There is a house in our neighbourhood that currently stands vacant, and it is currently for sale.
It’s a prime example of speculation in the housing market.
The house was sold in 2011 when the original owner passed away. The selling price, as we understand, was about $500,000.
The house, a 3-bedroom bungalow built around 1940, sits on a 50-foot lot and is about 1,000 sq. ft.
For the next eight years, it was rented out by the owner to a number of different tenants until it was sold in 2019.
The selling price was $1,300,000 – 2-1/2 times what it sold for in 2011. That represents a 17.5% annual growth rate in value.
The purchaser applied to the Committee of Adjustment to sever the property and build two oversized homes. The residents objected and the Committee of Adjustment agreed with their objections, unanimously refusing the application to sever.
The owners eventually put the house back on the market for $1.8 million.
In the brief time they have held the property, they are effectively expecting a 16.6% increase in value during which time they have done nothing to add value to the property. As noted in the opening paragraph, the house currently is vacant, so it is not generating any rental income to offset its carrying costs.
In the listing, the owners suggested to potential buyers that the property had potential to be severed and rebuilt.
Let’s look at this.
Assuming the sellers gets their $1.8 million, the cost per severed lot would be $900.000. Usually, in cases of severances, the builders try to build approximately 2,000 sq. ft. of house. At a conservative estimate of $350/sq. ft. to build, the builder would be investing another $700,000 into the property, bringing the total investment to $1,600,000.
Current MLS® stats indicate an average house price of $834,497 Long Branch. This represents houses of all sizes as well as condos. It also represents sales of newly built homes as well as resales of existing dwellings. So, the price for a 3- or 4-bedroom house with 2,000 sq. ft. of space would be significantly higher. According to the MLS®, averages for 4-bedroom homes in Long Branch are about $1,600,000 which, again, represents a mix of new builds and existing homes.
If we assume the average asking price in Long Branch for a 2,000 sq. ft. home is about $1.700,000, which would net the builder only a $100,000 profit assuming everything goes as planned.
But we haven’t factored in costs such as applying to the Committee of Adjustment for the necessary variances, the commission paid to a real estate agent to sell the property, land transfer taxes or interest to carry the property while it is under development. And these probably do not represent all the costs a builder might incur. If the application has to go through TLAB because either the builder or the neighbours appeal a Committee of Adjustment decision, that can easily add another $100,000 to the cost, for hiring a lawyer, a professional planner and an arborist.
Let’s assume this property is purchased by a family who wish to have a custom home built and so they do not plan on severing the property.
Using the property value of $1.79 million and another $700,000 for construction, the owners who wish to build instead of severing would have to ask in excess of $2.5 million for their 4-bedroom, 2000 sq. ft. home, should they decide to put it on the market. That’s well above the average of $1,700,000 for a comparable property in the neighbourhood. But it’s also likely the family would live in the home for several years.
It should be noted that, between 2011 and the present, no improvements have been made to the property we described by any of the owners. So, apart from trying to sever the property, the collective owners have done nothing to add value to this property. And yet they’re expecting something in excess of a 15% return on their investment.
In the meantime, the residents on this street have a house with no neighbours to interact with, that is not being maintained and no real expectation that this will change in the near future.
And it’s not an isolated example in Long Branch. There are several properties that were granted severance approval back as far as 2015 that still have the original homes. In other words, the owners got their severance but have done nothing since.
If everyone is so concerned about housing supply, why haven’t these properties been developed?
If this isn’t speculation in one of its worst forms, it probably is close.