Danist Soh on Unsplash
Hugh MacLellan’s 1945 novel described a perceived lack of communication between English- and French-speaking Canadians. In 2022 we have two new solitudes that aren’t communicating – the “Housing Crisis” people and the “Climate Crisis” people.
Buildings (after oil & gas extraction and transportation) are the third largest contributor to GHG emissions. This is particularly true in Canada, where we heat or cool our homes almost every day of the year. Industrial, commercial, and office buildings seek LEED certification showing their commitment to reducing emissions.
Residential housing, however, contributes more than 30% of the sector’s emissions, yet little is discussed about building more fuel-efficient houses. We know the “mileage” ratings of the cars we buy – but not the houses. Why not?
I regularly read about new materials and technologies (R30 Glass, Heat Pumps, Solar Roof Shingles…) that significantly reduce the carbon imprint of homes. Homes today can be built to a “Net-Zero” standard, meaning no GHG contribution; however, these materials and technologies bump up against the other solitude, the “affordability” element of the Housing Crisis.
Builders argue the costs of these new materials and technologies are prohibitive, lobbying hard against even the slightest change to our building codes.
The federal and provincial governments are determined to do everything they can to build thousands more residential units over the next 10 years. Ottawa is also determined to meet GHG emission targets, but unless we break down these solitudes, most of these units will be leaky and fuel inefficient.
In residential construction, there is a cost v. benefit disconnect. The cost of the materials and technologies needed to make a home “Net-Zero” fall on the builder and first purchaser of the house. The benefits accrue to subsequent owners and the planet throughout the 75-year expected life span of the home. We need to solve that disconnect.
The root of the problem is the builder/developer business model. We need a new one.
Here is the existing model, simplified.
Builder/Developer
- Buys a farm - assume 40 acres for $1M/acre or $40M
- Spends 10 years paying planners, lawyers, designers, architects, engineers, etc., to create a Plan of Subdivision.
- Makes mortgage payments for 10 years on the mortgage pledged to buy the farm.
- Bets that during those 10 years, the 40 acres have appreciated, ideally doubled, in value, so each acre is now worth $2M.
- Wants the municipality to approve a Plan of Subdivision allowing four (I’m being conservative to make the math easy) building lots on each acre.
- Paid $250K for each of those ¼ acre lots that are, by the time the Plan of Subdivision is registered, worth $500K.
- Spends a year and $200K paying for materials and labour to construct the house so that by the time purchasers walk into the subdivision sales office, the builder/developer is (at least) $700K (land worth $500K and construction costs of $200K) “into” each unit that is now for sale.
Ten years' worth of mortgage payments, professional fees, staff salaries, development charges and other levies charged by the Municipality to fund the streets, sewers, parks, etc., needed in the subdivision, together with all their additional costs then need to be recovered on ONE DAY. The day the house is sold to its first owner.
If the sale is for $700K, the Builder/Developer is unhappy, $1M happier, and $1.4M very happy. $700K of profit on every one of (4 X 40) 160 lots is $112M of profit!
Builders/developers see no reason to change the model.
Every dollar spent on climate-friendly materials and technologies in this model is deducted from the land appreciation critical to the model. This also explains why there are 60,000 approved lots in the GTA that builders/developers aren’t developing. Appreciation depends on scarcity.
I don’t begrudge these builders/developers, but I have always wondered about the following: Annuitized and transactional income.
Builders/Developers take all the risks to create an asset but need to recover all of their costs and make all their profit on one sale, on a single day. Thanks solely to the existence of that asset, the following will each earn monthly income for 75 years (assuming that to be the useful life of the average Canadian home).
- Bankers will get monthly mortgage payments.
- Municipalities will get monthly tax payments.
- Utilities will get monthly payments.
- P & C insurers will get monthly premium payments.
- Cable companies will get monthly internet/TV payments.
- Home Security companies will get monthly payments.
Think of all that revenue on every house, monthly for 75 years, and the builder/developer does not get a dime.
Then think of all the “transactionally priced” service industries that get paid every time the house changes hands.
- Realtor commissions.
- Home inspection fees.
- Appraisal fees.
- Legal fees.
- Mortgage Default insurance premiums.
- Title Insurance premiums.
- Land Transfer taxes.
Not a dime for the builder/developer that took all of the risks to create the asset here either.
How might builders/developers get a piece of all this action and reduce their dependence on that single first sale? Put another way, how might they expand or extend their revenue relationship with the assets they take all the risks to create while simultaneously making houses more affordable?
I can suggest a (very) rough analogy.
In the 1960s, the “Big Three” North American auto-makers tried to sell you a new car annually. Models were constantly changing, adding chrome and fins. The Oil Crisis hit in the 1970s, and consumers demanded less chrome and more fuel efficiency and safety. The auto-makers changed their business models. They started financing arms. They bought into dealer networks. They developed divisions selling “genuine” parts.
It is time builders/developers did something similar. We will never get “Net-Zero” homes trying to recover their costs on ONE DAY, but there is a lot of annuitized and transactional revenue available that could start to solve the cost v. benefit disconnect.
We need the “Housing Crisis” and the “Climate Crisis” people talking to each other.
