The 2 big unanswered questions about Victoria’s new housing plan - Grattan Institute

The Victorian government has a bold new plan to build 800,000 homes over the next decade. But achieving that target won’t be easy and will require tough choices to be made.

The Allan government will need to change planning rules to allow more density in Melbourne’s established suburbs, and it will have to dump some of its beloved Big Build to free-up construction workers – starting with the money-sink Suburban Rail Loop.

The government should be commended for setting such an ambitious target, because more housing will mean cheaper housing for all Victorians.

New modelling by Grattan Institute shows that if Victoria hits the target, rents could be 13 per cent lower than otherwise by 2034.

Renters would save $14 billion over the decade, and almost $3 billion in 2033-34 alone, compared to business as usual.

But this ambitious target has two big unanswered questions: where will those extra homes be built? And who will build them?

On the first, the government sensibly plans for 70 per cent – or 560,000 – of those new homes to be built in established areas. Done well, denser cities are more vibrant, walkable, and service-rich – much more so than a highway-ringed satellite suburb 50km from the Melbourne CBD. 

It’s also much cheaper. Infrastructure costs for a new home in an established suburb can be between half and a quarter as much as for the same home on the urban fringe.

But Victoria has struggled to meet this target before. The government’s current housing plan, Plan Melbourne 2017-2050, also aimed to build 70 per cent of new housing in established areas. The reality? Less than half of new homes have been built there.

Why? Because state and local planning laws make it hard to build more housing in established suburbs.

These rules reflect the interests of existing – often wealthy – residents of desirable suburbs who would prefer their neighbourhoods stay as they are. Prospective residents, who might live in new housing in these well-located suburbs if it were built, find themselves without much say.

The government’s new plan outlines some modest reforms that will help increase the supply of housing. They include offering a separate approval pathway for large developments where at least 10 per cent is affordable housing, boosting density in 10 activity centres across Melbourne, and streamlining granny flat approvals.

But there’s nothing to allow substantially more housing to be built in Melbourne’s inner and middle-ring suburbs – where Victorians most want to live.

To make that happen, the Allan government should reform planning rules to allow more medium-density housing – two to three-storey townhouses and five to six-storey apartment buildings – to be built in Melbourne’s most desirable suburbs.

The government should reduce heritage overlays – those applying across large areas rather than individual buildings – where they conflict with the goal of getting more housing built.

And it should set housing targets for local councils, to push them to approve more housing, and faster.

Councils that hit their targets should be rewarded with extra funding for parks, libraries, and other community facilities. Those that don’t should lose their planning powers.

But what of the other big question: who is going to build these new houses?

A target of 800,000 homes in the next decade would require building about 10.7 homes per 1,000 residents per year. That is achievable, but only at a stretch.

At the peak of the most recent housing construction boom, before the pandemic, Victoria built an average of 10.4 homes per 1,000 residents per year. And the state’s construction workforce has increased by a third in the past decade, faster than growth in the overall workforce.

The trouble is developers are competing for workers and materials with the government’s infrastructure Big Build. And it’s hard to see how Victoria can build 800,000 new homes and all those Big Build projects without major cost hikes.

This is why the government should reassess its infrastructure pipeline, starting with multibillion-dollar megaprojects such as the Suburban Rail Loop where costs are rising but the benefits are sketchy.

The SRL was promised before the 2018 state election, well before the pandemic radically changed the work and travel patterns of many Melburnians.

Now that more of us work from home more often, the value of the rail loop is much less certain. The new Premier should bite the bullet and cancel this project.

The Allan government is right that the only genuine long-term fix to Victoria’s housing crisis is to build more homes. But making that happen will require some tough choices.

Over to you, Premier.

Joey Moloney

Economic Policy Deputy Program Director
Joey Moloney the Deputy Program Director of Grattan Institute’s Economic Policy program. He has worked at the Productivity Commission and the Commonwealth Treasury, with a focus on the superannuation system and retirement income policy.