The drivers behind Australia’s apartment shift

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From the Housing Industry Association (HIA) comes a decent new report examining the drivers behind Australia’s changing housing composition, including the shift to apartment living:

‘Multi-unit’ dwellings are now a far more significant part of the new home building market than at any other point in Australia’s history…

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Obviously this situation appears as somewhat of a ‘paradigm shift’.

…multi-unit commencements are at record levels, and this represents a marked deviation from the longer term trend. In contrast, detached house commencements are trending up, but only slightly above the longer term trend level. Note that the record high for detached house commencements occurred back in 1989.

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Structural changes to housing supply policies mean we should expect larger numbers of multi-unit dwellings than in the past… However, the trend decline in the number of detached house commencements (albeit a very modest decline) risks failing to meet the needs of other parts of the community. Policy failures relating to the supply of new residential land have been a major contributor to the relative underperformance of detached housing…

Policy Environment:

Metropolitan planning strategies in all states outline rather ambitious targets for the share for new homes located within existing metropolitan areas. To the extent such planning strategies have been implemented, and with infill sites predominantly accommodating mid and higher density dwellings, the policy focus has enabled the supply of multi-unit dwellings to be more responsive. Similarly, a lack of policy focus has acted to constrain supply of new residential land around urban fringes…

HIA’s research reaffirms anecdotal evidence that foreign buyers are far more active in the high-rise inner-city apartment markets… The recent surge in foreign investment in residential property is likely to have made a significant contribution to the record volume of higher density housing currently being built…

Funding the provision of the physical infrastructure and ongoing community services required to support a growing population provides a challenge for policy makers. There are divergent views on whether investment in infrastructure to support residential development in greenfield developments on the urban fringe or through infill development provide the most beneficial outcomes. Indeed, there are more than enough case studies to execute a case for either greenfield or infill being more cost efficient; and individual circumstances will always be important…

It is likely that policy makers’ apparent aversion to investment in infrastructure for housing relates to the timing of expenditure. Greenfield development on the urban fringe is likely to require a more substantial upfront investment to establish infrastructure and community services from scratch, whereas provision of infill is likely to represent a series of incremental expenditures retrofitting existing infrastructure to increase capacity…

For greenfield developments especially, much of the upfront costs are transferred to the buyers of new residential lots via infrastructure charges and levies charged to developers. This reduces the affordability of new lots for detached houses…

Consumer Preferences:

At a given price point, households may be increasingly inclined to reside closer to employment opportunities and the amenities of urbanised areas over the amenity provided by a detached house further away from urban centres…

Established residential areas are typically serviced by a wider range (but in the short term, fixed number) of community services than are available on urban fringes. Greenfield developments and master-planned communities include provisions for community services and infrastructure. However, housing is typically an earlier stage of development than many of the high value services which are only delivered when the community reaches a critical mass…

When building or buying a new home in an established area the nearby amenities are known, whereas building a new home in a greenfield area has an inherent degree of uncertainty about how quickly the community will grow and when the infrastructure will be established…

The gradual decline in lot sizes and increase in dwelling sizes that has occurred in new residential developments over time means that detached homes in greenfield developments have less outdoor space than they had in the past. As a consequence, the marginal difference in amenity between a detached home and a lower density attached dwelling (eg town house, semi-detached dwelling, unit) has narrowed. This is likely to have been a key factor that has contributed to the growth in the lower/mid-density multi-unit type housing.

Demography

The most notable demographic issue in the Australian context is the aging of the ‘baby-boomer’ cohort…

There is an expectation that a larger share of the aging population will reside independently in their own home longer than previous generations…

Lower/mid-density multi-unit housing in existing areas is likely to provide an accessible low-maintenance dwelling type that will enable older people to live independently in their own homes for longer…

The fertility rate in Australia, measuring the average number of children per female, is lower amongst the current cohort than it has been in previous generations. This implies families are, on average, smaller households than they have been in the past, and also that there may be more households without children. With family households likely to be smaller than in the past, there is a valid contention that such households are likely to demand smaller dwellings. However, this may be putting the cart before the horse; having fewer children may be the response to the housing situations families face…

Housing Affordability

For some households, multi-unit dwellings represent more affordable substitutes to detached houses. Housing affordability pressures, principally related to the price of serviceable residential land, have forced the market to make more intensive use of available land. This means more dwellings in a given area than there has been in the past. This situation is evident across greenfield developments where there are predominantly detached houses, and in urban areas where more infill developments are constructed on available sites.

For greenfield developments especially, much of the upfront costs associated with establishing community infrastructure charged to developers of new residential lots via infrastructure charges and levies are embodied in the sale price of residential lots and is therefore transferred to the buyers. This reduces the affordability of new lots for detached houses. The excessive component of infrastructure charges on new residential development is a significant tax on new housing.

For greenfield developments, accommodating the additional costs imposed by the taxes and levies while ensuring lots remain affordable for home buyers has typically meant smaller lot sizes than would otherwise be the case. It has also meant increasing the number of sites for low and mid-density dwellings, and incorporating sites for higher density dwellings. In urban infill developments, this equates to maximizing the useable space on the site within the allowable parameters related to the site However, this is balanced by the higher costs associated with building higher and also excavations for basements. With land supply likely to remain constrained in most markets, affordability pressures are likely to remain a factor influencing the composition of new housing.

Nothing we don’t already know. The shift to apartment construction has been driven by a combination of: planning policy (urban consolidation and high land costs); poor housing affordability; foreign investment; and consumer preference.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.