Housing: where to now?

What would you rather have right now? An approved 150 unit inner city development site? Or an approved 150 lot greenfield land subdivision anywhere within the urban footprint? The answer says much about future challenges for housing development in Australia.

The rapid deceleration of the apartment market in Australia should come as no surprise. The speculative frenzy which saw investors commit to off the plan purchases in such volumes drove an unprecedented wave of apartment development in Australia’s capital cities. More than 80% of most of these projects were sold to investors, not owner occupiers. Many of those domestic investors – driven by FOMO – were leveraged often at 90% or more of the purchase price. Plus there were foreign buyers lining up and in no short supply. Competition was intense and prices rose rapidly. Despite warnings, buyers continued to rush the gates, egged on by boosters, marketers and some who just plain lied.

One of those lies – in my opinion at least – was that Australia’s “love affair” with the detached suburban home was over. The future, we were confidently assured, was one where the inner city apartment ‘lifestyle’ would be the preferred housing option, for a range of demographic, work and lifestyle reasons.

One such headline was from the ABC: “Apartment living is now a fact of Australian life. Meet the families going up, not out” (ABC News, August 2018). It led with a ‘typical’ young Sydney family renting an apartment in Sydney’s Neutral Bay. (The irony of a family living in Neutral Bay being labelled ‘typical’ was obviously lost on the author). Or this piece from The Melbourne Age: “The high rise of apartment living in Australia” (August 2018) which claimed: “Just as Melbourne’s laneway bars have spread to the rooftops, the city’s residents are heading skyward into apartments, leaving behind the traditional Australian dream of the quarter-acre block with a house and backyard.”

The worst examples came from real estate media channels, like this piece from Open Agent: “Why apartment living is the Australian dream” which made the outrageous claim that “Living the Australian dream is no longer a two storey house with a grand backyard. City areas generate more money for the economy than any other region in Australia. High density areas provide greater opportunities for work and lifestyle, meaning these areas also attract high-rise apartment living.” That’s right, a small apartment with views to another adjoining apartment block is the stuff of our dreams.

Manipulating the evidence was easy enough. Yes, there was growth in inner city living as urban renewal enhanced the appeal of inner urban areas and more people – especially those in the 10% to 15% of metro wide workers with jobs in the CBDs – sought to live closer to their work. A graph like this might suggest rapid growth across a long period of time.

But rarely was this growth put into context with broader metro wide growth. Here is the same inner city population data, in the context of wider metro area population growth.

 

When tightening credit met with rising oversupply, the crunch came. Values are falling across the board but the worst is found in the apartment market. Domestic investors have retreated and foreign investors departed. Approvals for new apartment projects are in free fall (albeit from very high highs). Some projects are being mothballed mid construction, while (according to a Financial Review report earlier this year) around a third of current approvals haven’t and won’t commence.

Prices for many new apartments – especially those designed for speculator appetites - have fallen below their contract value. The scale of the rapid rise and fall of apartment approvals is highlighted in this Macrobusiness chart:

  

Some developers are reportedly now offering sales commissions three times the level of a couple of years ago, along with a range of other incentives to entice buyers back into the market. Even the rental market is struggling, with apartment vacancies rising and rents falling. If it had been true that “residents are heading skyward into apartments, leaving behind the traditional Australian dream (of a detached home)” then why would this be happening? And why would most of you have answered ‘yes’ to the 150 lot subdivision over the 150 apartment project in the opening paragraph?

The problem going forward is that enough investors will have long memories of being caught with negative equity in off the plan apartment projects, and even when the finance taps are reopened, lenders may be equally cautious. Getting apartment projects out of the ground in anything like the record numbers we have seen in recent years is unlikely – meaning fewer additions to the dwelling stock from this type of product until market confidence (from investors, owner occupiers, financiers and developers) returns. This could be some years.

The “missing middle” – townhouses and duplex style projects – have been promoted as a solution and while these may have much going for them in urban planning circles, they are not popular in the detached residential neighbourhoods in which they’ve been appearing. Communities are making their hostility known to elected councillors and those same councillors who need to face the electorate at the ballot box are aligning with community opposition to “the missing middle.” This is democracy at work. Suggesting that opponents are ‘wrong’ or ‘misguided’ or that they hold ‘inappropriate views’ is nothing less than a form of ruling class elitism. (Perhaps it would be better to dispense with democracy and simply start doing what some urban planners insist is needed, despite ‘poorly informed’ community opinion?).  So for a variety of reasons, the ‘missing middle’ is unlikely to fill the supply void for housing in sufficient numbers to keep pace with projected population growth.

This leaves traditional suburban development. While much derided by some urbanists and designers, it remains the preferred form of housing for families. It’s just that many families now struggle to afford them. And now, finding land to create them has been made increasingly difficult. With the exception of Melbourne (which by accounts has responsibly adjusted its forward land supply in line with market demand), other cities have rigid growth boundaries and a range of planning and environmental overlays which will inevitably choke the supply of new suburban housing going forward. While it may remain desirable in the market, the notion of further suburban expansion in anathema to many planning schemes. It will become both scarce and (as happens with scarcity) expensive.

So what’s going to meet the housing demand for the future waves of population we are told will inhabit our cities? High rise apartments? Little appetite for some time. The missing middle? Problematic politics. Greenfield suburban housing? Good luck finding the sites.

It will be interesting to watch how this all plays out in the years ahead. Shortages of supply – if this is what we will soon face – usually lead to the same outcome. Which could see the whole cycle of policy induced market dysfunction begin all over again, until the next correction.