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Why you’ll be waiting a long time for family-sized condos

Published on in the Financial Post

It’s a frequent refrain from young condo-dwellers looking to upsize or start a family without fleeing to the suburbs: Why aren’t there more large units  downtown?

A recent report by the City Building Institute (CBI) at Ryerson University and a survey by Environics Research both highlighted the need for three-bedroom units in Toronto, arguing that developers and builders are ignoring the demand for larger units by young professionals and baby boomers.

The axioms of urban economics, however, explain why large condominiums are ill-suited for very dense urban cores.

Like other vibrant downtowns in Manhattan and London, Toronto has a tightly clustered financial district that is also home for some young professionals who are mostly unmarried, without children and rent smaller-sized condominiums.

A key to the development puzzle lies in the gap between the stated preferences of these young renter professionals (“Wouldn’t it be nice to start a family downtown?”) with the revealed preferences of young households with children (“The suburbs it is”).

On a per-square-foot basis, a three-bedroom condominium downtown will always be significantly more expensive than a similar-sized townhouse in a suburb. Why? Land prices.

Downtown land is in huge demand because it is scarce, which leads to high prices and high-rise buildings. Condo sizes are smallest in places with the highest land prices. Contrarily, places with less expensive land attract larger units, as per the first axiom of urban economics: Prices adjust to achieve locational equilibrium.

For economic efficiency, scarce and high-priced land must be used for high-density office and residential land uses. Smaller sized units, and not three-bedroom condos, are a more efficient residential use of scarce land that permits more workers to be near their jobs in the financial core.

So, what to do with the unmet demand for large condos?

Well, if there really were an unmet economic demand, builders would have responded to it. Evidence of actual pent-up demand for owner-occupied three-bedroom condos, it turns out, is rather elusive.

Recent Environics surveys found young professionals complained of a lack of three-bedroom condos (a stated preference), but did not necessarily show an interest in owning large condos themselves. In fact, 81 per cent of respondents said that they did not want a condo at all, with most desiring a detached home. Environics found that young professionals were predominantly renters and that 83 per cent did not have children.

Builders respond to revealed preferences and not stated preferences. They are aware of life-cycle triggers, such as the birth of a first child, which increases the demand for space and pushes young families to the suburbs where cheaper land makes owning larger houses possible.

The suburbs, as a result, have become better equipped to cater to families with children: restaurants there always have plenty of high chairs, but try showing up with three children at an upscale downtown restaurant for dinner and watch the staff scramble. The suburbs also have an abundance of soccer fields, playgrounds, parks, hockey arenas, and parking lots for vehicles stuffed with sporting equipment.

When, by contrast, was the last time you saw a parent travelling with hockey bags and children on a subway?

Renters, and not investors, generate the demand for shelter space in and around downtowns. Investors respond to the demand by providing one and two-bedroom units to renters. As it is, downtown residential rents barely cover the ownership costs of investors who effectively subsidize the renting young professionals.

If three-bedroom condos in the downtown core made more cents for investors, they might make more sense for builders.

In the end, it is all land economics.