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Making apartments affordable: from speculative to deliberative development

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Abstract

Urban planning policies in Australia presuppose apartments as the new dominant housing type, but much of what the market has delivered is criticised as over-development, and as being generic, poorly-designed, environmentally unsustainable and unaffordable. Policy responses to this problem typically focus on planning regulation and construction costs as the primary issues needing to be addressed in order to increase the supply of quality, affordable apartment housing. In contrast, this paper uses Ball’s (1983) ‘structures of provision’ approach to outline the key processes informing apartment development and identifies a substantial gap in critical understanding of how apartments are developed in Australia. This reveals economic problems not typically considered by policymakers. Using mainstream economic analysis to review the market itself, we find high search costs, demand risk, problems with exchange, and lack of competition present key barriers to achieving greater affordability of apartments and limit the extent to which ‘speculative’ developers can respond to the preferences of would-be owner-occupiers. The existing development model, which is reliant on capturing uplift in site value, suits investors seeking rental yields in the first instance, and subsequently capital gains, and actively encourages housing price inflation. This is exacerbated by lack of density restrictions, such as has been the case in inner Melbourne for many years, which permits greater yields on redevelopment sites. The price of land in the vicinity of such redevelopment sites is pushed up as landholders' expectation of future yield is raised. All too frequently, existing redevelopment sites go back onto the market as vendors seek to capture the uplift in site value and exit the project in a risk-free manner. This paper proposes three major reforms, which together would enable development of better, more affordable apartments for housing consumers: § Firstly, that the market for apartment development be re-designed, following insights from the economic field of ‘Market Design’ (a branch of Game Theory). A two-sided matching market for new apartments is proposed, where demand-side risks can be mitigated via consumer aggregation. § Secondly, consumers should be empowered through support for ‘deliberative’ and ‘do-it-yourself’ (DIY) development models, in order to increase competition, expand access, and promote responsiveness to consumer needs and preferences. A ‘Smart Housing Market’ is proposed to broker the necessary connections and simplify the process. § Finally, planning schemes need to impose density restrictions (in the form of height limits, floor space ratios or bedroom quotas, for example) in localities where housing demand is high, in order to dampen speculation and de-risk development by creating certainty. Restrictions on over-development on larger infill sites can be offset by permitting intensification of ‘greyfield’ suburbs. Aggregating existing housing lots to enable precinct regeneration with moderate height and density increases would permit better use of airspace thus allowing design outcomes that can optimise land use while retaining neighbourhood amenity.
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... Deliberative development is when a group of prospective owner-occupiers become the proponents of a multi-unit development in place of the developer (Sharam, Bryant and Alves, 2015c). There are a number of ways this might occur, ranging from groups of friends coming together to develop, to strangers being brought together by an architect or developer who is facilitating a deliberative development. ...
... In Germany, some governments have been actively supporting deliberative developments by specifying some state-owned land for development in this way, or ensuring brownfield redevelopment precincts have appropriately sized lots for deliberative developments (Sharam, Bryant and Alves, 2015c). ...
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Without this profit development does not occur. Assessments of development feasibility take into account market demand and supply, what is permissible under planning policy, development costs, infrastructure contributions as well as finance charges, professional fees and land costs. Developers will assess many sites and reject perhaps 95 per cent of them because they are financially unfeasible. On infill development sites there are a variety of additional barriers to generating profit and therefore the delivery of infill housing of all types. The barriers to delivering diverse and affordable housing are even greater and are shown in Figure 1 below. Figure 1 uses an outline of the basic development process to illustrate the blockages in housing supply. In order to overcome these barriers the industry needs to deliver a range of innovative solutions. Identifying these solutions is the primary aim of this Investigative Panel Project. The panel brought together around 50 experts from the public and private sectors across four panels in two cities, Sydney and Perth. Rather than just reporting the barriers to infill development, the objective of this panel was to put forward a range of suggestions from those working in the development industry designed to increase housing supply on infill sites. Consequently, this report is very much a synthesis of expert opinion rather than an academic exploration of the issues. Sydney and Perth were chosen as the case study cities because they represent two extremes in the delivery of medium and high-density housing on infill sites. In Perth, around 80 per cent of housing supply comes from detached dwellings; the figure is closer to 60 per cent in Sydney. In Perth the new metropolitan plan, Directions 2031 and Beyond, seeks to double the rate of infill development to around 50 per cent of all new housing, a level already being achieved in Sydney. The Project hoped to take lessons from Sydney and apply to Perth, but it quickly become clear that there were also significant barriers to infill development in Sydney, often quite different to the challenges facing Perth. The panels provided twelve hours of discussions. Synthesised from these discussions were 40 suggestions put forward to overcome the barriers to delivering diverse and affordable housing. Suggestions range from the simple to the ambitious, achievable to the near impossible. For each suggestion, further analysis explores the origin of the ideas, the level of opposition and the route to implementation. The aim of this report is not to analyse or promote particular suggestions but rather to provide a platform for them, to generate ideas, promote debate and hopefully elicit change. Central to the suggestions is the role of the private sector. The vast majority of infill housing will be delivered by the private sector and a profit must be achievable in order for housing to be completed. While it became clear that making the development approval process more certain, more efficient and less costly is crucial (deemed approval at the expiry of specific time limits is one solution), the panels' identified a complex range of other interconnected issues. The delivery of affordable housing on infill sites is a major challenge. Land prices and construction costs require revenues from developments that more often than not preclude the delivery of affordable housing. With land prices and the cost to revenue balance forcing many sizable developers out of large scale infill development in the short-term, it is left to medium-density developments to provide this housing. For the private sector to deliver diverse and affordable housing on any significant scale, there need to be partnerships with the public sector and community housing organisations, ideally on public sector land to maximise contributions. Planning agreements and inclusionary zoning requirements from re-development organisations will provide an important, but limited, quantity of housing. The suggestions put forward in this report reflect, on the one hand, a desire for less public sector involvement to let the market operate efficiently but, on the other hand, necessary public sector intervention to secure affordable housing in what are often high value areas. Financial feasibility will drive market development but, given development costs and landowner price expectations, revenues need to be sufficient to generate the required minimum level of profit necessary to compensate for the risks of development. Therefore, without intervention within the development approval process, the market is unlikely to deliver a product considered affordable to those on low to moderate incomes in all but the lowest value areas. Planning policy could be used to intervene to make the provision of affordable housing integral to the approval process, but this can lead to market distortions and is particularly problematic when developers already own land and therefore any reduction in revenue will affect their profit. There needs to be in place a method of incentivising private sector developers to deliver an element of affordable housing on typical, small-scale infill development sites. This could be through development incentives, such as density bonuses, but such incentives must be targeted at the developer and not inadvertently passed to the landowner in the form of land value uplift. Incentives that increase land values do nothing to enable the delivery of affordable housing. Inclusionary zoning would enable developers to pass affordable housing contributions on to land owners but it would take considerable time for policy to become embedded within planning documents and overcome the complications that stem from existing ownership issues. Additional requirements within the development approval process would also need to be administered efficiently to ensure that there are no delays as a consequence. Construction costs, particularly labour costs, and a building industry structured to deliver a traditional single story product, at least in Western Australia, need to be addressed and banks should be more flexible in their lending practices to promote infill development by smaller developers (one of the more ambitious suggestions). Encouraging smaller developers to deliver small-scale, infill development projects such as three-storey walk up apartments was identified as the most effective way to increase housing supply. Large-scale residential towers are not the solution. However, as noted previously, securing large quantities of affordable housing in high land value areas (inner & middle suburbs) will require policy intervention. In many ways the decline in affordability, for first home buyers in particular, may force developers to provide a different type of product, and we are already seeing evidence of this in Perth. Smaller lot sizes, smaller houses and generally a greater diversity of dwelling is starting to be developed delivering a lower priced product to the market at price points where demand is greatest; below $400 000. The success of such housing demonstrates how profits can be made from non-traditional products and this is the most effective way to increase the number of developers delivering such housing. In combination with partnerships with the public sector, more intense use of publicly-owned land, a more efficient and less political development approval process, and better coordinated and funded infrastructure provision, medium-density development within inner and middle suburbs provides the best opportunity to increase the supply of diverse and affordable housing. A consistent theme from the discussions was the degree of consensus between the private and public sectors. The majority of public officials agree with the private sector that increasing the supply of infill development is a crucial strategy for Australia's cities. Both the private and public sector agree that the issue of leadership is very important: leadership promoting the benefits of infill development, coordinating infrastructure provision and driving public acceptance of higher density development and affordable housing. Figure 2 below presents a summary of the suggestions, synthesised from the panel discussions, which could apply at various stages of the development process. One of the key findings is the contradiction between decreasing government intervention in the market and the delivery of non-subsidised affordable housing. Many of the 40 suggestions pertain to simplifying the development approval process and allowing developers to meet the requirements of the market. By removing levels of intervention it will be almost impossible to secure affordable housing as developers would not be maximising profits by adding an element of affordable housing to market developments in the vast majority of infill locations. © 2012, Australian Housing and Urban Research Institute. All rights reserved.
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