Condos cost more than houses per square foot, but in some markets the gap is closing
Housing is a heterogeneous good. Diversity in age, location, quality, size and type makes comparisons difficult.
Despite these differences, average housing prices are often used to compare housing across jurisdictions or typologies. Hidden in the average price, however, are diverse attributes that can paint a different picture if one accounts for them.
Size, like location, is one of the primary determinants of value. But most comparisons of housing prices do not control for size by divulging price per unit of space.
That bigger homes sell for more than smaller homes, everything else being equal, seems obvious. That single-family dwellings, which are generally much larger than condominiums, also carry higher average price tags, also makes sense. But when comparing homes and condominiums, the latter of which are usually built in areas where land values are higher, on a per-square-foot basis, the relationship between size and price becomes more complex.
A recent report from Royal LePage took a closer look at that relationship. The comparative analysis revealed that when one controls for dwelling size, single-family detached (SFD) housing prices in Toronto, Vancouver, and Calgary approached, and in the case of Vancouver surpassed, those of condominiums.
The high size-adjusted price of SFD housing provides new fodder for urban economic theory. One of the axioms of urban economics is that prices adjust to achieve locational equilibrium. If the size-adjusted price of condominiums is comparable to the size-adjusted price of SFD housing, which is usually built where land is cheaper, should one assume that intra-urban variation in location no longer matters?
Royal LePage’s brief tabulated the size and the size-adjusted price of dwellings sold between January and July of 2019 in large housing markets in Canada. The report found, as one would expect, that on a per-square-foot (SFT) basis, condominiums still cost more than SFD housing.
There was, however, one apparent exemption. In the City of Vancouver, the median price of SFD housing on a per-SFT basis was higher than that of condominiums.
The findings raise an interesting question: Do size-adjusted prices in Vancouver contradict the tenets of urban economic theory?
The answer to the riddle, at least partially, lies in housing supply. In markets where low-rise housing is in high demand and short supply, even size-adjusted prices can climb and approach those of high-rise dwellings.
Consider the City of Vancouver where, according to the 2016 Census, two high-rise apartments (not necessarily condominiums) existed for every single-detached house. In fact, the Census recorded only 41,305 single-detached houses in the City of Vancouver. With such a small stock and an unmet global demand for housing in Vancouver, the price of SFD housing, even when controlled for size, is expected to escalate.
The City of Toronto is not much different. The limited supply of low-rise housing, especially the SFD dwellings, is likely the reason for high SFD housing prices.
The 2016 Census reported 83 per cent more high-rise apartments than single-detached homes in Toronto. The Royal LePage report picked up on the supply-side dynamics and revealed that the median per SFT price of condominiums in Toronto was a mere 12 per cent higher than the same for SFD housing.
The price dynamics differ for the greater Toronto area (GTA) where the abundance of developable land moderates land prices, which is subsequently reflected in dwelling prices and sizes. Whereas the median size of an SFD house in the City of Toronto is twice the size of a typical condominium, a standard SFD unit in the GTA is 2.5 times larger than a regular condominium.
The difference in land values is also evident in the difference in size-adjusted prices. Unlike the City of Toronto where the median price of a condominium is only 12 per cent higher than that of an SFD dwelling, condominium prices in the GTA on a per SFT basis, are 53 per cent higher than those of SFD dwellings.
Price of a commodity is influenced by its demand and supply. Recent data for median housing prices suggests that in markets where SFD housing is in short supply and high demand, size-adjusted prices of low-rise housing can approach those of high-rise dwellings.
Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at http://www.hmbulletin.com.