Four reasons Australia can't keep up with housing demand

The Reserve Bank released its September quarter bulletin, which included a superb article outlining the bank's research around supply-side constraints across the capital cities of Australia.  The report identifies four factors that are impediments to a responsive housing supply across the country:

• Complexity of the planning process that can create uncertainty, lengthy delays and risk for developers as well as significantly increase costs for developers;
• Provision and funding of infrastructure – gone are the days of the government funding the costs of roads, utilities and community services out of the tax base.  The report states “developers often fund at least half of new utility and transport infrastructure in Sydney, Brisbane, Perth and Adelaide”.  Often the costs fronted by developers are negotiated across each project, providing an uneven playing field and planning uncertainty;
• Land ownership and geographical constraints – fragmented land ownership across infill and greenfield locations makes it difficult for developers to identify and acquire sites that are appropriate for large-scale development.  Additionally, the geographic constraints such as the large tracts of national park north and south of Sydney are identified in the report; and
• Public attitudes towards infill development – the report specifically comments on infill developments being subject to community opposition, which can result in rejection, restrictions on development approval and a loss of project viability.

One of the most revealing tables in the report compares the costs of greenfield development across each of the major capital cities. Indicative costs for developing a greenfield site in Sydney are more than three and half times what it costs in Melbourne.  The imbalance in development charges provides a distinct insight about why new development has been so lacklustre in Sydney while at the same new housing supply has been very sufficient in Melbourne.

Source: RP Data

The report is timely in the sense that the ABS also released its June quarter dwelling commencements data, which showed that, despite a 4.6% rise in dwelling commencements over the quarter (which was driven by a spike in the volatile ‘other’ sector which generally refers to apartments), new dwelling starts were down 10.8% over the year.

The graph below, which tracks annual dwelling starts versus the annual change in population growth, clearly highlights the lack of any response in housing supply to surging population growth between 2004 and 2008.  In fact, as population growth (read ‘housing demand’) surged, new housing starts were trending downwards.  More recently we are once again seeing population growth ramping up at a time when new dwelling construction remains weak.

Source: RP Data

The third graph from the RBA report highlights how a comparably low-cost and reasonably efficient land release strategy played out for Melbourne.  Despite recording similar rates of population growth between Sydney and Melbourne, the number of land parcels released in Melbourne has been more than double what has been recorded in Sydney.

Source: RP Data

The RBA authors of the report summarise their findings like this:

“Given the difficulties involved in satisfying the large number of stakeholders involved in the housing supply process, it is likely that these important issues will remain on the policy agenda for some time.”

I couldn’t agree more.  Developing land in Australia is currently a tough gig, it seems, and with most state governments looking to bolster their budgets it is hard to imagine any resolution to issues like infrastructure charges and levies any time soon.  From another perspective, attracting population growth means that development needs to be facilitated (if not encouraged) by all levels of government.  A larger taxation base has got to be a positive for most state governments at the moment given their financial positions.

Tim Lawless is national research director of RP Data.