A radical new law intended to reduce New Zealand’s infamous housing crunch could well be a model for how Canada could curb its ever-skyrocketing real estate prices, according to experts contacted by the National Post.
Changes that result from technological breakthroughs are not always positive. A couple of months ago, reading the article “Digital dystopia: how algorithms punish the poor,” which outlines technology’s ability to negatively impact the most vulnerable, made me reflect on the impact of technological innovations on the real estate industry.
With new accomplishments, there is often a wave of new problems that follow. Evolution gave humans morality as a default setting, but some individuals may display traits like greed and unethical behavior and engage in unique and creative fraud activities. When it comes to real estate, the risk of digital misbehavior becomes very real. For example, someone can steal your current property ownership; or, when you buy a house, your down payment can disappear. Everyone thinks that it will never happen to them until it does.
The Bright Side Of Tech Progress
Innovation involves new ideas or creative thoughts, and the ultimate goal is an improvement. When entrepreneurs take steps of more considerable uncertainty, out-of-the-box thinking, and experimentation, the world gets introduced to outstanding products.
According to an article featuring an interview with tech investor Ramy Adeeb, real estate was previously largely ignored by entrepreneurs and investors, as it was one of the “more antiquated” and “unsexy” industries. However, Adeeb states that companies using technology to improve real estate might be part of the “third wave” of exits. Even though the innovation in real estate has been historically slow, certain changes have happened to the industry in the last decade.
For example, Gary Gold (Hilton & Hyland’s Executive Vice President, who participated in many interesting transactions, including the nation’s most expensive mansion), remarked that the real estate transaction process involved 3-4 pages just a decade ago; now, the transaction involves 3-4 inches of paperwork, most of which homebuyers do not even read. Gary Gold believes that the most significant breakthrough of the decade for real estate was DocuSign, as the e-signature solution allowed transaction parties to execute enormous amounts of paperwork more quickly. E-signature solutions like DocuSign are supported by the NAR (National Association of REALTORS), and these products have been adopted by industry participants (including brokers and agents) for electronic purchase agreements.
Digital signature technology has freed homebuyers from wasting precious time, paper, and energy on the completion of transaction documents. The U.S. is fortunate in this sense, as other countries such as Japan and Dubai still have not adopted e-signatures for completing real estate transactions.
Other Internet innovations have brought apparent advantages to the real estate industry. Platforms that allow people to browse for properties online, such as MLSs, Zillow in the U.S., Zoopla in the U.K., and SeLoger in France, have introduced more transparency to the local marketplace.
Has Digitalization Brought Increased Liquidity Or Housing Affordability To The Homebuyer?
A while ago, I discussed the potential market recession with Gino Blefari, who is the CEO of HomeServices of America and the Chairman of Berkshire Hathaway HomeServices. During the discussion, Gino asked me, “Do you know how many homes were sold in 1998? It’s almost the same number as today, even though we added 20 million more homes in the last decade.” Thus, the volume of annual sales has been steady (at around 5 million homes), with a moderate increase due to population increase. Digitalization and innovation have not brought significant changes to the liquidity of the real estate asset class. The affordability of real estate has not increased, either. Currently, about 10% of a property’s price is still spent on transaction fees and the preparation of the home for sale (excluding renovation costs).
While digitalization has not positively affected the liquidity of real estate, it has offered hackers the ability to steal property ownership and payments more easily. For hackers, the $280 trillion real estate market has a lot of opportunities. The transparency of listings on MLSs and platforms like Zillow allows hackers to find the information that they need to target unsuspecting victims. The digitalization of transaction documents (including the utilization of e-signatures, Google Drive, and emails) has led to the opportunity for hacks and fraud, with millions of dollars lost.
Real Estate Scams, Fraud, And Bribery
Cyberfraud is, perhaps, the biggest issue in the modern digital world. According to the FBI’s Internet Crime Complaint Center, cybercrime is a billion-dollar problem that heavily impacts the real estate marketplace. Email wire fraud cost companies and homebuyers $26 billion since 2016. Additionally, this is just the tip of the iceberg, as the FBI estimates that only 12-15% of all wire fraud cases are reported. A 1,100% increase in real estate scams from 2015 to 2017 shows us the extent of the vulnerability of real estate professionals and homebuyers.
A typical wire fraud scheme involves a hacker who gets ahold of a property’s agent email information from MLSs or Zillow. The bad actor monitors the progress of the transaction from the email communication or by browsing for public links of transaction data on Google Drive, Dropbox, and the like to get other details. Many people suspect that there are internal people in the industry feeding the data to hackers. On the day of the sale, the con artist mimics the closing agent or title company and uses a fake email address to send an email with wrong payment instructions. Sometimes, the hackers send the instructions to agents, and agents send these instructions to their customers. The money gets wired somewhere else.
Another case is title fraud, which is not covered by title insurance in 99% of the cases. Real estate is becoming a digital asset where proof of ownership is evidenced in the form of a database record instead of a physical document or a physical occupancy of a dwelling. Thus, the current framework provides an opportunity for hackers to get access to property ownership digitally. Some cases even involve the illegal transfer of ownership on a title registry level. In the U.S., if a hacker aims for a change of property ownership for an individual who is deceased and does not have heirs, then the change will typically be unnoticed. In developing countries, one can bribe an IT specialist and obtain full access to property registries. From there, property ownership can be transferred. For example, the Bulgarian registry stopped working in 2019; as per the official sources, some data was presumably altered, and there were no backups. Unfortunately, cases like the ones mentioned are hard to detect and fight in court. Although some individuals manage to obtain justice, the majority of these cases, especially those involving deceased individuals, are often left undetected.
Furthermore, attacks on the U.S. counties’ operation systems, which store sensitive data, are becoming a new norm. The recent Baltimore ransomware attack is just one example that highlights imperfections in the modern digital framework.
In 2019, I asked a number of tech-driven brokerages in the U.S. on whether they feel worried about cyberattacks. Unsurprisingly, the majority of them responded, “Yes.”
Privacy Issue In Real Estate
The abuse of consumer data by corporations is nothing new. In real estate, both realtors and consumers complain about the issue. Some real estate agents criticize data ownership by companies like Zillow. There are homeowners whose information is publicly traded on sites such as infoUSA.
It is frightening that anyone in the U.S. can find information such as your name, your phone number, and your email address by merely looking up your home address on some websites. While such search algorithms can be useful for realtors for lead generation, publicly exposing private information is a privacy violation.
Hopefully, with the California Consumer Privacy Act, consumers will have more control over their data. If so, the market dynamics will change. In one of my previous articles, I shared some thoughts on how data can be controlled and how data verification and storage can become additional income sources for real estate professionals in the future.
Due to the risk of fraud, the NAR strongly recommends that its 1.4 million members choose very secure technological solutions and avoid using emails for closing transactions. In fact, the organization’s website directs readers to “never trust wiring instructions sent via email.”
The situation with cyber risk might improve. An increasing number of market participants, including the U.S. NAR, are starting to understand that new protocols are needed to address the digital dystopia that the current real estate industry faces. NAR’s CEO Bob Goldberg stated, ”NAR has a strong commitment to furthering technology that ensures the security of the real estate transaction, protecting all parties.”
Technological advancements such as blockchain and decentralized governance, AI-powered tools, object and voice recognition tech, VR, and AR will give rise to the next generation of changes in real estate.
New decentralized methods of managing the Internet, online communities, and transactions will evolve. In the context of property ownership frameworks, distributed ledgers are proving their efficiency, as they are immutable records that are recognized in the courts of many U.S. states. Immutability is achieved with the decentralized nature of blockchain. According to Kuba Jewgieniew, the CEO of tech-driven brokerage Realty One Group, “Blockchain will provide a more streamlined and secure process to our industry, especially with title and settlement services.”
Despite all of the skepticism revolving around blockchain, no one can overlook the real use and real application of this technology in the real estate field. If you follow tech topics, a decentralized Internet was the topic of the last two seasons of HBO’s Silicon Valley. Additionally, decentralized governance is part of Mark Zuckerberg’s long-term focuses for 2020 and the following decade. During my conversation with proptech-focused venture capitalist Arnie Sriskandarajah at Round Hill Ventures based in the U.K., Sriskandarajah said, “Blockchain is still nascent, but we see the potential that it has on the industry, especially on how real estate is traded. It can advance leasing and sales transactions.”
Many real estate market participants believe that blockchain tech is one solution that can help the industry fill the cyber trust gap. The key to building something “trustable” is to use blockchain as a part of the algorithms and programming languages.
In addition to immutable records and automation using blockchain-based smart contracts, AI can add a level of automation to transactions. For example, machine learning can help with quickly finding errors in non-compliant documents in one transaction. Image recognition is used by some startups to evaluate homes’ prices. AI can determine what is inside a house, and algorithms can analyze property prices instantly; in fact, the tech-driven brokerage Compass is working on AI tools. Kuba Jewgieniew admits, “AI is a must-have.”
Whether these new advancements in emerging technology will bring new cyber problems to the real estate industry is questionable. On the positive side, as per Gino Blefari, “We are getting to a point where property buying will not be as stressful for homebuyers.” Ultimately, a home purchase is one of the most important transactions in an individual’s life, and there are plenty of tech-driven innovators that are eager to deliver a better consumer experience.
A radical new law intended to reduce New Zealand’s infamous housing crunch could well be a model for how Canada could curb its ever-skyrocketing real estate prices, according to experts contacted by the National Post.
This week, in a rare bipartisan action, the New Zealand government introduced measures to quash “overly restrictive planning rules” that hinder development in urban cores.
New Zealanders may now develop up to 50 per cent of their land — and build up to three storeys — without requiring consent from municipal authorities. The reforms also unleash landowners to build up to three homes per lot in areas that previously restricted those lots to one or two homes.
While the measures do not mandate development of existing homes, they mean that New Zealanders now have much more freedom to build on their land without butting up against municipal planning laws. A similar law applied to Vancouver and Toronto, for instance, would automatically free builders from the need to seek local approval for a laneway house.
A government-commissioned analysis by Pricewaterhouse Coopers has estimated that the new measures will spur a building boom expected to add between 48,200 and 105,500 new units of housing in New Zealand by the end of the decade.
“I think reforms like this would likely help increase Canadian housing stock quite a bit,” Nathanael Lauster, a housing density researcher at the University of British Columbia, told the Post.
Lauster helped created the Metro Vancouver Zoning Project , an effort to meticulously document zoning laws in Canada’s third largest city. What the project has revealed is that the vast majority of land in Vancouver is zoned for single family homes, effectively making densification illegal in much of Canada’s most unaffordable real estate market.
In an extensive analysis of New Zealand’s new housing reforms, Lauster called them a “welcome new model” for stripping “exclusionary” powers from the hands of local governments, which disproportionately favour the interests of existing homeowners. “It’s relatively easy for municipal politics to become captured by those most resistant to change and greater inclusion,” he wrote.
New Zealand’s new measures were supported both by its Labour Party government and its conservative National Party opposition. Tellingly, the policy’s official launch was attended by National Party Leader Judith Collins.
“National supports this policy because it focuses on supply. Rather than making life harder for property owners, this policy tells them that you have the right to build,” Collins told a Tuesday press conference .
The National Party leader also struck out at Kiwis who opposed the law on the grounds that it would strip communities of their “character.” “Our communities lose their character when people can’t afford to own their own home,” she said.
New Zealand is currently plagued by a real estate market that is even more unaffordable than Canada’s. The gap between New Zealand’s average incomes and its average real estate cost is currently among the highest in the OECD .
Notably, the problem continues to grow despite the fact that New Zealand maintains strict controls on foreign ownership. In 2018, the country banned non-residents from purchasing pre-existing New Zealand real estate, although foreigners are given limited reign to purchase new builds.
Canada’s already overheated real estate market is on a fast track to match New Zealand for unaffordability. In just the last year, average Canadian home prices soared by an incredible 21.4 per cent .
The singular reason for this is lack of supply. Canada has the lowest number of housing units per capita than any other country in the G7, a ratio that is only getting worse as lacklustre housing development is met with massive population growth.
In Canada, any law to defang municipal zoning laws would need to come from the provinces. With New Zealand having a population of only five million, its national government often makes decisions that would be considered regional issues in Canada.
However, there is strong precedent to show that Canadian provinces have relatively free reign to steamroll municipal laws whenever they want to.
One of the starkest recent examples was when the province of Ontario abruptly cut the size of Toronto City Council in half.
While the City of Toronto took the issue to court framing it as an undemocratic coup, just this month the Supreme Court of Canada ruled that Ontario acted constitutionally.
In the recent Canadian federal election, all three major parties debuted housing plans that mostly skirted around the issue of municipal barriers to development. The Conservatives proposed tying federal transit funding to a city’s willingness to densify, but there were no blunt New Zealand-style promises to override onerous local zoning laws
“If there was a blanket up-zoning of land in Canadian metropolitan areas, it would lead to an increase in the housing stock,” said Steve Lafleur, an analyst specializing in housing affordability at the Fraser Institute.
The libertarian-minded Fraser Institute isn’t one to advocate stricter government control of an economic sector, and Lafleur said that provincial “micromanaging” of local zoning would not be ideal. Nevertheless, he said, “given immense demand for housing, it is impossible to believe that there would not be a boom … if denser housing were allowed.”
The suburbs made a remarkable comeback during COVID-19, as residential prices, rents and sales escalated faster than those in the urban core, while commercial real estate data depict a similar picture of strength and resilience in the areas outside the downtown areas.
Indeed, the real estate story during COVID-19 is a tale of not one, but several markets. One is that the roaring housing market defied all predictions of doom and gloom, with unprecedented increases in demand coupled with lacklustre supply pushing housing prices upwards.
Another is focused on commercial real estate markets, which are further differentiated by geography and type. Often concentrated in the urban core, office real estate continues to struggle with growing vacancy rates and softening of rents. The short-term forecasts for office markets spell even more trouble, with vacancy rates projected to rise further.
But not all is lost in commercial real estate. Industrial real estate, especially suburban warehousing space, has emerged as an unexpected saviour, with leasing volumes rising across Canada. And if you thought COVID-19 had taken the retail sector down, think again. The on-again, off-again restrictions have certainly hurt retail real estate as has the shift to e-commerce. But retail leasing volumes started to recover after the second quarter of 2020, and retail vacancy rates are forecasted to stay steady.
Recent data from CoStar Group, which tracks and analyzes activity in commercial real estate markets, demonstrates the diversity in market trends. For example, office leasing, like residential real estate sales, declined in the first quarter of 2020. But office leasing has since struggled to fully recover, while residential sales sprang back almost immediately.
The decline in office leasing is most pronounced in Toronto, where CoStar Group data show leasing volume in the third quarter of 2021 was 47 per cent lower than the average for the same quarter from 2018 to 2020. Other major markets, including Calgary and Edmonton, which were struggling even before the pandemic, showed similar declines.
The office market in Vancouver, though, showed resilience. Leasing volume there was up by 33 per cent in the third quarter of 2021 compared to the average for the same quarter from 2018 to 2020. Why is Vancouver bucking the trend? Carl Gomez, chief economist and head of market analytics at CoStar Group Canada, believes it’s because of the number of small- to medium-sized tech companies located there.
Toronto’s urban core is dominated by firms specializing in banking, finance, law, and insurance. The shift to working from home has been more pronounced in those sectors, according to Statistics Canada. The decline in office space leasing was, therefore, expected given the declining demand.
Suburban office markets, however, have managed to stay in the black. The net absorption of office space has been negative in downtown Toronto since the second quarter of 2020. But the suburban Greater Toronto Area (GTA) has fared much better, with positive net absorption quarter after quarter.
The urban-suburban divide also persists in Vancouver. The net absorption of office space has been negative downtown, at least since the first quarter of 2020. The suburban office markets, on the other hand, have reported positive net absorption. Even in the second quarter of 2020, soon after COVID-19 was declared a pandemic, suburban Vancouver reported almost one million square feet in net absorption.
The suburban markets are also conducive to the growth in industrial real estate. By the fourth quarter of 2020, industrial leasing had topped pre-pandemic leasing levels in Canada. Furthermore, an additional 16 million square feet of industrial real estate is in the pipeline for Toronto and almost eight million for Vancouver.
The better-performing suburban commercial real estate markets in Toronto and Vancouver suggest a slight shift in location preferences that the pandemic has accelerated. However, one should not be quick to write-off downtown areas just yet. With offices and educational institutions resuming face-to-face operations by early next year, downtown spaces are expected to be back in demand, which might require vacancy forecasts to be revised downwards.
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 the Haider-Moranis Bulletin website, www.hmbulletin.com.
Calgary had its strongest third quarter for housing sales since the price of oil plummeted in 2014, according to the latest report by the Calgary Real Estate Board (CREB).
There were 6,628 sales in the third quarter of this year, a sign that even as the pandemic is continuing to dampen the local economy, Calgary’s housing market remains resilient, says CREB’s quarterly update report released on Wednesday.
The report says much of the growth in demand has been driven by the low interest rates and the fact that many buyers’ incomes were not impacted by the pandemic and in fact saw their savings grow.
Overall, residential prices in Calgary rose by one per cent over the previous quarter and are about nine per cent higher than prices recorded in the third quarter of last year, the report said.
CREB’s chief economist, Ann-Marie Lurie, says much of the upswing in activity was driven by detached and semi-detached home sales. And she said while supply has risen, it’s still somewhat of a seller’s market in Calgary.
“Supply-demand balances improved for buyers compared to what we saw in the spring, but the market continued to favour the seller in the third quarter,” she said.
The report says the benchmark price is $538,700 for detached homes. That’s up 10.5 per cent from last year.
In the semi-detached market, the benchmark price is $427,767. That’s up 9.3 per cent from 2020.
For row housing, the benchmark price is $299,933 — 8.5 per cent higher than last year.
And in the apartment-condo market, demand rose in the third quarter, but to a lesser extent, the report says.
“The condominium market never entered sellers’ market conditions like other property types, but at five months of supply, this market is considered relatively balanced,” the report said.
The benchmark price in this sector is $253,533. That’s up by roughly 2.5 per cent year over year.
CREB also notes that, aside from strong resale figures, the newly built side of the market is also doing well, with housing starts up by more than 70 per cent in Calgary.
CREB says in its report that the boost in the local housing market activity is contributing to an economic recovery that’s also being driven by the uptick in oil and gas prices.
“This has contributed to employment growth in not only the finance, insurance and real estate sectors, but also the construction industry,” the report said.
Calgary housing market sees best Q3 since 2014, says real estate board – CBC.ca
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