Laneway housing has been a hot news topic in Vancouver this fall. Often, stories have presented this latest housing trend as the ultimate answer to building affordability into the Vancouver market. With 1,000 city permits now issued for laneway homes since 2009, I've heard many people talk about what a great way it could be to build income on your existing property. Or how it can provide a unique solution by offering grown children or aging parents a place to live.
But based on numbers alone, a laneway house project is probably not a solid investment for landowners.
As a developer, I often get asked my opinion on laneway houses. And even though I don't own one myself, or have any stake in a company that builds them, I decided to put some numbers together.
The cost to build a typical laneway house -- a 644 square foot house on a 33-foot lot -- is about $300,000 on the West Side*. That's just construction costs and does not include the land.
Let's assume you have no debt and you miraculously build on time and on budget. Let's also assume you lease it up immediately for $2,150/month and have no vacancy allowance. Even with all these generous assumptions your annual return is just 3.58%.
For a similar return, you can buy a ten-year government bond, risk free. Or for a greater 5-7% yield, you can invest in a corporate bond or a public REIT stock. So with such a low return, why would you take the risk? Economically, it doesn't make sense.
From my years of experience as a developer in Vancouver, many people underestimate the challenge and the risks of development. Costs can quickly get out of control, quality can be compromised, city approvals cumbersome, and schedule can be delayed -- to say nothing of how much precious time your project will consume.
From a lifestyle perspective, like providing options for your family, laneway housing can be a great solution. It can be a useful planning tool to save heritage homes from the wrecking ball.
But it's probably not a smart investment for landowners and it doesn't appear to be making housing more affordable for people in the city.
So how do you really tackle affordability? In my next blog, I'm going to talk about why transit oriented development is the way of the future and why the city needs to look at taller buildings along transit lines. That's my answer to building density and affordability in Vancouver.
*Note: Vancouver East side results similar