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Why size does matter

Overly stringent planning regulations and their associated costs have been cited as the main reason apartment prices are so high across Australia’s main cities.

The findings were detailed in a new report from The Reserve Bank of Australia (RBA) which sought to outline the underlying cause of apartment shortages across Sydney, Melbourne and Brisbane.

The report, aptly titled The Apartment Shortage and released earlier this month, looked at the severity of the shortage and found it could best be gauged by the difference between what home buyers will pay for an apartment and what it costs to supply.

The report found that home buyers will pay an average of $873,000 for a new apartment in Sydney, despite the fact it only costs $519,000 to supply. This equates to a gap of $355,000 or 76 per cent of costs.

In Melbourne, the difference was less noticeable with the average new sale price of an apartment sitting at $588,000, when it costs only $491,000 to supply – a gap of $97,000 or 20 per cent of costs.

Similar number crunching in Brisbane showed the average price paid by a home buyer for a new apartment in the Queensland capital was $470,000, when it cost $460,000 to supply – a difference of just $10,000 (or two per cent of costs).

The report, which also sought to examine how the shortage of apartments varies across time, location and building types, found that over the past decade the excess demand for apartments had increased substantially in Sydney, fluctuated without trend in Melbourne and declined in Brisbane.

In Sydney the excess demand proved most severe in inner suburbs, where RBA researchers found newly completed apartment buildings have been shorter than the lowest cost height in almost every area.

Significantly, the authors of the report concluded that the gap between the supply cost and the delivery to market cost was sustained by planning restrictions and planning risk.

“The shortage of apartments is most severe in the inner suburbs of Sydney, where height limits prevent more construction. Elsewhere, restrictions on converting low-density housing to apartments are important,” the report noted.

The results have obvious implications for housing policy and town planning, as well as helping explain the dynamics behind housing prices, the report stated, while noting the shortage of apartments is worst in inner Sydney, where height limits restrict construction, and high-rise constructions offer a less costly way of supplying more housing because they don’t include the costs of extra land.
The report suggests constructing taller buildings in metropolitan Sydney rather than increasing medium density housing, arguing this makes the most economic sense as a solution to the shortage.

 

This is because as building height increases, the per-apartment cost of land declines while construction costs increase.

This effectively means that above a certain height, tall buildings become more costly to build than shorter buildings. In Sydney, where the shortage is most pronounced, this crossover point occurs at 20 storeys, much higher than the typical apartment building, which is 10 storeys.

The report found the typical apartment height in Melbourne was 17 storeys and 13 storeys in Brisbane.

In response to the findings, the Tom Forrest, the CEO of property development industry group The Urban Taskforce Australia, said he believed the additional costs are due to the excessive time taken to obtain approvals in the NSW planning system and the high degree of risk associated with approvals, despite the strong demand for new apartments.

“Given the economic shock created by COVID-19, the RBA’s independent confirmation of the excessive costs associated with the NSW planning system presents an opportunity for the NSW Government to cut housing prices by approving more supply and allowing for more height”, Forrest said.

While noting the NSW Government had responded well to COVID-19 with new fast-tracked assessment programs and the new Planning Delivery unit, Forrest said the fact remains that the planning system had “slowed the planning approval process even before COVID-19 hit”.

“Planning approvals, particularly for apartments, have now fallen off a cliff. It is important to remember that almost 70% of all new dwellings built in Sydney are apartments.”

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