Reality check: Promised 67,000 homes a year would send building into freefall

Another day, another “radical” proposal to fix housing supply and deliver more affordable homes. The promises – to deliver 67,000 additional homes a year, cut rents by 12 per cent and prices by $100,000 – sound wonderful. Even better, the new homes would be well located near transport and jobs.

The Grattan Institute’s latest “plan” to lift Australia’s laggard housing construction is essentially an anti-plan. It proposes allowing six-storey apartment blocks around railway stations or centres by default, and three-storey townhouses and apartments within 15 kilometres of CBDs – across the nation.

Grattan has sound economic credentials and its economic modelling is usually tight. But when economic modellers try to plan actual cities, reality gets in the way.

The first reality check is the bold claim that increasing housing supply by 67,000 dwellings a year (nearly a third more than our current national target) would lower prices by $100,000. Perhaps so. But the model assumes a private sector willing and able to finance new projects in a falling market. In fact, the empirical evidence tells us that building completions fall when prices stagnate – a fall of $100,000 would more likely send new development applications into freefall.

Second is the assumption that the only thing stopping extra construction is planning regulation. Again, this is out of step with the evidence. In fact, getting permission to build new homes isn’t the problem. There is a backlog of dwelling approvals – it’s turning those permissions into housing completions that is slowing us down. According to Australian Bureau of Statistics figures, nearly 35,000 homes are sitting in limbo, approved but not yet commenced.

The third hitch is that developers don’t like uncertainty any more than local residents. While an individual landowner wants carte blanche over their own land, they don’t want their neighbours to block their views or sunlight, overlook gardens or balconies, or stymie future potential. What seems like red tape to economists is often a place-based rule designed to maximise development opportunities while minimising offsite impacts to neighbours and the wider community.

The closer you get to the centre of Australia’s eight capital cities, the more diverse and complex the terrain. Local planning rules are designed to calibrate these complexities – from topography to the road and street network to the combination of existing and former land uses, including hazards and contamination risks. The most efficient way of increasing housing supply – and diversifying the housing stock – is to undertake upfront strategic planning at local and precinct scales. Default “as of right” codes work well for straightforward developments, especially in greenfield, previously undeveloped, areas.

But in existing settings the complexity of existing and previous land uses means that codes need to be either very cautious – unnecessarily limiting opportunities – or very open-ended. The latter means that assessing proposals still takes time. If not, serious problems emerge when it is too late. Recent quality issues with the NSW apartment sector stand as a cautionary tale.

Lastly, incremental and ad hoc development can prevent future higher-density housing, which mightn’t yet be feasible. Sequenced planning ensures infrastructure upgrades can be targeted, improving development quality and marketability.

It’s always important to scrutinise state and local planning laws and to eliminate unnecessary rules which add time or cost to the decision-making process. Ending Victoria’s third-party appeal system – not matched in the other states – would be a good start. Winding back generous car-parking requirements in inner areas could be another low-hanging fruit.

Making sure that medium and high-density housing is permitted near transport and services – while preserving existing employment lands and important cultural heritage – is clearly sensible. That’s why it’s already an objective across Australia’s eight capital city plans. Further, the state and local governments have already commenced additional planning reforms under the National Housing Accord.

There are currently almost 224,000 dwellings under construction, approaching the accord’s national target of delivering 240,000 a year. Activity is way above the nadir of 184,000 homes in September 2020, supported by easing interest rates and the uptick in prices.

Australia needs strong housing supply to keep up with population growth and change, and to moderate the housing market. Currently, housing construction is constrained by feasibility pressures. These are most acute in the medium and high-density sectors, where complex site conditions add risk and where developers still struggle to obtain finance for projects that need 70 per cent off-the-plan sales to get off the ground.

These industry constraints won’t be alleviated by planning reform. Initiatives to support build-to-rent and affordable developments will help. But unfortunately, the biggest boost to new supply will happen when property prices rise again.

Nicole Gurran is a professor of urban and regional planning at the University of Sydney and director of the Henry Halloran Urban & Regional Research Initiative.

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