What to do, what to do about affordable housing and supply?

There was some very interesting commentary this week on the state of the property market.  Firstly, Ric Battellino the Deputy Governer of the Reserve Bank gave a speech on myriad of issues including dwelling supply at the national Housing Supply Conference in Melbourne this week. 

His comments agreed with the consensus (yours truly included) that Australia hasn’t built enough dwellings.  However, Ric’s analysis suggests that this is not due to a cutback in dwelling investment, dwelling investment continues to increase.  He gives four reasons:

  • First, Australians are on average spending a lot more on each new dwelling. Real expenditure on each new dwelling built is now 60 per cent higher than it was around 15 years ago. 

Clearly we can all agree to this, the cost of residential dwellings has increased over the last 15 years, as has the cost of virtually everything.

  • Second, a high proportion of dwelling investment is in the form of alterations and additions – i.e. upgrading existing houses rather than building new ones. Almost half of all dwelling investment has been accounted for by alterations and additions in recent years. 

So, residents are choosing to renovate and extend rather than invest in new dwellings.  I think most people can agree with this.  Why give up the house you have to move to the outskirts of the city where public amenity is poor and the cost of constructing a new property is significant.  Why not just alter your current property?

  • Third, a higher proportion of the new houses built are simply replacing existing houses that have been demolished. The RBA estimate that between 2001 and 2006, around 15 per cent of new houses built replaced houses that had been demolished; 10–15 years earlier, that figure was less than 10 per cent.

This comment suggests that only 85 per cent of new dwelling commencements actually add to supply, the other 15 per cent is simply there to replace those properties which have been demolished.

  • Fourth, a significant proportion of dwelling investment appears to have gone into holiday homes or second homes. Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin. As a result, the ratio of the number of dwellings to the number of households has been rising over time; as at 2006, there were 8 per cent more dwellings in Australia than there were households. Presumably, most of this surplus reflects holiday houses and second houses.

With economic prosperity comes demand for second homes and holiday homes.  It can therefore also be assumed that 8 per cent of new dwelling additions are going to be ‘consumed’ for want of a better word by those who already have somewhere to live.  This leaves us in an interesting position, only around 77 percent of dwelling commencements in this country are actually catering to population growth, no wonder we can’t build enough stock.

Speaking at the same conference as the Deputy Governor was the National Housing Supply Council chairman Dr. Owen Donald.  He raised significant concerns about the impact that land supply, finance, planning reforms and local governments will have on the supply of new homes.  He stated that the country would fall short of providing the 153,000 dwellings required each year until 2028. 

He also raised concerns about local area activism which was constricting supply, particularly in inner city areas which were ripe for infill development.  These groups are commonly referred to as NIMBY’s the Not In My Back Yard crusaders.

Undoubtedly this is a tough situation to manage, in order to cater for additional demand higher densities and in particularly higher densities in inner city areas are important.  However, inner city areas are where land costs are greatest, where people have forked out a greater amount of their hard earned cash to live and where there is a greater supply of our character homes.  What makes Australia unique is that you can still buy a house just minutes from a major city.  Around the world most cities have gone the other way and your only option for housing close to the city is a unit.

The results of the recently released Housing Mobility and Conditions Survey show that the second greatest reason for people moving house (after buying their own property) is because they wanted a bigger or better home.  The survey also found that a common theme throughout the study was that when people were dissatisfied with their property, size and in particular not enough size, was a commonly recurring theme.

It would appear that Australian’s still long for the large block of land with the large houses yet we continue to push for inner city densification.  There is undoubtedly demand for this type of development and it is certainly appealing when you’re young and single but speaking from experience, I think many reach a point in their life where they want a property of their own.  One which they don’t share with a variety of common owners and in my opinion, many want the freedom to do what they choose and not to be governed by Body Corporate by-laws.  This being the reason why you see such a high proportion of single person and couple household within inner city suburbs which are dominated by units.

Personally, I think the way to go is to decentralize some Government services.  There is no reason why state government departments need to base themselves in capital cities, especially nowadays.  If Government’s decentralised, public servants would have to follow we could expand our regional cities provide the right infrastructure from the start. 

Property prices are generally more affordable in regional areas and moving services to these areas would provide the demand required to make more affordable housing economically feasible for developers.

We have already seen the Queensland State Government offer up a ponzi scheme whereby they propose offering migrants $3,000 to not move to the South-East corner.  What is $3,000 going to do when you can’t get a job?  Moving government departments to regional areas will remove population from the state capitals where we consistently see Government’s are unable or unwilling to provide required public infrastructure.  It will also have a multiplier effect on the local region with supporting businesses having to move into these regions and creating additional job opportunities.

With this decentralisation, it doesn’t need to be regions hours outside of the capital.  Areas such as: Wollongong or Newcastle, Geelong or Moe, Toowoomba or Gympie, Murray Bridge or Victor Harbour or Bunbury in WA would be a good start.

I see few alternatives as land costs continue to climb due to Government charges and red tape in our capital cities.  Clearly, most residents still long for a house rather than the inner city unit and true satellite cities supported by Government jobs and affordable housing would certainly be a step in the right direction.

Cameron Kusher

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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5 Responses to What to do, what to do about affordable housing and supply?

  1. Brian Parkes November 27, 2009 at 8:55 am #

    I suggest you forward copies of this to all state planning ministers. It is contrary to the direction many state planning policies are heading.
    For example in WA, regional towns apart from major cities, are having severe restrictions imposed by the WA Planning Commission on any residential development outside the towns themselves.
    Planning ministers need to look at the “bigger picture” and incorporate many of the comments in your article into their state planning.

  2. Anthony November 30, 2009 at 7:50 am #

    “We have already seen the Queensland State Government offer up a ponzi scheme whereby they propose offering migrants $3,000 to not move to the South-East corner.”

    In what way is this a ponzi scheme?

    Google -> define:Ponzi scheme:
    “A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned.”

    • RP Data Research December 3, 2009 at 10:36 am #

      In reply to you comment Anthony, ponzi was probably not the correct word however, persons investing tin these types of areas would have likely done their money because it is unlikely $3,000 would provide an incentive whatsoever. A ridiculous scheme would have probably been a beter word to use. I will be posting a follow up blog today.

  3. Garth Hunt December 3, 2009 at 10:33 am #

    GST on land sales and also on new house & land packages is a major disinsentive to developing new property, especially where profit margins are already slim, as can be the case in major cities where it is expensive to buy land to subdivide.

    GST costs to developers reduce the amount of houses developed as profit margins are eroded. In turn,less houses being developed increases the cost of housing due to a lack of supply.

    Do you know if State Govenments (in particular NSW) are reviewing these GST charges ?

  4. David December 7, 2009 at 6:20 am #

    Alot of big blocks just 20-25km west of Sydney CBD (Wentworthville,Pendle Hill etc) but council regulations and red tape restrict sub division of alot of these blocks. Even if council regulations were relaxed then there are the cost implications of sub dividing and tax consequences making all this not worth it for the landowner.

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