The root of Sydney and Melbourne’s housing crisis: we're building the wrong thing

As is well known, the shortage of affordable separate housing in Sydney and Melbourne means that most first home buyers and renters cannot currently find housing suited to their needs in locations of their choice.

The dominant response from the housing industry and commentators is that governments must unlock the potential for more intensive development of the existing suburbs. From this standpoint, the recent surge in high-rise apartment construction in Sydney and Melbourne is part of the solution.

For those looking at the issue from a financial perspective, escalating housing prices is seen as a reflection of low interest rates, as well as incentives for investors to take advantage of negative gearing and capital gains tax concessions. For the Australian Prudential Regulation Authority, this means the answer is to restrict access to borrowing.

While these factors are important in contributing to the affordability crisis in housing, the issue has deeper roots that lie in the changing demographic make-up of Sydney and Melbourne’s populations.

Our new study on new household and dwelling projections for Sydney and Melbourne from 2012 to 2022, highlights the need for rigorous academic research to inform public urban policy.

To date, policy has been driven by advice from commentators using a flawed evidence base. None have grasped the scale of need for family-friendly housing, or understood the full effects of ageing in place on the availability of detached houses in Sydney and Melbourne.

The projections build on the widely-assumed expectation that Net Overseas Migration (NOM) will continue at 240,000 to 2022 and that Sydney and Melbourne will receive almost of this number.

The household projections assume that the propensity to form households by age group and family type will remain the same as in 2011 in both cities. Projections for dwelling needs were then computed for both cities on the assumption that households will occupy the same type of dwelling (separate house, flat) by family type, age group and migration status in 2022 as was the case in 2011.

On these assumptions, Sydney will need to provide dwellings for an additional 309,000 households and Melbourne an additional 355,000 households over the decade 2012 to 2022.

The key finding is that contrary to most housing industry opinion, the greatest need will be for family friendly dwellings. This is because of the large number of young resident and migrant households who will be entering each city’s housing market. Most of these households are likely to start a family and when they do so, will look for a separate house.

Author provided

Author provided

It is true that there will be a large increase in the number of single person and couple families over the decade. However, most of this increase will be amongst older, already established households. The evidence indicates that the great majority are ageing in place. (See Table 11 in the report.)

The surge in the number of older households is a consequence of population ageing as successive ten-year cohorts replace smaller cohorts born in earlier years. This ageing effect is having an enormous but largely unrecognised effect on Sydney and Melbourne’s housing markets. It will generate the need for an additional 109,570 extra dwellings in Sydney over the decade to 2022 and 161,990 in Melbourne. In addition, net overseas migration will add a dwelling need of 198,810 in Sydney and 193,140 in Melbourne by 2022.

This combination of high dwelling needs of young residents as well as from NOM, along with the blocking effect of the ageing population, is contributing to a severe and continuing squeeze on the detached housing markets in Sydney and Melbourne. This is particularly marked in the inner and middle suburbs.

The reason is that, by 2011, 50 to 60% of this housing stock was occupied by householders aged 50 (See Table 10 in the report). This situation will get worse as the number of these older households increases.

The study compared the recent pattern of dwelling approvals by housing type in Sydney and Melbourne with the needs implied by the dwelling projections. The conclusion was that there are too few separate houses being approved in both cities and too many apartments, especially in Melbourne.

Current policies of urban renewal or urban consolidation in established suburbs will add little to the supply of affordable family friendly dwellings. This is primarily because of the increase in the price of potential building sites. There is a vicious circle in play as the scarcity outlined above contributes to further increases in the price of separate houses and thus to the cost of possible sites for higher density dwellings.

Implications

Because few families can afford detached housing in the inner and middle suburbs, more are being pushed into the outer suburbs and the fringes of Sydney and Melbourne. It is still possible to find such affordable housing in the outer and fringe suburbs of Melbourne, but not in Sydney. A detached house costs a minimum of $600,000 even in the remotest corners of Sydney. The only affordable option for most of these home seekers is a unit in these outer suburban locations.

There is no short term fix. In the long term more resident and migrant families are likely to seek affordable housing elsewhere, or in the case of migrants, may by-pass Australia altogether. Those who choose to stay will have to make adjustments to their life-style as by delaying starting a family.

On the other hand, a glut of high-rise apartments is inevitable, although it is being masked by the long lead time in the completion of newly approved apartment projects.

This is because the recent surge in approvals is way above the need for such dwellings. This is especially the case in Melbourne. The apartments being approved are predominantly tiny 60 square metre or smaller dwellings with no access to protected outdoor space. They are totally unsuitable for raising a family. They are tiny because most investors prefer to buy at prices below $600,000.

Co-author David McCloskey, was a partner in Deloitte Analytics and Adjunct Senior Research Fellow with the CPUR. He is now the Founding Director of SenseValue. He is also a research partner at The Australian Population Research Institute.

Bob Birrell was the Founding Director of the Centre for Population and Urban Research at Monash University. He is now with The Australian Population Research Institute, a non-profit demographic think tank. Co-author David McCloskey was a partner in Deloitte Analytics and Adjunct Senior Research Fellow with the CPUR. He is now the Founding Director of SenseSave. He is also a research partner at TAPRI.