Urban zoning and affordable housing are opposites

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By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.

The debate about house prices rises or falling, and what is, or isn’t a good for the economy, continues to dominate headlines – and not just in Australia. 

Indeed, the cost of accommodation in most developing nations, is often coupled with wide spread reports of a growing divide between those who entered ownership early enough to reap the financial rewards stemming from a substantive period of healthy capital gains, against a generation who are finding the challenge of funding vastly higher capital prices, is coupled with less than desirable choices resulting from poor supply side policies.

Yet the governance of housing supply is hamstrung firstly by the idea that everyone should stay centrally located, squeezed into an area parallel to existing transport networks, which although already over capacity, results in intensive development of high density, low grade, accommodation.

In part this is based on the faulty logic that a larger percentage of residents not only want to live in the city, but if located adjacent to tram and train routes, would ditch the car in preference of either for their daily commute to work.

Whilst my experience as buyer advocate bears evidence that the concept of being close to public transport is desired by the vast majority of purchasers, various studies have dispelled the myth that increasing percentages are using the crowded networks for their daily commute.  Not to mention the difference between living ‘walking distance’ from public transport, or feeling the house rattle as the train or tram trundles past.

In Melbourne – unless you work directly in the CBD – travelling by rail usually entails a second trip by either bus or taxi at the other end. And as around 81% of jobs are located outside this area,with most being scattered broadly across the wider metropolitan regions, road networks are still the quickest and therefore preferred option for the larger percentage of residents – (as evidenced in the study ‘Making Public Transport work in Melbourne,’ by Bob Birrell, Rose Yip and David McCloskey.)

This goes some way in resolving the ill-advised notion that dense living can reduce pollution, rendering it ‘environmentally sustainable’ – with studies by organisations such “Sustainable Population Australia” showing;

“…that high-rise housing increases per-capita greenhouse gas emissions by up to 30% due to a total reliance on power switches and being unable to enjoy the natural cooling of shady trees and living sustainability. Department of Planning and Energy Australia study (NSW) and the ACF Consumption Atlas show high-rise buildings emit more greenhouse gases per dwelling and per person than smaller blocks of flats, townhouses or detached homes”

As for those living in outer suburban districts, any concept of fast public transport to attend a football match, a day at the races, or experience inner-city ‘night’ life, is a long gone fantasy.

Some of Melbourne’s non-existent train lines were initially ‘mooted’ as far back as the 1890’s – and following numerous feasibility reports which amount to millions of ‘arguably” wasted dollars, they’ve become no more than dotted lines in the Melways.

Obviously units offer a cheaper entry point into tightly constricted markets.  The price difference in median values between an apartment and house ranges from around 12 to 30% (dependent on area and size – RPData.)

However, In Melbourne, the challenge of keeping apartment prices low is complicated by new zoning regulations, rendering some neighbourhoods immune from dense development, whilst others have the green light.  This further limits the concentration of land where construction can occur, and escalates already inflated land values.

Additionally, to get planning and building approval for an apartment block is a costly venture, requiring 100% debt cover and often resulting in a period of years from concept to ‘lock up.’

The complexities include levies for funding of communal facilities (such as underground parking, street lighting and so forth), which contributes significantly to the cost of the product.

Getting council approval can involve a lengthy period to resolve protests from existing residents and local councils, who fear the social and economic impact on their neighbourhood culture and local environment, and all of the above adds to developer holding costs until the project is finalised.

To obtain the necessary funding, the larger percentage are marketed to overseas buyers using vastly inflated commissions, who face no restriction when purchasing ‘off the plan.’

They are constructed with a ‘squeeze as many as possible’ mindset, compromising natural light and storage space along the way, and providing the finished product at an affordable price point (below existing unit medians) is no easy task.

High owner corporation fees to fund the required security features, lighting in corridors, lifts, lifestyle amenities (such as a gym or roof top garden for example) equates to at least a few thousand a year. Rental guarantees are often marketed to promise a return not possible once the guarantee has expired. And if the developer encounters financial difficulties during this period, there is no government legalisation backing up any promise of payment.

Hence the supply of high-density accommodation is mostly purchased by the investment sector who find it easier to obtain funding than the first home buying demographic, yet it seems a significant proportion sit vacant for periods of time.

For example, Melbourne’s Southbank has a vacancy rate close to 8% (SQM) which also falls in line with data obtained from Prosper Australia’s speculative vacancy report, which analyses water usage to assess residential vacancies across the metropolitan region over a 12 month period – the methodology of which is explained in detail here.

The research shows 7.9% of accommodation in the suburb uses no water at all, and over 22% less than 50 litres per day (a statistic which may be influenced by some being serviced apartments.)

All of the above, works on the ‘assumption’ that most people like to live close to the city and whilst this may apply to residents in their early years, who delight in the hub and bub of an inner city lifestyle, including student renters who need to locate close to nearby university campuses, there isn’t much evidence that the rest of us are prepared to give up space, to live in the type of accommodation provided.

Indeed, the idea that demographically we’re becoming a nation of downsizers is somewhat mythological, but it doesn’t stop the flow of regular articles suggesting we’re all becoming a nation of ‘happy strata dwellers,’ with “families are increasingly flocking to high-rise apartments.”

Whilst there’s no doubt we’ll see an increasing shift to apartment living due to lack of feasible alternatives, there is no evidence to suggest this is desired by the vast majority of ‘home buyers.’

It’s been shown the elderly overwhelmingly downsize to medium density accommodation thereby avoiding high-rise developments altogether – younger generations in their 20s and 30s have a better propensity towards high density living, and the proportion is increasing; however figures still only peak around 14% at the age of 27, and the trend across all age groups is marginal, with only 1 in 20 choosing this form of accommodation nationwide (as of the 2011 census.)

Obviously, most local home buyers prefer houses to apartments – and for the high-rise price tag of a two-bedroom flat, there’s far more bang for buck in established accommodation that doesn’t come with the additional risk of a view being built-out, queues to exit the car park, and 150 immediate neighbours traversing through various stages of their housing ‘career.’

Extra supply for the buy-to-let market should not be diminished, and it’s not my intention to do so.  However, there’s a broader need to establish quality accommodation for a larger proportion of home buyers who will accept townhouse living if locating inner city, but reject high density developments. And contrary to popular belief, it is possible to accommodate an equal number of residents in medium density dwellings without building to the skies.

Movements such as Create Streets in the UK are at the forefront of pushing low rise initiatives, and Robert Dalziel – the London-based architect for Rational House, who visited nine cities around the world, including Mexico City, Shanghai and Berlin, has comprehensively examined how high-density can be made agreeable for a broad demographic of home buyers.  More information can be found in his book –commissioned and published the Royal Institute of British Architects: entitled A House in the City — Home Truths in Urban Architecture.

However, families require houses (not apartments) gardens, green areas and local schools. They need community facilities, a local doctor on hand, good public transport and nearby shopping centres – and they need it all at an affordable price point.

It’s probably for this reason, that the major part of Victoria’s growth has been evidenced in fringe localities such as Wyndham, Melton and Whittlesea. And one thing we’re not short on in Melbourne is land. Yet regulatory constraints in outer suburban localities cause their own complexities that increase land prices making the entry point for such developments effectively double what they should be. 

As Dr Alan Moran recently pointed out in the Herald Sun “Without government restrictions on (the) city edge, land … would cost under $100,000. Regulatory-driven scarcity adds $100,000 to $150,000 to costs which the new homeowner must bear.”

Even within a wide expansive boundary as mooted in Melbourne’s new urban growth strategy, the government limits land use until they have gone through a lengthy process of mapping out areas for infrastructure known as a ‘Precinct Structure Plan’ – and as soon as you restrict the supply of anything, scarcity inevitably inflates values.

Larger developers are not slow to purchase swathes of acreage prior to rezoning, and then once ‘Psp’s’ have been finalised, drip feed it onto the market.

Consequently, government bodies have little understanding how released plots respond to consumer demand or control over unnecessary land banking.

There’s little sense creating new suburbs without the necessary infrastructure. However, such facilitation is currently financed via hefty development overlays, which are passed onto the buyer rather than initiatives such as bond financing, where residents pay back proportionally over a lengthy period of time, thereby bypassing an upfront fee which is piled onto the capital cost of their initial purchase (the detail of which I’ll go into in a future column.)

Additionally, a broad based land value tax, as advocated in the Henry review, would recoup a percentage of the windfall developers advantage, as prices increase though urban zoning, providing further encouragement to bring the plots into effective use and provide further funding for essential amenities.

The subject deserves deeper analysis, but the above touches on some of the measures we’re unwantedly subject to, by State governments who ‘spruik’ how they’re bringing affordable housing onto the market, yet in truth are doing quite the reverse.

Comments

  1. Nah buddy, this ain’t going to happen! Not when you have the entrenched mentality in all the government (local, state and federal) that urban zoning is good for you! And then couple that with all the suckers who overpaid anyway and then you’ll see why this is not going to change willingly.

    To reply with a sort of a meme: Because f*** you, that’s why!

    • Urban zoning can be quite good for you. No matter what you pay for your home, if someone sets up a factory next door in what was a residential street when you bought, lack of zoning will certainly make your home more ‘affordable’ for the next person to purchase it.

      The real problem is not zoning of itself, rather the co-opting of zoning by developers and the corrupting of politicians who assist those developers rather than their constituents.

      • They should zone nursing homes away from resi areas.. preferably co-locate them in industrial areas.

        /taking a piss at boomers. 😉

      • “Places like Dallas and Atlanta have zoning to separate residential from industrial uses.”

        Unfortunately not all towns in Texas appear to do the same. 🙁

        http://en.wikipedia.org/wiki/West_Fertilizer_Company_explosion

        The damaged buildings included the public West Middle School, which sits next to the facility.[27] A neighboring 50-unit two-story apartment building was destroyed.[5]

        The blast damaged the nearby West Rest Haven nursing home and many residents were evacuated. Many of the nursing home residents received cuts from flying glass, but emergency personnel on scene judged that most of these injuries were not life-threatening.[28]

      • It is very important that large quantities of explosive materials are kept safely away from people and from houses where people live.

        Even if the law allowed this, any half-decent human being would not impose such danger on their local community.

      • Yes…and then there’s this:

        “According to their last filing with the EPA in late 2012, the company stated that it stored 540,000 pounds (270 short tons; 240 t) of ammonium nitrate and 110,000 pounds (55 short tons; 50 t) of anhydrous ammonia on the site.[18] A week after the explosion, Homeland Security Secretary Janet Napolitano told Senate investigators that the company did not appear to have disclosed its ammonium nitrate stock to her department. Federal law requires the Department of Homeland Security (DHS) to be notified whenever anyone has more than one ton of ammonium nitrate on hand, or 400 pounds (180 kg) if the ammonium nitrate is combined with combustible material.[14][15]”

        and this:

        According to the company’s insurer, United States Fire Insurance of Morristown, New Jersey, the facility only had one million dollars in liability insurance: According to official estimates, the amount is highly insufficient to cover the cost of damages. Furthermore, according to The Dallas Morning News, Texas law allows fertilizer storage facilities to operate without any liability insurance at all, even when they store hazardous materials.[30]

  2. Thank you, Catherine. Zoning, Debt and Tax are all structural and can be reformed. Anyone building their fortune on these pillars beware the removal of any part of this three legged stool.

    Don’t Buy Now!

  3. Affordable housing is a myth though while land prices, even for tiny blocks, demand a premium like they are 1 acre blocks from yesteryear. A drive for affordability is unfortunately creating bland suburbs.

    Driving around suburbs of North West Sydney (Kellyville, Rouse Hill, Beaumont Hills etc) which have been established over the last 10-15 years, these are just wastelands aesthetically. Blocks are so tiny, there is no room for gardens, front yards, backyards or trees.

    Where is the choice these days? Do we just want to continue to develop suburbs that are devoid of atmosphere and livable environments? Block sizes need to be rethought or a variety of suburbs need to be planned that offer people the ability to create aesthetic environments.

    We continue down the path we have now and we are just rewarding the rich living in established suburbs that got all their bells and whistles in the 70’s and 80’s.

    How are you meant to entice people to move further out when the new sub-divisions/suburbs are developed to the bare minimum, with no thought on aesthetic environment.

    • There is a simple reason for that “cramming”. The developers have paid so much for the raw land. Not only do they need to sell 1/10 of an acre sections for $250,000 to make a profit, they need to make the streets narrower, use cul-de-sacs to minimise space lost to intersections, and fight like tigers to be allowed to sacrifice as little as possible to parks and green space and bike paths and so on.

      In contrast, look at “The Woodlands” near Houston, to see the sort of “amenity” that a developer willingly incorporates in a suburb when he got the land for $10,000 per acre.

      It’s more like $1,000,000 per acre here.

  4. Obviously I disagree. There has been quite a detailed discussion playing out in the last 30 years between a small group of economists trying to understand the monopoly power of land owners. The puzzle being why land owners seem to be able to withhold land from higher value uses. If we look at Prosper’s report on land lots there are almost 20 years supply being held by developers. There are no technical or regulatory constraints on the rate of supply of these new lots being increased – the problem is that they only sell when someone walks up willing to pay the current price.

    More on this discussion here

    http://ckmurray.blogspot.com.au/2013/09/land-and-housing-are-durable-goods-or.html

    Relaxing zoning controls will not magically make developers flood the market and reduce prices – who would destroy their future revenue streams by supply homes at a lower price now?

    • Relaxing zoning controls will not magically make developers flood the market and reduce prices – who would destroy their future revenue streams by supply homes at a lower price now?

      Of course it would, it’s just the cheap product brought to market wouldn’t come from the existing inventory of the prevailing participants.

      As I explain to my peers about why malaysia has a fanatstic food culture. Hawkers there are deregulated, and good product providers push out the bad.

      Our current situation has few competitors who are herding in terms of price setting. Customers are essentially captive.

      Vastly relaxed zoning would see new competitors offer land at cheaper prices, and custoemrs able to circumvent the incumbents providers.

      It would see the destruction of prevailing competitors sure, but it’s hard to argue that isn’t a just outcome.

      • Ready-to-eat food supply in Asia is an excellent example of the competive market at work.

        By contrast housing-land supply in Australia is an excellent example of the opposite – an extremely uncompetitive market.

        Rumplestatskin is an excellent example of someone who cannot pick the difference between the two.

    • Rumple,

      Your points re the massive amounts of land locked up in developers landbanks have merit, evidenced by the 16,000 new dwelling approvals recorded in Sept. Annualised at nearly 200,000 new dwellings p.a. this rate could massively increase new housing supply. The amount of shovel-ready new land appears not to be a problem. Real competition on price appears to be the blockage. How we motivate landbankers to compete on sale price and clear that blockage is a puzzle of many pieces. Relaxing the UGB, the zoning system, introducing a broadbased LVT and getting necessary infrastructure to this land asap are all key pieces to the puzzle.

      • Rumplestatskin is just being a developer-basher here, like lefties who say the “solution” to unaffordable housing is compulsory wage increases are “employer bashers”.

        Even Joe Hockey in his speech in NY recently, displayed the understanding that developers “land banks” have been obtained at such high prices that they need to wait for resumed peak prices for end housing if they are to make a profit. Rumples expecting developers to have to outbid each other for the available raw land and then sell at “affordable” prices, is like socialist governments regulating the supply of something and then forcing retailers to sell it at a loss.

        I recall anecdotes of Vietnamese farmers fleeing into hiding because they were expected to sell their crops at a loss. I am sure Rumples could find a job advising the government in Venezuela, they obviously admire “economic” advice of the kind that ends up with them running out of basics like toilet paper.

        Rumples just never sees that “splatter” development, when freely allowed, is ALWAYS affordable, and renders the entire market affordable. It strips the owners of land adjacent to existing fringes, of oligopoly powers.

  5. An example of affordable apartments is the HK’s Home Ownership Scheme.

    http://en.wikipedia.org/wiki/Home_Ownership_Scheme

    A two bedroom apartment is less than 50 square meters, with 8 units to a floor. The soul crushing density is offset by price and amenity, with school, childcare and supermarkets are within walking distance. Using a cost per square meter of $3000/sqm, each apartment will be less than $200K.

    Unlike HK however, Australia have a lot of open space. The government should not be forcing people to live in such density when open spaces are available.

    • Overwhelmingly, zoning restricts density and forces people to live in low density area. This is evidenced by how ridiculously expensive it is to buy a 3 bedroom inner city apartment (as opposed to a 3 bedroom outer suburban home), due to insufficient supply. Families who need affordable housinga re effectively forced to the fringe by zoning.

      • Overwhelmingly, zoning restricts … and forces people

        Correct. Zoning is elites forcing their preference on other people.

        Few people realise that the reason there was so much 1/4 acre development in Australian cities is that zoning forced this upon people. Now the elites decry sprawl (that they created) and instead force people into 400m2 fringe blocks or 2-bed units.

        The underlying problem is their use of force via zoning. (No. I am not a free market nutter)

    • And that “affordability”, in HK, is by way of government intervention to prevent planning gain forcing those prices any higher…..!

      The “market” prices are well over $3000 per sq m. In fact $3000 per sq m is almost as low as the norm for NZ housing…..!

      NZ being the height of absurdity, of course.

  6. I have to agree with your description of the apartment market. I own one as an investment and it is doing ok, but i’m not sure I’d like to live in one.

    The problem with them for me is that most of the new apartments are often dark (many requiring lights on all day and night) and the size. On the weekend I looked at a few on domain and found ones for sale in East Malvern that were only 32sqm!!! Seriously, I doubt the masses would give up their long commute for one of these prison cells even if it does have european appliances.

    Then I looked at land in the fringe and in many of these recently established estates all that was left were blocks of around 320sqm, enough for a small house with a single garage and no back or front yard. First home buyers with a sub $400k budget will find themselves in one of these tiny homes 50k from the CBD with the hope of a bus service in the next 5 years

    • “…..with the hope of a bus service in the next 5 years…..”

      That most of them won’t use, either, I must point out. As Catherine Cashmore points out in her excellent article.

  7. When I was a lot younger I didn’t take any interest in politics – I left that to the government and trusted that whoever was in power wanted to do the right thing by the people. Of course I was very naive; I think that goes without saying.

    It is so obvious now that the opposite is true. The government, developers, vested interests, banks, big business – all those who really run the country are in it for what they can get.

    They don’t care that the landscape of Australia is changing; that our cities are losing any semblance of the charm or uniqueness they used to hold – dollars come first. They don’t care that the unwashed plebs, that is, anyone who is not in the privileged position to already own property, are relegated to postage-stamp blocks or tiny dogboxes in the sky – the name of the game is squashing as many people as possible into any given area.

    It seems ludicrous that we are one of the most sparsely-populated countries in the world, but you wouldn’t know it when you look at the unbelievable cost of land in our cities. And it’s bad enough that they’re trying to cram people into ever-smaller sized blocks and living quarters, but they insist on flooding the cities with millions more people, telling us how good it is for us grow the population.

    The problem is that we can come up with all sorts of solutions and ideas, but let’s face it, when the country is being run by pure greed only, then what hope is there of anything changing?

    • The problem is that we can come up with all sorts of solutions and ideas, but let’s face it, when the country is being run by pure greed only, then what hope is there of anything changing?

      The way way of change is the way it has always been.

      The only thing the rich fear than losing their wealth is their mortality.

      Their wealth means nothing if they aren’t alive to enjoy it.

      This problem is only a few assassinations away from fixing.

      • On that note, I’m actually a bit surprised there haven’t been a few untimely deaths of bankers and wall street types, especially in the US.

  8. Ms Cashmore is to be commended – at least someone out there is trying to get some issues on the table.

    And yes, I’m going to be boring. Unlike those posters commenting on the aberrant example of small town US screw up – another whole story of real world economic forces combined with human cupidity (fertiliser plant next to nursing home)……Texas/Houston provides a very good example of alternatives when it comes to land development and provision of housing.

    Look past prejudices and see what can happen when limited government regulation is combined with [often ruthlessly efficient] market forces = Houston

  9. The drip feeding of land is so blatant. A suburb 12kms from the Brisbane CBD currently has machinery laying down roads/sewage/power 100m meters from an area developed at least 13 years ago. Since then countless stages have sold off bit by bit over the years around it.

  10. The choice that is missing from Auckland’s housing market, and I would guess much of Australia as well, is what I lived in happily in my 20’s in the US. That is, low-rise (2-3 story) large apartment complexes managed by a single management company. Such complexes have landscaped grounds, limited common areas (small gym, club house, etc.), and construction and appliances are reasonable quality because they are long term investments for the owner firm. I strongly suspect that they basically don’t exist in Auckland because the low rental yields make them uneconomic investments (thanks to all our amatuer landlords). So instead we have 20-somethings flatting in family homes and neglecting gardens – inefficient!

  11. I am very pleased that we have another great researcher as part of the effort on this topic. Catherine Cashmore, great article. Look forward to more.

    There is a very interesting book chapter by Prof. Philip Morrison of Victoria University, Wellington, in which he states that the cost of housing in Wellington rises in ABSOLUTE terms from suburbs to centre, even in spite of the reducing size of it. This work is unfortunately not online; it is in the “Handbook of Creative Cities”, edited Andersson and Mellander.

    I believe that there is a dilemma of economic land rent that even the specialist economists have not yet resolved; that is, allowing increased density, abolishing height limits, etc, contrary to the suggestions of Ed Glaeser, does not result in reduced cost of the accommodation provided thereby; all that happens is that the site owner makes more money.

    Theoretically, doubling the density allowances for a whole city represents a “doubling of supply”, yet this does not seem to have been proven to have any effect on affordability. I think the essential problem is that all the sites are already in use, have structures on them that need demolition, and the amount of new development that can possibly be brought to market by all developers capable of doing this stuff is never enough, and never timely enough, to result in genuine competition on the pricing at which each site vendor can sell for.

    Besides this, building “up” is always more expensive than building “out”. I think Singapore represents the absolute best that can be done via density not spread, even when there are no property rights at all and no “planning gain” at all – a housing median multiple of around 6. This is impressive compared to Hong Kong.

    But can anyone see Australia adopting Singapore policies on land ownership just so Sydney and Melbourne median multiples can be kept down to 6 via intensification instead of horizontal spread?

  12. Hugh PavletichMEMBER

    Thank you Catherine for an excellent article.

    It is extremely pleasing to read the views of someone with extensive experience in the industry.

    We need to see much more of this by Catherine and others industry practitioners as well.

    Hugh Pavletich