High density housing’s biggest myth

By Ross Elliott, author of The Pulse

Advocates of higher density housing development in Australia’s major cities – inner city areas in particular – are fond of pointing to a range of statistics as evidence of rising demand. Dwelling approvals, dwelling commencements, tower crane counts and various other sources, both reputable and dodgy, are referenced and then highly leveraged to support claims that our housing preferences have fundamentally changed in favour of high density apartments. But what’s the one inescapable fact that these advocates are missing?

“Higher density living on the rise” is typical of the light weight PR puffery that passes for market analysis these days. This piece is typical of the boosterism:

“Since 2008/09 multi-unit housings’ share of dwelling approvals in Queensland has jumped from 31 per cent to 46 per cent. Much of the increase can be attributed to an increase in approvals for high-rise apartments, with the sector’s share of dwelling approvals doubling between 2008/09 and 2013/14, from about 12 per cent to approximately 24 per cent.”

So far, correct. But it goes on to draw this unjustified but widely supported conclusion: “the popularity of apartment living in the larger capital cities had been driven by a number of factors including decreasing housing affordability and the changing lifestyle of baby boomers and young professionals.”

Or how about this piece of PR chasing nonsense pumped out by a bank no less: “Australians are favouring smaller, more affordable homes, with approvals for the construction of flats, townhouses and semi-detached houses nearing their highest level in 20 years.”

What’s wrong with these conclusions? Simply this: rising dwelling starts for apartments in inner city areas do not necessarily reflect ‘changing lifestyles’ or any ‘popularity’ for this product by home buyers. What it does reflect is a (so far) ravenous investor appetite for the product. This is entirely different to an owner occupier appetite. If owner occupiers were buying these apartments in large numbers, you could then conclude that inner city apartment living was becoming more and more popular. But speculative investors have no intention of living in the product they’re buying.

Owner occupiers in the main aren’t looking for tiny one or two bedroom units. Some developers have targeted the owner occupier unit market, and their designs feature more three and even four bedroom units, spacious in design and with features designed for living in as adults or families. The price points are vastly different. This is so far a niche market which is performing strongly, but it’s completely different to the cookie-cutter apartment stock which is driving the stats.

What is happening in Australia now, and which is being reflected in the dwelling stats for apartment construction, is a nation-wide frenzy of speculative investment in inner city apartments, fuelled by negative gearing, SMSFs, foreign buyers and the search for returns in a very low yielding market. For many apartment projects, more than 80% or 90% of the stock is sold to investors, not to people with the intention of living there. This includes a significant proportion of first home buyers as investors, as Michael Pascoe recently pointed out.

To meet the investor market, apartments are getting smaller and smaller – to meet the price points demanded by investors. Typically, most projects offer a mix of one and two bedroom units only – and these are designed to squeeze every square inch of efficiency out of them. Construction economics and pricing is all about size, features and finishes and every dynamic is put under the microscope and cut from the project if it means the unit offering can be sold for less without sacrificing margin. Many continue to be offered through project selling agencies or “investment channels” in order to achieve a certain level of pre-sales. ‘Rental guarantees’ from developers provide investors with some certainty that their investment will perform predictably for the first year or two. A successful project is one that is sold out, preferably pre-sold. Actually being occupied is another thing altogether.

What this is doing is creating a large pool of rental units of similar size and design and in similar locations. And contrary to the sort of froth and bubble many commentators attach to the ‘rising popularity’ of apartments, many are vacant: simply locked up and not used by their owners (often overseas buyers). Others are looking for tenants, but can’t rent for what investors need to get. Inner city apartment vacancy rates are rising, and rents are starting to fall: a sure sign of market where supply is beginning to exceed demand.

‘Official’ vacancy stats produced by Real Estate Institutes only count the properties actively being marketed for rent. The ones that are simply unoccupied and not available for rent don’t form part of the figures. A recent study in Melbourne reviewed water consumption in a number of Docklands Towers and concluded that those apartments with next to no water consumption were effectively empty. They put the vacancy at nearly one in four. Or you can simply look at these towers at night, and count the lights that are on, and draw your own conclusion. Or maybe ask some restaurant or shop owners who took leases in new projects on the promise of “a bustling inner city café society” what the trade is really like.

Increasingly, smart developers are selling sites with approvals in place but before a sod has been turned. In some cases they’re selling even before the approval has been obtained. Why go through the grief of developing something when someone else is happy to pay you a premium many times what the site cost you?

I don’t actually see anything wrong with any of this. Property markets going through booms and busts are not a new thing. Just ask industry people on the Gold Coast. Or have a look at CBD office markets. Plus, if it weren’t for the frenzy of activity we’re seeing in the apartment market now, there’d be precious little else going on. So it’s keeping an industry alive, and all those whose jobs depend on it. Investors are entitled to take risks and they are just as entitled to lose money as make it. There are no guarantees.

But please, stop suggesting that what we’re seeing is anything but a case of investor-fueled activity. Investors are buying a financial product, not a lifestyle choice. To suggest it means Australian society is surrendering a three or four bedroom home in favour of a one bedroom apartment is stretching the conclusions that can be drawn from the stats way way way too far.

Comments

  1. The problem is that these many of these apartments are not well insulated and built in towers that are far too close together.

    Many apartments lack double glazed windows and have poor ventilation, creating a complete reliance on electric heating and cooling. Mold is also a problem due to poor venting of bathrooms.

    The densities being built in Melbourne are over and above Hong Kong, New York, and many other metropolises, resulting in a a lack of sunlight inside apartments and few open spaces on the block.

    Foreign investment is fine, but the resultant construction is inappropriate and will be a blight on Melbourne for multiple decades.

    http://www.theage.com.au/victoria/melbournes-hyperdense-skyscrapers-would-never-be-allowed-in-other-global-centres-a-new-report-finds-20150209-13936d.html

    Having lived in Europe for a while my view is that widescale medium-density is the way to go. Those changes rely on local councils. Until then, Melbourne’s housing market will remain broken and undesirable.

    • Agree completely. I disagree with Ross and Leith that there is any upside to this. It is a bubble with classic massive malinvestment, which will become clear post-crash – empty, unsaleable, valueless chicken-coop apartment buildings. Some kind of free market repurposing will have to be the long term solution, but I can see the planning classes and the rentier classes in cahoots trying to force Australians to live this way in perpetuity. Hope there is a revolution.

      European medium density is indeed a happy medium. There is all sorts of nonsense talked about the competing models of “US car-mad sprawl” versus our enlightened elite planners visions of Hong Kong in Australia. In fact low density cities like Boston and Atlanta have around 800 people per square km, HK has 66,000, London with scandalous overcrowding among low income earners) has 15,000; Amsterdam has 2500 same as Los Angeles and Auckland. Lyon has 1500, around the same as most Australian cities.

      A bit more knowledge and facts on these issues would really really help people understand what they need to be voting for and against.

      • Phil, yep, there is an opportunity cost here with the construction of these massive towers. The resources used to build all them could have gone towards building housing that people actually want to live in. Instead we will likely have to re-do them at some point in the future, maybe even tear them down.

        There is also the loss of heritage buildings that could have had more sympathetic re-purposing on some sites. The Sydney CUB site is a good example of this.

      • Hamish, I agree with your comments, though I don’t mind what they’ve done with the CUB site – they created a new park, kept some of the old chimneys etc, created a pretty iconic new group of modern buildings, an connected Chippendale with Broadway. That said, I haven’t been inside the apartments so I can’t speak for what the quality is like. They were charging nearly $1mil for a 2BR unit so you’d want to hope they were good quality!

  2. I agree that many home owners have a preference for 3 bed units rather that one or two bed offerings, but singles and young couples are happy with one and two bed units.

    In my experience there is definitely a growing acceptance of this accommodation and it is less expensive that houses on 600M2 blocks inner city.

    • Acceptance that it is all you can afford.

      Once you realise that you can’t afford anything you actually want to live in, the alternative is to take advantage of the city lifestyle; being close to work and the gym and facilities, but living in a crap flat.

      • it would be interesting to see how much time (in a conscious state) Australians spend in their expensive homes.

        I would guess very little compared to other countries because of nice weather year long, long working hours, long commute time, and outdoor lifestyle …

        So lets say in an average year around 2000 hours including time spent cleaning and maintaining, the question is weather it’s worth paying $10 more per hour over 30 years to buy place better than “crap flat”

      • I can afford many different housing options, but I chose to purchase an apartment for my future residence.

        Dwelling suitability depends a lot on family requirements.

      • Peter, of course that’s fine for your personal preferences and circumstances, however let’s be sure not to confuse acceptance with acquiescence!

        The majority of the people I know who live in apartments, units or townhouses are doing so simply because they don’t have any other palatable options, not because they really want to.

        They don’t like the noise
        They don’t like the lack of space
        They don’t like not having open air (other than a balcony whilst Melbourne winter winds blow past because let’s face it, there aren’t many trees for cover on the 15th floor)
        They don’t like having to park their car in a shoe box sized space where it’s just going to get destroyed by those inconsiderate sods who park around them
        They don’t like having to wait minutes for the lifts again when they realise they’ve forgotten their phone and have to go back upstairs to get it
        I get to hear all about it so I could go on and on…

        They acquiesce to this reality because they can’t change it.

        Maybe in a couple of generations when enough young adults have grown up as kids in this type of environment we may eventually get to the point where this is their preference but I highly doubt it.

      • You said it, Aaron.

        There are some good academic surveys done in the UK where they have had these deprived choices for decades. People are overwhelmingly miserable and wanting a bit more space and privacy and fair “housing” costs.

        The sickening thing is that none of this means fair housing costs at all. It is the worst lie of the rent-seeking one-percenters that intensification=affordability.

        In fact the data runs pretty clearly correlated from Houston, 1300 people per square km, median multiple 3, at one end, to Hong Kong, 66,000 people per sq km, median multiple 16 at the other.

      • Peter, I bet your “future dwelling” isn’t a 1 b/rm crap box!

        I don’t know who your talking to, but I haven’t met any young couples who want to live in those dog boxes, except students.

      • true Dennis, it isn’t a one bedroom crapbox, but my point was that just because a dwelling wasn’t what everyone here wants it doesn’t mean that no one will want that dwelling just the way it is.

        I have a family member living in a one bed unit inner city with a wife and child. I keep telling him that he needs a bigger unit, but after living in London and Prague in a smaller apartment they are very happy with what they have.

    • I don’t have a problem with apartment living per se but there is a fine line before they start to drive you crazy. The big things for me are space and noise.
      I presently live in a cluster of 3 level apartment blocks and the noise bounces from one to the other so if the neighbours are up chit-chatting away ’til midnight it’s like they’re in your bedroom. You can imagine what parties are like!
      As to space, modern apartments are becoming more like a hotel room where it’s fine if you’re going/eating out all the time but if you want to maintain a normal life and lifestyle, i.e. hobbies such surfing/cycling, there’s nowhere to put anything!
      The studio concept is a joke. Who wants to sleep in the same room as they cook?

  3. After labeling media BS as crap, Ross joined the club by falsely claiming that only owner occupier lifestyle matters and it’s completely irrelevant how rental demand looks like.

    And as usual truth is somewhere in the middle. It is true that high density is mostly driven by investors and usually foreign or foreign looking investors, but it’s also true that Australian fast growing and changing population has different appetites compared to 10 years ago. This is especially true for rental market demand. Most of 200 thousand people who come to this country every year come with different lifestyle preference and no much money to become owner occupiers. Coming from high density areas in Asia and Europe they are likely to have high density urban living preferences, and you none needs data to confirm that large majority of residents in these high density areas are foreign. In addition to them there is also significant portion of young Australians who prefer inner city “hipstery” lifestyle.

    People do not buy these units to live in for three main reasons: they have no money to buy these expensive and unaffordable homes, these homes are small and do not satisfy long term needs and they are of poor quality. In other words, these new small but low quality apartments are only good when new, only good for young singles and couples and are not worth buying compared to cost of renting.

    This doesn’t mean that none wants to live there, they are actually perfect for young renters, who want smaller place, who want to live close to everything on a small budget, enjoying their lifestyle and without need to work long hours.

    So, this is a pointless discussion between two kinds of people: greedy media with financial interests and midlife crisis suburban men with kids who don’t want to accept that some people still have fun.

    • They are not that cheap, for the same price, you could rent a unit or a house in one of the nearby suburbs.

      • they are $50 to $100 more expensive than something in nearby suburbs – same as public transport tickets for two

  4. “(Urban) densification is about as popular as Ebola … “ says New Zealand Deputy Prime Minister Bill English …

    Finance Minister says calls for densification as popular in Auckland as Ebola – Yahoo Finance New Zealand

    https://nz.finance.yahoo.com/news/finance-minister-says-calls-densification-020800747.html

    Finance Minister Bill English said calls by the Reserve Bank Governor for more densification in Auckland’s housing were “about as popular in parts of Auckland as Ebola” would be.

    Graeme Wheeler told Parliament’s finance and expenditure select committee this week that building height restrictions and NIMBY attitudes in inner Auckland were standing in the way of an adequate supply-side response to the region’s housing shortage. He estimated the backlog of unsatisfied demand at between 15,000 and 20,000 houses.

    beehive.govt.nz – Dep PM Bill English – Speech to the Auckland Chamber of Commerce and Massey University

    https://www.beehive.govt.nz/speech/speech-auckland-chamber-commerce-and-massey-university-4

  5. The problem with development (in Melbourne) is that residents are not receiving the benefits of the “best of high density” or the “best of low density”. They are getting a bastardised and terrible version of high density and a crippling version of medium density. Even “low” density estates are on peanut-sized blocks with poor infrastructure (and shitty build quality for the dwellings).

    The city really is going down the toilet (albeit slowly) through a lack of vision and corrupt and short-sighted planning approvals.

  6. If you look at the high-density construction in Japan now, it’s extremely good for new apartments, which are on the whole bigger, well designed, and with quality fittings/materials. Why has this come about? Previously, the Japanese construction industry was literally yakuza-run and the typical Japanese citizen was starved for choice. Economic conditions have forced the industry to change. Quality and size has gone up, while developer margins have gone down. These apartments range in prices and I would still think a 2-3 bedroom apartment with carpark will range anywhere from 400-700K in the key urban areas.

  7. The “lights on at night” test is unreliable. Various things like holidays, working late, doing evening activities, and going to bed early make it fairly unreliable. At least the water usage test is only thrown off by holidays.

    • Needs to be a time-lapse test to be fair. Take a photo of the same building a couple of times each evening for a month. Then see which windows never light up.

      Should be a fair test.

  8. Very well said. With some development s at majority 1 bed ‘product’ these slumsville towers could easily be converted to future nursing homes or student accommodation once it is realised that australian s housing needs have not changed.