Simply building more apartments is not the answer to property shortages
Solving the housing crisis is not as simple as just churning out more apartments, as some disastrous overseas examples have demonstrated.
The contemporary narrative on housing affordability seems to be that it’s simply a case of adding more supply.
In the major cities with land boundaries to contain urban sprawl, that usually means building a lot more apartments. If land is near a train station or similarly well perceived infrastructure, building apartments is – we are told by the experts – a no brainer.
The first problem with this thesis is that it ignores the massive pressures we are placing on our housing markets through accelerated demand.
Record levels of population growth via immigration policy – increasing at speeds we cannot keep up with either with paperwork or building work – is exacerbating the housing shortage. You cannot just talk about supply without talking about demand.
The second problem with this supply side thesis is that the nature of that proposed supply is expensive.
In short, apartments cost more to build than the traditional low-set brick and tile house. You can add as much new supply as you like but if the cost of that supply is by nature costly, all you will potentially do is make things worse.
The reality of construction economics is 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.
These days, I am told the going rate per square metre for a mid to high rise apartment building is around $10,000 to $12,000 per square metre. So a basic 100m2 apartment (two bed one bath) will need to sell for around $1 million to $1.2 million for the project to even proceed.
Apartments below this will not be delivered by the market as they would make a loss.
For an apartment to be “affordable” it should ideally be around $450,000 (based on the median household income of $90,000 per annum and an income multiple of five – which itself is considered high by global standards). You can see there’s a big gap in those prices.
The market may keep building new stock at a base of $1 million and upwards, but it will reach a point where buyers with that sort of coin thin out, at which point the supply side will also dry up.
If you can’t sell them, you won’t build them.
Is this not what we are seeing in our major urban markets in Australia today? And where does that leave 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.
That hasn’t stopped our clueless political class from sprouting higher density as some sort of cure-all for housing.
Canada’s harsh lesson in supply focus
There are good outcomes for higher densities but affordability isn’t one of them. Maybe they should have a look at some of the worst markets in the world to understand why their favoured theory isn’t working? How about Vancouver?
Vancouver in British Columbia, Canada, has for many years been rated as one of the world’s least affordable housing markets. This has been despite the addition of high volumes of supply.
Local academic and author Patrick Condon (James Taylor chair in Landscape and Liveable Environments at the University of British Columbia’s School of Architecture and Landscape Architecture and the founding chair of the UBC Urban Design program) has pointed out that the city tripled its housing stock 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.
Yet this city is still held by some Australian policy makers as a poster child for housing policy and density.
Maybe they weren’t looking at this graph from Professor Condon, which shows Vancouver added more supply than almost any North American city but did so almost exclusively with high density (multi-family) housing and at a very high cost.
The bottom line seems simple.
Apartments will suit a lot of people, and in many locations are the only way to add supply. But understand this is policy approach that will not only do nothing for affordability, but potentially make housing more expensive than it already is.
