Four reasons why Australia’s housing sector hasn’t responded to demand

The Reserve Bank released their September quarter Bulletin this week (here) which included a superb article outlining their research around supply side constraints across the capital cities of Australia.  The report identifies four factors that are impediments to a responsive housing supply across the country:

  • Complexity of the planning process which can create uncertainty, lengthy delays and risk for developers as well as significantly increase costs for developers.
  • Provision and funding of infrastructure – gone are the days of the Government funding the costs of roads, utilities and community services out of the tax base.  The report states “developers often fund at least half of new utility and transport infrastructure in Sydney, Brisbane, Perth and Adelaide”.  Often the costs fronted by developers are negotiated across each project providing an uneven playing field and planning uncertainty.
  • Land ownership and geographical constraints – fragmented land ownership across infill and greenfield locations makes it difficult for developers to identify and acquire sites that are appropriate for large scale development.  Additionally the geographic constraints such as the large tracts of national park north and south of Sydney are identified in the report.
  • Public attitudes towards infill development – the report specifically comments on infill developments being subject to community opposition which can result in non-approval, restrictions on development approval and a loss of project viability.

One of the most revealing tables in the report compares the costs of greenfield development across each of the major capital cities.  Indicative costs for developing a greenfield site in Sydney are more than three and half times what it costs in Melbourne.  The imbalance in development charges provides a distinct insight about why new development has been so lack lustre in Sydney while at the same new housing supply has been very sufficient in Melbourne.

The report is timely in the sense that the ABS also released their June quarter dwelling commencements data which showed that, despite a 4.6 percent rise in dwelling commencements over the quarter (which was driven by a spike in the volatile ‘other’ sector which generally refers to apartments), new dwelling starts were down 10.8 percent over the year.

The graph below, which tracks annual dwelling starts versus the annual change in population growth clearly highlights the lack of any response in housing supply to surging population growth between 2004 and 2008.  In fact, as population growth (read ‘housing demand’) surged new housing starts were trending downwards.  More recently we are once again seeing population growth ramping up at a time when new dwelling construction remains weak.

The third graph from the RBA report highlights how a comparably low cost and reasonably efficient land release strategy played out for Melbourne.  Despite recording similar rates of population growth between Sydney and Melbourne, the number of land parcels released in Melbourne has been more than double what has been recorded in Sydney.

The RBA authors of the report summarise their findings like this:

“Given the difficulties involved in satisfying the large number of stakeholders involved in the housing supply process, it is likely that these important issues will remain on the policy agenda for some time.”

I couldn’t agree more.  Developing land in Australia is currently a tough gig it seems, and with most state governments looking to bolster their budgets it is hard to imagine any resolution to issues like infrastructure charges and levies any time soon.  From another perspective, attracting population growth means that development needs to be facilitated (if not encouraged) by all levels of government.  A larger taxation base has got to be a positive for most state governments at the moment given their financial positions.

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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2 Responses to Four reasons why Australia’s housing sector hasn’t responded to demand

  1. Chris Stavenhagen September 17, 2012 at 9:06 am #

    Hi Tim,

    It would appear that government has once again abdicated its responsibilities in relation to governance of our state. It appears that generally government is moving away from actively managing many areas in which it formerly took the lead.

    Gone are the days when the government would construct main roads and provide electricity, water and sometimes sewerage mains to areas it wanted to populate. Developers would then attach subdivisions to this group of principal facilities and hey persto another planned suburb would emerge. All very logical and desirable. The government would then have a whole new group of tax payers from which to recoup its costs over time. This was seen as a community good whcih benefited the population as a whole. The notion of privatisation has meant in effect that governments can slip slide away from spending money on basics. They will always tell you about the cost of of everything and nothing about the benefits of encouraging investment and population building. They just get lost half way in the cost/benefit analysis.

    To put the whole cost of infrastructure on to developers means that the price of a block of land has increased to the point where, when added to the ever increasing cost of producing a building, makes purchase by an end user cost prohibitive. Instead of bleating about ‘cheaper housing’ proposals (read slums), governments should be addressing the issues blocking private developers satisfying the need for housing in the market place. Let’s also not forget greedy local governments who appear to regard housing developments as cash cows that they can milk then add to their coffers and waste money on stupid loser investments and wanky schemes that have nothing to do with their core responsibilities.

    Governments of all persuasions continue to disappoint with their short term ‘let’s promise it for the next election’ approach to the big issues confronting the community at large. Where is the statesmanship that made this country great? It appears lost in the realm of mediocrity that passes for leadership at this point in history. I hope that one day there can be a co-ordinated approach that will strike a balance between the needs of people for somewhere to live and the available cash with which to achieve that goal.

  2. Andrew Baker December 4, 2016 at 1:20 am #

    First of all, the median house has more than 2 people in it (on average each house in Australia has something like 3.2 occupants at a time according to ABS data) – so if population growth is 300k per year, new starts should be substantially less than 150k which is almost never the case on this chart? Dwelling starts vs population growth is 1:1 in 1993-1994… so one person per new dwelling? Surely that is a vast oversupply? The only time there seems to be building starts that house 2-3 people (and not more) – the period from 2006-2010. It doesn’t make sense to ask where the supply response was as there had been an oversupply for 20 years leading up to that period.

    We have now overbuilt in most capital cities because future starts aren’t considering the number of people being housed in each dwelling in comparison to the uptick in population growth. It’s frustrating to see people be so wildly wrong by using the wrong metrics to measure demand. Investor credit oversupply fuelled by historically low rates of interest and tax rebates for property investment (NG and CGT concessions) is what has driven current rates of property demand – not immigration as is obviously shown in that graph. When will people learn that Ponzi financing in any way shape or form eventually collapses the entity in which it resides? It has happened almost everywhere else in the world it is just a matter of time before we face a huge credit crunch here also – I for one will not feel sorry for people that are investing at the moment when they lose their money trying to be options traders.

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