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The end of affordable housing in Melbourne?

At a critical juncture: policies to try to make Melbourne a more compact city have failed. AAP

The end of affordable housing in Melbourne?

At a critical juncture: policies to try to make Melbourne a more compact city have failed. AAP

The Melbourne housing market is at a critical juncture.

A new research paper by Monash University’s Centre for Population and Urban Research called ‘The End of Affordable Housing in Melbourne?’ argues housing affordability has collapsed and the type of housing being provided is unsuitable to the needs of the additional households that will emerge over the coming decade.

Yet there is little recognition of the underlying causes of this crisis by government, and the academic and property circles that dominate debate.

When Melbourne 2030 was legislated in 2002, the goal was to make Melbourne a compact city. It was hoped that the plan would concentrate the construction of affordable apartments in and around transport centres across Melbourne.

The policy has failed. Dwelling prices in established areas have escalated to levels well beyond the financial capacity of most new households. Most of the new dwellings built in established suburbia have been dispersed infill (town houses and units), not apartments.

Price increases in established suburbia have deflected demand to the suburban fringe. As a consequence, the share of dwellings in fringe estates has increased, rather than decreased – as intended under Melbourne 2030. However, by the late 2000s, house and land prices on the fringe, too, were no longer affordable for most aspiring first-home buyers. This was largely because the stock of land ready for subdivision had depleted.

The Victorian Labor Government responded by requiring municipal councils to introduce new structure plans for established suburbs, which would open up additional development rights for medium-density housing, particularly along transport corridors. It also added 41,600 hectares within the Urban Growth Boundary for potential subdivision.

And it introduced a new Precinct Structure Plan (PSP) process under the supervision of the newly established Growth Areas Authority (GAA), to speed up the planning process and increase the amount of fringe land ready for subdivision.

Such measures could only succeed if they provided new households with the type of dwellings they needed and could afford. However, policy makers have assumed that most of the growth in new households will consist of one and two person households who would welcome apartment living, including older persons in larger detached housing. The reality is likely to be different.

Centre for Population and Urban Research (CPUR) projections indicate that the great majority of new households formed during the decade 2011 to 2021, and who will be looking for accommodation in Melbourne, will be amongst young adults. Most of these new households will be either thinking about or starting a family. Apartment living is unlikely to meet this need, especially if all that is available is very small apartments.

Apartments

CPUR analysis shows that apartments cannot be marketed at a price that those looking for family-friendly housing can afford. Construction costs and apartment size are closely linked. Few apartments of 110 square metres or more are being built in Melbourne.

Instead, thousands of small apartments of less than 70 square metres are being built in the CBD and its surrounds. Most of these apartments are purchased off-the-plan by investors. For projects currently in the planning stages or under construction, the trend is towards even smaller apartments. Meanwhile the cost of infill in Melbourne has risen to levels that most new households cannot afford, largely because the cost of the land on which to build townhouses or units has escalated.

In this context the fringe housing option will continue to be important as a safety valve for households unable to afford housing in established areas.

Fringe housing

The availability of affordable housing on the fringe will be crucial to providing family-friendly housing for new households. However, although the amount of land zoned for subdivision has increased, there is still no requirement that the land in question is in the hands of developers or that they will rapidly subdivide it. In addition, the costs of land subdivision have increased. It is now difficult for developers to put a conventional house and 450-square-metre land package on the market for less than $400,000, above the financial capacity of most aspiring first-home owners.

Developers have responded by targeting the trade-up market (households who possess a dwelling and wish to upgrade). The typical product, based on a block of 450 square metres and a house of 200 square metres costs around $450,000.

At the other end of the spectrum, there has been an increase in the production of lots of less than 350 square metres. The houses designed for these lots are small (around 150 square metres) and house and land packages for such houses currently cost $300,000 to $350,000. This is within the price range of most first-home buyers, but these packages offer a much smaller home than those looking for family-friendly housing require.

There is already evidence of ‘leap-frogging’ to peri-urban areas outside the Melbourne Statistical Division, where larger land and dwellings can be bought at far lower cost than within the UGB.

The outlook

Some commentators have predicted a housing price crash. However, this is unlikely in Melbourne because the escalation in house prices is largely due to scarcity.

The Sydney experience is instructive. By 2000, the housing affordability crisis in Sydney was far more serious than in any other Australian capital city. Despite this, housing prices continued to rise. The construction of new dwellings in Sydney slumped (relative to the level in the 1990s) because developers could not produce dwellings at a price that most new households could afford.

Yet, household growth in Sydney continued strongly (mainly from overseas migration), thus ensuring continued competition for the available stock. The outcome is that a much higher proportion of young households now live in apartments in Sydney, especially as renters, than is the case in Melbourne. Household formation has also slowed relative to Melbourne, and Sydney is experiencing a high loss of people to other locations in Australia.

Those planning Melbourne’s future have not come to grips with the causes of Melbourne’s affordability crisis. The provision of even more high-rise apartment blocks or further extension of the Urban Growth Boundary, — the current Victorian Government’s strategy — will not provide a solution.

Read the research paper, The End of Affordable Housing in Melbourne? by Bob Birrell, Ernest Healy, Virginia Rapson and T. Fred Smith, at Monash University’s Centre for Population and Urban Research