No, we can’t address affordability by building lots more apartments

One of the (many) furphies that gets aired (frequently) in discussions around housing affordability is that we can build ourselves out of the problem by building a lot more high-density housing units rather than typical detached suburban houses.

In fact, the opposite is likely to happen should we attempt this course of action. Here’s why.

First, the reality of construction economics is such as that every square metre of space in a high-rise apartment building is more expensive – roughly double or more – than the same square metre of space built in a detached single level home.

The traditional “sticks and bricks on slab” construction of detached suburban housing has been incredibly efficient over a very long period of time. As a building form, it lacks complexity (despite recent moves to introduce it via new standards). It’s even been said that in post-World War II Sydney, as many as a third of the new suburban homes were by owner-builders.

Despite recent and rapid cost escalations, the build cost per square metre of a low-set detached suburban house is still around $1700 for the modest spec home. Not including the land, you can still find project home builders who will give you the keys to a brand new three bedroom, two bathroom house from around $220,000 to $300,000 – and that’s for roughly 200m2 under roof.

It’s a different story for multi storey apartments. These are more complex structures, with a good deal more going into them – more than just concrete and reinforced-steel slabs (which are themselves more expensive than timber frames or bricks for a low set house). There are also lifts, fire systems, standby generators, deep foundations and excavations for basement car parks… it’s quite a list. Building them also takes a lot longer than a standard house and involves at least one tower crane, sometimes more.

All of which means each square metre of floorspace in that high rise unit tower is going to cost around $4,000/m2 for a structure of basic design. This applies to the whole floor of course – corridors and common areas included. The cost per metre for the actual living space, developers and QS’s tell me, is closer to $5,000 per square metre. So a unit of 120 square metres will cost around $600,000 just to build. Not including the land or other development costs. This is around half the size but twice the cost of our detached new stick-and-brick example above – which includes builder margin.

Market prices need to factor in land and other development costs. The new low set detached house and land package will set you back from around $500,000 to $700,000, depending on location. (This is the discount end of the market of course). New home units however are well above this. Try finding a new three-bedroom apartment for $700,000 in Brisbane. Many are priced at $1m or more, even those well away from the urban core. (Spend a little while searching on realestate.com.au and see for yourself!).

What’s happening to the theory that we can solve affordability by building more apartments? It doesn’t stack up. You can’t “solve” affordability by building more of the most expensive building types.

It gets worse. Developers will know that, given base build costs plus land, infrastructure levies, and other costs (including allowing for a margin), they will have a minimum retail price they can deliver apartments for. The build cost is virtually the same in middle and outer suburbs as the inner city (land being the only differentiator). But in middle and outer suburban markets, the price points that people will pay are below the cost at which the product can be delivered. So it’s not worth doing. Instead, they will turn their attention to locations which can support higher purchase prices – and already well-off inner-city locations tick that box. There is less risk and a deeper market in building units that sell for over $16,000 per square metre (nearly $2m each or more) in any number of inner city locations, than trying to build lower cost units in suburban locations.

Which means the market supply of higher density housing will concentrate in and around the inner city where you will increasingly see new projects with price tags four times the Brisbane unit median. This is hardly doing anything for affordability.

A similar thing happened in Vancouver, Canada. There, as Patrick Condon (James Taylor chair in Landscape and Livable Environments at the University of British Columbia’s School of Architecture and Landscape Architecture and the founding chair of the UBC Urban Design program) points out, the city tripled its housing via high density infill: “this was an unreservedly good thing – in all but one respect. This giant surge of new housing supply did not lead to more affordable housing as we all hoped. Somehow, confoundingly, the reverse happened.”

Sure did. Vancouver became the world’s least affordable housing market. Not a great outcome if affordability is your objective. Don’t be like Vancouver.

Last words:

Yes, townhouses are a halfway point in build costs. Suburban renewal precincts with townhouses or low set apartments are a more affordable answer, but even this is a challenge given construction economics.

No, outer suburban detached housing will not result in more people trying to get to the inner city for work. These buyers typically don’t work in the inner city. Inner city workers are typically higher paid. In New Farm for example, one in five households earns over $4000 a week. Inner city markets are high income markets with high-cost real estate. These people typically don’t work in the suburbs at a hospital or in retail or in education.

No, we don’t have “a housing supply crisis”

We have plenty of things we could call a crisis, but suggesting we have a housing supply crisis isn’t one of them. Here’s why.

First, recall that the immutable law of economics 101 is called “the law of supply AND demand.” The two work together. In periods of high demand, the law states that supply will normally respond with increases. Failure to do so will see prices rise. In periods of low demand, supply should also fall. Failure to do so will see prices fall. 

Looking at supply of housing commencements on a national basis, it’s hard to see a crisis. Sure, early 2023 figures are low, but the longer-term trend should provide some comfort.

What about the demand side? Our rate of population growth has come off the Covid-induced shut down and is headed for the moon. It’s both a very rapid increase (almost vertical) and at total levels that are themselves records. This is almost entirely the result of immigration policy. In other words, it’s deliberate. 

So combine very rapid increases in demand and record levels of overall demand that are well in excess of what the market can supply and guess what – prices rise, vacancies fall and we start calling this self-inflicted situation a crisis.

There’s another reason that “housing supply crisis” doesn’t ring true, and that’s because building houses is still – despite high profile builder collapses – relatively easy. It’s the land to put them on that we’ve made a herculean challenge. Sure, there’s no shortage of land in Australia but economists who don’t understand the delights of our planning systems would have little idea how hard it is to find suitably zoned land, either serviced or capable of being serviced, in or near locations where people seem to most want to live. This artificially induced supply constraint has been supported in the interests of combatting sprawl. Yet it is also having the effect of reducing the supply side response. Bringing land to market is now a minimum 5 year (in some cases longer) proposition for many larger urban markets. It’s also costly. 

(Ironically, when asked, many seem to respond in favour of sprawl – allowing more homes in new suburbs outside city centres was the most popular response to a range of options offered in this 2023 Resolve Political Monitor poll. The least popular? Allowing more apartments to be built within existing city areas):

So what I’d suggest is that we don’t really have a housing supply crisis, but instead we have a growth crisis. Not just a shortage of zoned land to build houses, but shortages of hospital beds, of schools, of transport infrastructure, even looming shortages of potable water and energy. 

How can pumping our population growth to record levels and doing so at warp speed, given what we know from bitter experience about our unresponsive regulatory environments, not end badly?