![]() It’s true, you can pretty much build anything anywhere and home prices are cheap in Texas. Texas is often used as the argument for a deregulated market that will make housing affordable. So close! “But Texas Is Deregulated & Cheap!” The author ends up concluding, “short-term, local-level impacts of upzoning are higher property prices but no additional new housing construction.” An MIT study set out to prove that this sort of broad upzoning helped create more supply and cheaper housing. The same amount of housing could have been created with an expedited upzoning process, while preserving lower input costs. In effect, the only thing that changed is the input cost for the developer building a home. Developers still have to go out and purchase those units, and then build the actual housing. The homes still have to be developed, and not many homeowners were waiting to redevelop their home. The day after the changes are made, you have homes with newly adjusted valuations and, well… no more new housing yet. Toronto needs a lot more housing at any price though, and at least this helps create supply, right? Not exactly. Zoning Before Planning Means Higher Input Costs To Build And we all know that Vancouver is notorious for how well they handle housing affordability. Vancouver used this brilliant tactic to turn $2 million homes into four $1.8 million homes on the same lot, at a quarter of the size of the old units. In a high demand market like Toronto, that can establish a price floor when prices are falling, since you’re no longer comparing two of the same homes. Buyers can no longer buy one of these homes, they’re buying a developer lot of four homes, minus the cost of building them, plus/minus liquidity. Toronto’s broad upzoning effectively turns every single-family detached home into a developer lot. Overwhelming majority of cases… until lobbying establishes a new highest and best use, eh? Toronto Will No Longer Have Single-Family Homes For Sale, It’ll Have Mini-Developer Lots This is not only because of natural human nature, but also because of economic pressures to do so.” - Principles of Appraisal, RECO. The typical buyer/owner will use a property to its best advantage whether for enjoyment or profit. “In the overwhelming majority of cases, properties are already developed to their highest and best use. Real estate agents in Ontario use a textbook written by the regulator called Principles of Appraisal that literally has a whole chapter and numerous exercises on the impact of zoning to limit and increase valuations. It’s a part of the basic education for the industry. Highest and best use isn’t a principle only known by real estate pros and investors. If a tiny house is zoned for a 50-foot tower, the value should be roughly the cost of a 50 foot tower, less the cost of demolishing the existing structure and construction-plus or minus liquidity. If a property has additional zoning available, it’s probably not at its maximum utility, and the seller would consider the possibility of what could be built there. ![]() It’s up to the buyer to find out how to collect market rents, which is why long-time tenants often find themselves being shoved out the door after a building is sold.Ī real estate fundamental and an important part of “highest and best use” is zoning. Those tenants are likely paying significantly less than market rents, but market rents are used to determine the value. If an improvement can be reasonably obtained, then it’s added to the valuation of the home.įor example, a landlord might be selling an apartment building with long time tenants. Real estate valuations are determined by the catchy phrase, “highest and best use.” Values are based on the maximum utility of the property, not its current use or what it’s now making. Real Estate Values Are Determined By Highest & Best Use Despite the popularity of the narrative, it’s contrary to basic real estate valuation principles and typically does the opposite-raises home prices and makes little to no difference in new supply. The City is notoriously slow when it comes to increasing zoning applications, so this was pitched as a way to improve affordability by increasing supply. The City of Toronto adopted a broad upzoning measure this week, converting single-family zoning into multiplex zoning with up to 4 units. Politicians in Canada’s largest city just approved a new law that may help prop up its bubble.
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