Land Values: Could laneway homes be the key to unlocking new housing in Vancouver?

Builder Jake Fry has a simple idea that he believes could produce at least 30,000 new small homes in Vancouver over the next decade. For context, that’s as much as the entire Broadway Plan has set as its target amount of new housing for the same period.

The idea: let Vancouver homeowners sell the laneway homes they’re willing to make room for in their backyards instead of being restricted to only renting them. Unlike the current Broadway Plan, which is trying to squeeze 30,000 new apartments into a relatively restricted strip of the city (and coping with the demolition of affordable older apartment buildings that has many people worried), laneway homes would be a relatively low-impact way of making room for newcomers. It’s something that California has just authorized as of October last year.

The case that Fry—who’s been building laneway homes since Vancouver first allowed them in 2009 with his company Smallworks and who’s been a driving advocate at Small Housing BC—makes is that the relatively low number of laneways currently being built (300 to 400 a year in recent years) is the unfortunate but inevitable outcome of city policies that make those backyard houses a dicey financial choice except in special circumstances. And that’s a waste of a huge resource.

“We’re dealing with a really large cohort of homeowners—upwards of 50 percent—that don’t have a huge mortgage,” he says. “The largest group of residential landowners in the country are sitting without an exit strategy.”

The current city policy in Vancouver (along with every other municipality that allows rentals) does not allow laneway homes built in most of the city to be sold, period, end of story. Those built on a property with a pre-1940s house can be sold, but only if the main house is brought up to current building-code standards. That can cost anywhere from $200,000 to $500,000.

(I should note here that this is a topic rather close to this writer’s heart, after my partner built a laneway house for his daughter and family that we’re forced to own jointly, with the attendant perils of that situation, because it’s too crazy expensive to reno and stratify.)

The math on the two existing options is this: a homeowner who builds a rental laneway will likely only be able to get enough rent to pay the mortgage taken out to cover the construction costs, plus the taxes, utilities and maintenance fees.

“We considered it [and] an architect advised against unless it’s for a family to live in (and mostly pay for). Otherwise, the costs are prohibitive and would be a drain even at [$3,000 per month earned in rent over decades],” wrote one woman who answered my social media call-out on the topic.

For the pre-1940s homes where a laneway can be sold, the finances are equally dicey. If it costs $500,000 for the laneway and another $500,000 to bring the main house up to city standards, it’s a gamble whether they’ll make any profit at all.

“You might end up with a net positive of only $150,000,” says Suraj Jhuty, the 33-year-old co-owner of Vancouver-based Theorem Developments, which specializes in laneways. “No one is going to take that risk to make $150,000.”

And it’s especially not attractive to sell off a backyard for such a minimal return. (In the past, when I’ve talked to Vancouver planners about this unappealing math, they’ve emphasized how much profit the homeowner is likely to make and questioned why they shouldn’t be required to invest some back. Which is kind of a weird take, since homeowners in the city who are currently selling to tower developers are getting almost double the assessed value of their homes without having to spend a penny on upgrades.)

The result is that the majority of the almost-6,000 laneways in Vancouver that are already built or underway are being done by smaller developers like Jhuty, who are undertaking them as part of a complete lot redevelopment, like the one near King Edward and Prince Albert where I visited him one morning.

With pre-1940s houses, they essentially remove everything except the basic frame of the old house and build a new one around it, along with the new laneway. It’s a simulation of heritage retention that produces housing that sells at top dollar.

With the others, like the site where I meet Jhuty, they demolish the existing house and build a new main house with a basement suite and laneway on the lot—yet another scenario that further limits home ownership to those who have the financial means to buy that higher-priced, multi-unit development.

So it would seem to make sense, if you want to intensify housing in the city and get more out of what is an awful lot of decorative, unused grass, to make some changes that would allow sales, and that might require some essential upgrades to be made in the main house, but not force a complete rebuild.

Jhuty says a valuable thing cities could require, if they allow the laneway to be sold, is some kind of upgrade that improves the main house’s energy efficiency and sustainability—improvements that are reasonably priced and a benefit for the owner and the city as a whole but not so expensive that they kill the project. He has never understood the current policy, where the city says a main house has to be fully upgraded for safety reasons (if the laneway is going to be sold), but that same urgency around safety doesn’t seem to apply to a laneway that is rented.

But, as I discovered when trying to figure out how feasible this might be, it’s a fraught topic.

Vancouver’s planning department is not currently open at all to the idea of any change. Senior planner Paula Huber emphasizes that the province is currently suggesting that 72 percent of all new housing in Vancouver should be rental, which tells them that it’s a bad idea to start giving away any already existing rental.

“In an environment where we have that kind of target for rental, a program to allow homeowners to convert would not be high on our priority list,” Huber says.

She also notes that the city’s current policy on allowing purpose-built apartments to be converted to rental is that it can’t happen when the vacancy rate is below 3 percent. Vancouver hasn’t had a vacancy rate that high in decades.

But the province, currently undertaking one of the most energetic housing revolutions on the continent, is more interested.

Housing Minister Ravi Kahlon says that, when he looks at other regions, it’s clear there’s huge potential for laneway houses, especially in California.

“It’s a big topic and this is only going to grow,” he tells me. In Los Angeles, where the city began permitting laneways (or what they call accessory dwelling units, or ADUs, down there) in 2017, new laneways now account for 20 percent of all construction. In California overall, there were almost 50,000 completed in 2022.

California, where ADUs are increasingly seen as a viable and important part of the solution to providing cheaper housing, passed new legislation in October 2023 allowing them to be sold like condos. That means some requirements from the homeowners selling them (notify utility companies, form a homeowners’ association to figure out costs that need to be shared), but nothing like hugely expensive upgrades to main houses in Vancouver.

Tackling laneway reform isn’t at the top of Kahlon’s list at the moment, given the dozens of other initiatives on his plate, but it’s definitely on his mind. Encouraging municipalities to allow smaller units to be built and sold is already part of the overall strategy in the new law allowing fourplexes everywhere.

“We want to see those smaller units owned by families,” he says. When the province has those other initiatives well underway, they’ll apply that same lens to laneways, taking a look at what is fact and fiction in terms of safety upgrades needed. “That is still a home ownership opportunity.”