I'm not going to relitigate that.
• 13:03
  SPEAKER_00: You know, we've also looked at how to exempt those development charges from HST to avoid tax on tax and so on.
• 13:09
  SPEAKER_00: Go to the missing middle initiative and you see all of this content.
• 13:13
  SPEAKER_00: But beyond that, the one obvious thing we could do is make development charges proportional to the size of the home so that larger detached houses pay more and smaller ones pay less.
• 13:23
  SPEAKER_00: And interestingly enough, like a lot of municipalities do that for apartments.
• 13:26
  SPEAKER_00: You know, that you might pay a higher development charge for a two-bedroom versus one-bedroom apartment.
• 13:32
  SPEAKER_00: But we generally speaking don't do that for detached homes, but we obviously could, and that would create more of a level playing field.
• 13:39
  SPEAKER_01: Okay, so let's step back and review what we've got so far to build our detached home outside of Ottawa.
• 13:44
  SPEAKER_01: We've got land costs, site overhead costs, and soft costs, including development charges.
• 13:49
  SPEAKER_01: And now we're up to 300 grand and we haven't even built anything yet, although we do have a porta potty and a dumpster on site.
• 13:55
  SPEAKER_01: So I guess that's something.
• 13:56
  SPEAKER_01: But next there's the actual construction costs, which obviously includes the home, but also exterior features like a driveway, landscaping, and things like that.
• 14:05
  SPEAKER_01: So, unlike our other costs, these do seem to mostly grow proportionally to the size of the house.
• 14:10
  SPEAKER_01: Bigger the home, the higher the cost.
• 14:12
  SPEAKER_01: But even with these costs, a home that is twice as large doesn't mean your construction costs double.
• 14:17
  SPEAKER_01: So why is that?
• 14:18
  SPEAKER_00: Well, well, think of it this way: like, let's say you purchase a home that's twice as big.
• 14:22
  SPEAKER_00: You're not actually having to go out and buy twice as much of everything.
• 14:25
  SPEAKER_00: You know, you're not having to buy two furnaces instead of one, two water heaters instead of one.
• 14:31
  SPEAKER_00: Now, you will probably have to buy a bigger furnace and buy a bigger water heater, but it's not twice as expensive to do so.
• 14:39
  SPEAKER_00: You know, you also probably need more bathrooms, more bathtubs, but again, you're not often buying twice as many.
• 14:45
  SPEAKER_00: So there are some economies of scale here.
• 14:48
  SPEAKER_00: Because a lot of what you're buying with a bigger home is bigger rooms.
• 14:52
  SPEAKER_00: Uh, and that has bigger floor space, but it doesn't necessarily have more items in that room.
• 14:57
  SPEAKER_00: Now, the actual cost you pay will depend on the quality of the finishes.
• 15:01
  SPEAKER_00: So you can kind of at some level, you know, pay as much as you want.
• 15:04
  SPEAKER_00: So if you want solid gold toilets, you know, obviously that's gonna cost more.
• 15:08
  SPEAKER_00: But the for the homes that we looked at, you know, for a 1,500 square foot home, you're looking at about$300,000 in construction costs.
• 15:16
  SPEAKER_00: But for a 3,000 square foot home that's twice as large, that goes up to about$450,000.
• 15:21
  SPEAKER_00: So it's not doubling, it's more of a 50% increase.
• 15:24
  SPEAKER_01: So for a smaller home, the land costs, soft costs, and site overhead costs might be more in total than the construction cost for building the actual home.
• 15:32
  SPEAKER_00: Yeah, exactly.
• 15:33
  SPEAKER_00: Because we looked at, you know, and then once I looked at the land cost and everything, you said, well, that's about 300,000.
• 15:37
  SPEAKER_00: And then we said, okay, if you're building a 1,500 square foot home, all of those costs are about 300,000.
• 15:43
  SPEAKER_00: So, you know, oftentimes, you know, the actual structure that you're building is less than half of the cost of the purchase.
• 15:51
  SPEAKER_00: And that's in Ottawa or like rural Ottawa, where land costs are much more affordable than other parts of the country.
• 15:58
  SPEAKER_00: So in a place like the GTA, where land prices are really high, development charges are really high, you know, 70, 80, 85% of what a new home buyer is paying for is everything but the actual house.
• 16:11
  SPEAKER_00: The actual structure might only be 15 or 20% of the costs.
• 16:15
  SPEAKER_00: And there's and we haven't even covered all the costs yet.
• 16:17
  SPEAKER_00: So, you know, there's a bunch that we can speed run through that really don't grow with the size of the house.
• 16:22
  SPEAKER_00: There's interest on the construction loan, there's carrying costs in the land, there's the financing and acquisition of the land, things like uh property taxes that you have to pay before you sell the home and somebody else takes it.
• 16:34
  SPEAKER_00: There are warranty expenses.
• 16:35
  SPEAKER_00: A builder is gonna build in a two to three percent contingency buffer on construction costs because you know, some of that work's gonna have to be done over.
• 16:42
  SPEAKER_00: Prices might unexpectedly spike on inputs like drywall and so on.
• 16:47
  SPEAKER_00: So you add in all of those other costs that I speedrun through, you're looking at about 30 grand.
• 16:52
  SPEAKER_00: And again, most of those aren't really proportional to the size of the house.
• 16:56
  SPEAKER_00: It it's close to a fixed fee.
• 16:59
  SPEAKER_01: Yeah, but you've left out something pretty important, and that's profit.
• 17:02
  SPEAKER_01: I mean, developers aren't charities.
• 17:04
  SPEAKER_00: Yeah, of course.
• 17:05
  SPEAKER_00: We can't forget them.
• 17:06
  SPEAKER_00: Uh, that is uh, you know, uh at the end of the day, the customer does pay for that, uh, the home buyer does pay for that.
• 17:14
  SPEAKER_00: And, you know, in a market like the current conditions in Ottawa, there's about$60,000 to$100,000 built in there on the size of the home.
• 17:21
  SPEAKER_00: And for the most part, in the data we've seen, that the profit margins are about the same, you know, on a 1,200 square foot house or 3,000 square foot house, it's you know, the same kind of profit margin.
• 17:32
  SPEAKER_00: In dollar terms, there's more money to be made on a larger home just because you know that the costs are higher at the same margin, the overall profit is higher.
• 17:41
  SPEAKER_00: But but you are kind of looking in that 60 to 100 grand range.
• 17:44
  SPEAKER_01: So have we got it all yet?
• 17:47
  SPEAKER_00: We've already done a lot, but we were actually missing one big thing, and that's the HST.
• 17:52
  SPEAKER_00: Now, right now, there is a temporary uh full HST rebate, but if we go back a few months ago, before that was out there, that's gonna add another 60 to 110,000 to the cost of one of these homes.
• 18:04
  SPEAKER_00: You know, somewhat coincidentally, that's also the size of the profit on one of these homes.
• 18:09
  SPEAKER_00: So the profit of actually building these homes, you know, the the the builder and developer basically gets as much for doing all this work as the government gets in in HST.
• 18:18
  SPEAKER_00: You know, at least that that HST is split across two governments.
• 18:21
  SPEAKER_00: But, you know, it's it tends to be about the same amount.
• 18:24
  SPEAKER_00: So if you add all of these costs together that we we've uh mentioned, that gets you to that 600,000 to 1.1 million, depending on where in the Ottawa region you're looking at, where is it located, how much land you're using, you know, the quality of the overall finishes and so on.
• 18:40
  SPEAKER_01: Okay, so this is probably more than I or anyone else ever needed to know about why homes are so expensive.
• 18:46
  SPEAKER_01: But it's actually been really interesting and educational for me as well, and really does explain why Project Economics favor building McMansions.
• 18:54
  SPEAKER_01: So thank you everyone for sticking with us and for watching and listening and to our producer, Meredith Martin, and our editor, Sean Fork.
• 19:01
  SPEAKER_00: And if you have any thoughts or questions about the price of a solid gold toilet, please send us an email to missingmiddlepodcast at gmail.com.
• 19:08
  SPEAKER_01: And we'll see you next time.