Housing in Australia’s cities is among the least affordable in the world. For decades, we have not built enough housing where people most want to live. A lack of well-located homes is dividing families and communities, and robs younger Australians of economic opportunity.
But there is a case for optimism – provided we change planning laws to increase housing density in our major cities.
On our latest podcast, Grattan housing experts Brendan Coates, Joey Moloney, and Matthew Bowes discuss their report More homes, better cities: Letting more people live where they want.
Transcript
Kat Clay: Housing in Australia’s cities is among the least affordable in the world. For decades, we have not built enough housing where people most want to live. A lack of well-located homes is dividing families and communities and robs younger Australians of economic opportunity.
So, what needs to change to ensure we build more homes where people want to live? Our new report, more homes, better cities: Letting more people live where they want, offers solutions to this complex problem. I’m Kat Clay and you are listening to the Grattan Podcast. Today I’m joined by report authors and housing experts, Brendan Coates, Joey Moloney, and Matthew Bowes to unpack this issue.
So Matt, you say, at the heart of our housing problem is that we just haven’t built enough homes to keep pace with population growth. Can you unpack this for our listeners?
Matthew Bowes: Australians have heard a lot about our nation’s housing crisis over the past few years, and at the heart of that problem is the fact that Australia just hasn’t built enough homes to meet the rising demands that Australians have for housing. And I think the easiest way to see that is to look at the adult population growth compared to housing growth over time. So adult population growth, that’s what matters most for housing demand. And if you look at the growth rates since, say World War II, they’ve actually been pretty stable over that kind of half a century or more. So, they’ve been growing around one and a half to 2% per year because even as our birth rate has declined. Our immigration program has increased to fill that gap. So, what’s really changed is the growth in the number of homes available for Australians. So back in the fifties, sixties and seventies, the number of homes in Australia was growing at a rate of two and a half to 3% per year. So that’s much faster than the adult population growth. But since the nineties, that’s dropped a lot, so it’s now less than 2% per year. And over the past two decades, the number of homes we have been building has been growing slower than the adult population. As we show in the report, we’re actually an outlier on this metric among developed economies. So, we’re one of the few developed economies that has seen the number of homes per adult decline significantly in that period of the past two decades. And the problem is even worse than this suggests because actually we don’t just need to see housing grow in line with population. We need to see the number of homes grow faster than population. And that’s because as Australians become richer, as we age as a society and as more people look to say work from home, we need more homes for the same number of adults, just to keep pace with that increased demand that economic and social change brings.
Kat Clay: So where are we seeing this impact the most?
Matthew Bowes: Where this really matters is in our nation’s, capital cities. That’s where the majority of the country lives. And there, what we’ve seen is generally a fair bit of growth outward. So, in some cities like Melbourne, we’ve seen a decent number of new greenfield suburbs, and we’ve also seen a bit of growth upwards right in the centre of the city within say, five kilometres of the CBD. But in those established suburbs, in between housing growth has been much slower. So, if you compare our capital cities like Sydney and Melbourne to similar-sized cities overseas, they’re generally a lot less dense. So, to cite one example in a Sydney is actually lower in terms of its population density than Los Angeles, which is pretty famous example of American urban sprawl. And that’s why listeners may have seen stories about some wealthy suburbs in Sydney and Melbourne that are actually seeing declining populations as high house prices are pushing out younger and lower income people out of those well-located areas in our cities. And that has flow on impacts for the job market. It has flow on impacts for productivity for how long people have to commute to get to work. And it’s frankly splitting up a lot of families and communities because people just can’t afford to live where they would like to.
Kat Clay: Yeah, Matt, I’m a perfect example of that. I mean, I grew up my whole life in Sydney and then moved to Melbourne more than a decade ago, and I can’t actually afford to move back to Sydney now.
And not that I particularly want to because I feel like I can have a better quality of life in Melbourne, closer to the city for less cost. Brendan, I’m wondering what happens when we don’t allow more homes where people want to live.
Brendan Coates: Well, look, it’s no coincidence that Australian cities are some of the least dense in the world and they’re some of the most expensive. That’s because as demand rises, as more people want to live close to the centre of the city, what you should normally see happen is the city will start to build up.
More people will live in apartments and townhouses and denser forms of housing because that’s how you can economize on the value of land, ’cause there’s only so much land within say, 20 kilometres of the centre of our major cities. And the best way to make use of that is to go higher. Now when planning rules don’t allow that to happen, then what you see instead is what we’ve seen, which is that land values just keep going up and up.
And if most of our homes are established freestanding homes, then they just keep going up and up in value. And what we want to see is a world where that density increases, and in fact The gap between what people will be willing to pay to build apartments on a block of land given construction costs.
The cost of that land acquisition and what the current price of that same apartment is in the secondary market is a really effective measure of how much planning controls are restricting how much housing we see on a site. And we see that in past work from the Reserve Bank that showed that planning controls add hundreds of thousands of dollars to the value or to the cost of housing in our cities.
And we see that in our own work where, you know, you can build more housing in places like Woollahra in Sydney for up to $500,000 less than what that same home’s selling for on the secondary market and nearly $300,000 less in the city of Melbourne. And that excess profit, that extra profit you can make from building higher is highest at the moment in places around the beachside suburbs of Sydney and in Melbourne’s inner East. And that’s just showing you the constraints that planning is putting on our housing system.
Kat Clay: Joey, the report says that state and territory planning systems say no to new housing by default and yes, only by exception. Tell us a bit, uh, more about what that means in practice.
Joey Moloney: So basically, probably the place to start is a quick high level of how the planning systems in our country actually come to be. Basically, each state government has a piece of legislation that creates a planning system. That’ll have different tools that the local councils can then use to create planning rules . So, a key one is zones. What you’re allowed to use a piece of land for and how intensely you’re allowed to use it, what you’re allowed to build on it. So, the state government set the framework and the tools. Then the councils use that to set and apply the rules.
So, we had a look. What does this look like in practice? Across our major cities, what kind of rules are actually being implemented? So, in Sydney, Melbourne, we found that 80% of the residential land established residential land within 30 kilometres of the centre of Sydney, and 87% in Melbourne is restricted to housing of three stories or fewer.
Right? So that’s a hard cap on how big a building can be, which means it’s a hard cap on how many homes you can put on that well located land. And then in Brisbane, Adelaide, Perth, the situation was like more intense again. Three quarters or more of the land is subject to height limits of roughly about two stories. That’s just what the zones say. At a high level, we’ve got this really high prevalence of low-density zoning across a lot of well-located land in our capital cities, but the storey doesn’t really end there. The systems are much more complicated. You’ve got this long list of other built form controls that exist that limit not just how tall a building can be, but how far it needs to be set back from the site boundaries. How much of the actual plot of land, the site it’s allowed to cover. So, all of these things add up and compound, and they create sort a system that’s essentially like jumping through slices of Swiss cheese.
And you can create situations, or we do create situations where it’s technically allowed to build something on a piece of land. In practice, it’s infeasible, certainly commercially infeasible because you just can’t make enough money from the amount of floor space that you’re allowed to build there.
The storey gets even more dire than that because even when those black and white rules might say yes, you’re entering into this world where you’ve got these complicated, long and uncertain processes to get an individual proposal up, even within an envelope that might permit it.
So, they’re complicated because you’ve got lots and lots of things that need to accompany a proposal. Statement of environmental, environmental effects in New South Wales, a bunch of other things that you need to submit to the council in order to get something approved. Councils often take a long time to process these applications. Particularly for bigger developments, it can be upwards of a year’s w ait. And uncertain because despite the fact the rules of the land use planning scheme might say, yes, you’re allowed to build, let’s say six storey apartments here, or you’re allowed to build three townhouses on this block that used to just have one home on it.
The council might have specified some objectives for the area that are a bit more vaguely worded. They might say that development in this area needs to be consistent with the prevailing neighbourhood character, right? So, there’s this additional uncertainty and that uncertainty generally has a bias towards no, even when the black and white rules say yes in the first instance.
And so, the last thing we looked at was, well, what’s the governance of the system that leads to this system that says, no, by default? Well, you probably have picked up by now that because a lot of this decision making about the rules and then the approvals get delegated to local councils.
Naturally our systems favour local politics, and local politics tends to favour people who have more time on their hands, which means that local politics tends to favour older, wealthier homeowners.
Kat Clay: I found this really interesting in your report that this idea that, um, people who have the time to engage with local council actually kind of take priority in consultations because they just simply have the time.
Joey Moloney: You see this when you look across any of the sort of numbers that have been compiled in this area in Melbourne and in Sydney, that when you compare who gets involved in community consultations on land use planning decisions versus who actually lives in the area, it’s always disproportionately older, wealthier homeowners.
So that’s why the governance of our system has this bias towards no. And then downstream of that, the rules and the processes in the system have a bias towards not as well.
Kat Clay: I mean, it’s my absolute plan for my retirement to get involved in local politics. I think it’d be fun. Okay. So, we’ve outlined a lot of issues with the system and how it is long and convoluted for people who are trying to build higher density properties. So, the big question is, and I’d like to hear from all of you, what should we do about it?
Matthew Bowes: So, I think the first thing to say is that there’s kind of two principles that are driving our recommendations here. The first is that when it comes to housing, at least the core goal of our planning systems should be to allow as many people as possible to live in the places that they want to live, to maximize their housing choices that they have.
And the second key insight is just building off what Joey was talking about there. It’s that fundamentally local governments aren’t equipped to handle this on their own. Our cities are divided up among a huge number of different small local government entities. They tend to be focused on appeasing a pretty small share of existing residents who often oppose change.
And so, it’s ultimately the state governments that write the planning legislation and that need to be able to take the broader view and ensure that our planning systems are up to scratch and are providing that housing choice.
We have three recommendations in terms of what kinds of changes states need to make to the rules that allow new homes to be built and where they allow to be built. The first of those recommendations is that we think that state governments should allow. Up to three storey apartments, townhouses, and terraces on all residential land in our major cities. So, there’s a number of reasons for this, but ultimately, we think that this is a pretty small step from the existing kind of homes that we’re already seeing in a lot of these inner suburbs, this kind of low-rise housing.
It’s cheaper and easier to build than high rises, and it also offers a different kind of housing choice to Australians that’s a bit closer to the kind of traditional detached home that a lot of Australians want. So, it’s providing a really important outlet for the demand that there is for new homes in our cities.
The second thing that we think governments should do is to allow for at least six stories in areas around commercial centres and transport hubs. So, these are clearly areas with good public transport. They often have lots of other amenities, like great shops or health centres. They’ve often got really high demand for new housing. And we’ve seen New South Wales and Victoria take important steps to allow for more homes in these areas with programs like the Low and Mid-Rise housing policy in New South Wales and the Activity Centres program in Victoria. But we think there’s a strong case for these programs to go further to ensure that they allow for at least six stories within all of these areas in walking distance of key train stations. And we also think that in other major cities like Brisbane, Adelaide, and Perth, they should also be looking to do the same around train stations as well as around rapid bus stops and shopping centres.
And finally, we think there’s a really strong case for state governments to step in and up zone the most high demand areas in our cities to something like 12 stories or higher, where there’s clearly that really strong demand.
And again, we’ve seen some efforts from state governments in this direction. So, for instance, the New South Wales government has been doing what are called state led rezonings. Which basically involve them identifying areas where there’s high demand and ensuring that there is permissibility within the planning system to allow for that kind of apartment building of 12 stories and higher.
And that’s really something we need to be seeing all state governments doing to ensure that where people want to move into these areas, there are homes for them to move into.
Brendan Coates: Yeah, and the most high-profile example of that is the Woollahra upzoning that the Minn’s government’s announced to put 15,000 homes in Woollahra. It’s about four ks from the city, very affluent area, great connections to the rest of the city. That’s probably the most prominent example of that state led rezoning program.
Kat Clay: Joey, what about you? What do you think we should be doing?
Joey Moloney: Yeah, so Matt just went through the changes that we think to increase the general permissibility in the system, right, so that we can get more homes built in our major cities, particularly in those well-located areas. But downstream of that, there’s this question of, well, what are the processes by which individual proposes within that permissive landscape are evaluated?
And like I was running through before, we’ve got this silly situation in our systems where we set these rules, but then we still have these laboured. Arguments and processes about individual developments and whether they should be allowed and whether they fit within the local context and whatnot. We think basically, as a general principle, your system should set the rules and that they should be the rules, and that things that fit within those rules should be allowed to proceed basically, yes, by default, if you are consistent with the prevailing planning rules in the planning scheme.
So, for modest density, like we said, we think three stories is a reasonable flaw to have across our cities for that modest density. We don’t think that really needs to go through a planning permit process. There’s complying development processes, which means that, you know, the plans can still get certified as consistent with the prevailing rules, but you don’t need to go through the council to get a planning permit. And you know, some state governments have these processes already. They’re a lot quicker; they’re a lot more efficient, and they’re a lot more certain. And we think they should be extended to all of those modest density three storey proposals that we hope to see coming through the system.
Matthew Bowes: And something to add there, Kat, is that already a lot of single-family homes, if you want to knock your home down and rebuild it, they’re already going through these complying development processes. So often what we’re talking about here is just allowing similar kinds of built form shapes. The amount of space that you are building is the same.
We’re just allowing people to divide it into townhouses and terraces rather than just one home.
Kat Clay: Oh, I’m seeing that a lot in my local area, which is actually positive to see that a lot of the old kind of 1950s bungalows getting knocked down and, and townhouses are being erected on that land. And I think it’s probably a much more efficient use of that space.
Brendan Coates: And you still need to follow the rules of the building code, so it’s still subject to building regulation. If you knock down a house and rebuild it, you’ve still got to get certification that, that the build works and these up to standard. It would be no different in this situation. It’s just skipping that planning approval step.
Joey Moloney: And we sort of want to extend this principle to larger developments as well. You know, Like four plus stories. You’re in the apartment world now, can still go through a planning permit process, but let’s take the uncertainty out it and create these sort of deemed to comply standards, these rules that if you are meeting this height limit, this setback, this site coverage.
There can be a long list of standards to make sure that it’s consistent with the planning scheme, but it basically means that if you meet that then, yeah, the planning scheme says yes to this rather than having a fight against a bunch of subjective criteria along the way. So that should be extended as much as possible, certainly to, that four to six area and above that as much as practical.
Now I just got one more point I want to hit here, which is to do with the processes that we have in place to assess the costs and benefits of planning rules. Historically, we’ve just systematically underweighted the costs of restrictive planning rules and overweighted the benefits that accrue to local residents in the form of less development in their area.
Now, we think that just fundamentally needs to change. We need to make sure that big changes to planning schemes, particularly where they increase the restrictiveness of what you’re allowed to use land for. Go through rigorous cost benefit analysis to make sure that the costs associated with restricting the amount of homes that can go in an area where more people clearly want to live are properly taken into account when we are imposing these rules.
Kat Clay: Brendan, this is typically a local and state government issue, but what can we be doing at the federal level?
Brendan Coates: Well, look, there is a federal role to play here, which has already been borne out by the fact there is a National Accord Housing Agreement to build, try to build 1.2 million homes over five years between the Commonwealth and the states. The reason the federal government has a role to play is because if one state tries to fix this on their own by upzoning then the, some of that housing affordability benefit will be exported elsewhere in the same way that Sydney has kind of been exporting its housing affordability problem to the rest of the country for decades. And we are happy to have you here in Victoria. The issue at the moment is the government’s got a plan for 1.2 million homes that is agreed with the states.
That plan is ambitious. It’s a, it’s the appropriate level of ambition. 1.2 million homes would make a big difference, but the incentive payments that sit behind it, there’s $3.5 billion in incentives. They’re including $15,000 per home that states build above a baseline of 1 million homes over those five years.
They’re not working. Basically, because we’ve seen sharp jumps in construction costs. Interest rates went up sharply over the last couple of years. That just means that states are well short of qualifying for the payments, even if they make substantial reforms as states like New South Wales, Victoria are.
And so instead we need a different approach and essentially that is extending what’s called National Competition Policy to incentive payments to residential land use. So basically, paying the states for doing the kind of reforms that we are advocating for in the report. It means that you’re paying them to do specific ambitious and verifiable reforms. So, they get rewarded for doing the thing that they can control rather than being subject to the whims of interest rates and global economic cycles that affect how much housing, the flow of new housing that gets built each year.
This is a big, long-term project. The planning system is one of the most important economic regulatory settings that we have in our country. It has enormous implications for where people live and work and so we should be tracking progress. And so we would like to see the Productivity Commission essentially evaluating over time each year are state planning systems, allowing enough housing to meet demand, how much of that is commercially feasible to build and basically tracking progress in a way that we just have not done in recent decades, which has led us to the world that we’re in today.
Kat Clay: Okay, Brendan, so say Australian governments do all of these things that you’ve recommended. What do we get out of this?
Brendan Coates: Well, the thing that we get first and foremost is more and cheaper housing. Basically, because if these controls are stopping us from building the house than we want, then if we relax, then over time we’ll see more housing. We saw this in Auckland, which we’ve talked about on the podcast before that Auckland did a big up zoning in 2016.
Within six years, the estimates are that’s added 4% of the housing stock that wouldn’t have otherwise been there. Rents are 28% lower than otherwise would be in Auckland’s. You know the one city in New Zealand where house prices have not risen. Vis-a-vis inflation since 2016 where they’re up across the rest of the country.
So, what we should expect to see if we benchmark to those kinds of reforms there and the impacts is ideally, we see a world where up to 67,000 extra homes get built on average in the long term in Australia. Compared to the pace of housing that we’ve had, home building we’ve had recently, that’s enough to basically reduce rents and house prices by about 12% over a decade.
That would shave a hundred thousand dollars off the median home price in Australia within that decade. And in the longer term, the effects were even larger because obviously prices and rents are set by the balance between the demand, which Matt talked about earlier. And the supply in the stock of housing, and we only add 2% of the housing stock each year.
So, it’s taken decades for this problem to emerge. It’ll take us a couple of decades to fully solve it, but there’s other benefits as well. So beyond that housing affordability benefit you get particularly a benefit for low income earners because when you build more housing, actually those that tend to benefit the most end up being those at the bottom who are otherwise stuck in this Hunger Games situation struggling for housing. Research from Australia and elsewhere shows that if you build more housing, you get a particularly big fall in rents and prices at the bottom. And that’s enough to materially improve people’s lives who are otherwise struggling.
It doesn’t take away the need for things like rent assistance increases, which we’ve talked about earlier in social housing. And then you get this big economic benefit because we’re in this world where if people can live where they want, they can locate closer to their work. Employers have a larger pool of workers they can draw upon.
And you get these nation scale economy benefits from the co-location of workers and firms. You get a greater transfer of ideas and knowledge and higher productivity. And we estimate that could boost, Australia’s GDP by about $25 billion in today’s dollars by 2050. So that’s a, a 1% boost to GDP.
Kat Clay: Brendan New South Wales and Victoria have already announced big reforms to planning rules over the past two years. How far have they gone to doing what you recommend?
Brendan Coates: They’ve actually gone a fair way, particularly in Victoria. And this shows that the politics of planning is shifting. That we’ve reached a point, particularly in Sydney, where, the housing crisis is such a crisis that it’s spurring politicians into action. So, both states have done variations of what we recommend, both upzoning for more gentle density across large areas of the city, and those higher density apartment buildings being allowed more around transit hubs.
Overall, when we look at what those two states have done, the increase in the sort of the zone capacity, the amount of extra housing that’s theoretically permitted to be built Victoria’s reforms boost that zone capacity in Melbourne, by the equivalent about 70% of the existing stock. Sydney, it’s about 40%.
And to put that in comparison, when Auckland did their upzoning they essentially increased the amount of capacity by the equivalent of a hundred percent of the existing housing stock. So, we’re talking about pretty material reforms. And the good news is quite a lot of that extra capacity is actually profitable to build.
So, particularly three storey townhouses are relatively cheap to build. They’re stick builds. You don’t need underground car parking; you can just have a garage. If you’ve got parking on site, they’re not using specialized labour and equipment, as Matt mentioned earlier, so they can be faster to build, less than a year to construct.
And the other place where we’re seeing it’s, it’s really profitable or it’s feasible, is those really high-density apartment buildings, eight, 10 stories and more. Where there is this uncanny valley is it is really hard to build four to six storey apartment buildings ’cause you’ve got to do basement car parking elevators, extra fireproofing, reinforce concrete, adds a lot to the construction costs, and you’re just not going high enough to get that extra return to make it profitable to build those high densities or those medium densities.
But the place that New South Wales can really learn from Victoria is in the gentle density space. So, we’ve recommended we should have three storey townhouses be available anywhere on any residential zone land without restrictions on minimum lot size.
Victoria’s actually gone a long way to that. Three storey townhouses and a lot of land and then two storeys in the neighbourhood residential zone, our restrictive zone. By comparison, New South Wales has just gone a lot less. So, a site, say a thousand square meter site in Melbourne, you can probably build somewhere between five and 10 townhouses.
The equivalent site in Sydney, you’re looking at say two to four homes at most, and a floor space ratio of half of what you can permit in Melbourne on the same site. And so, if Sydney did what we’ve recommended that it could unlock an extra million capacity for a million homes that could be profitably built today. In fact, more than that.
Kat Clay: Yeah, that could make such a huge impact in people being able to live where they want. Matt, finally, I’m interested in the public reaction to these kinds of reforms and recommendations. How have people reacted to these changes so far in New South Wales and Victoria? And I’m thinking especially of the people who say that building higher is going to affect the amenity of the suburb and the way that it looks and feels.
Matthew Bowes: Well, anytime that we look to create change in our cities, there’s going to be some people who are concerned about that change. And certainly, we’ve seen some people in Melbourne and in Sydney raise concerns about these programs, particularly because they might change the way that their neighbourhoods look. But I think the really positive thing seeing is a change in mindset, I think for a lot of the population around what change in our cities means. A lot of the time we’ve probably focused too much in the past on the downsides of changing our cities, of allowing more apartments and allowing more townhouses and terraces in existing suburbs. And people have pointed out, well, what are the impacts going to be like on my commute? What are the impacts going to be like on my local school? And I think that what’s become really clear, particularly as the population in a lot of these well-located suburbs flatlines or declines is that there are a lot of costs when we don’t allow people to live in the places that they would like to live in. It’s really bad for our kind of social fabric it is problematic for families when they don’t know where their kids will be able to grow up and live, or whether they’ll be able to grow up and live in the places that they would like to. It’s really problematic for sort of jobs and employers when they can’t actually access the kinds of employees that they would like to because they just can’t live close enough to the places that they work. And it’s also a real issue in terms of housing affordability, ensuring that our cities are welcoming, inclusive places that low-income people can afford to live in.
So, for all those reasons, I think the politics of this are shifting and we’re seeing people recognize that when we build more housing, it creates a lot more amenity in our communities. It creates a lot more opportunity in our communities, and that there’s really a case for optimism about the future of our cities if we allow for housing in these areas that have traditionally been most restrictive.
Kat Clay: That’s a great place to wrap it up. Thank you so much, Brendan, Joey and Matt for sharing, I think what is actually hopeful and aspirational ideas about improving housing across our country. If you would like to read this report, please find it for free online at grattan.edu.au. You can also engage with us on social media across most major social media channels at Grattan Institute. Please take care and thanks so much for listening.