Has High Density Development Missed the Mark?

The share of new medium and high-density dwellings (units) has increased across Australia’s capital cities to meet the demand for affordable homes.

But is this a positive outcome for the residential property market and housing affordability?

Units and particularly new apartment developments are largely catered for and built with investors in mind.

Developers are reliant on pre-sales (who are usually investors) to obtain the finance to commence construction.

In contrast, owner occupiers, who actually account for the majority of buyers, have typically favoured properties that they can readily move into.

However, units have a significantly longer gestation period than houses.

The Australian Bureau of Statistics reports that an apartment building on average takes 84 weeks to build, which is almost three times longer than a house.

A typical high-rise apartment building can take well over two years to complete, with the total development period being even longer when the pre-selling period is accounted for.

Consequently, units are less able than houses to meet rapid changes in demand, particularly owner occupier demand, due to the longer gap between the rise in demand and the new supply coming ontoOK the market. 

The lag can drive up prices as an undersupply will persist longer.

This price volatility also attracts speculative investments for capital gains rather than for long term occupation of housing.

In turn, this speculative demand fuels new supply to hit the market simultaneously as the market peaks, ultimately resulting in excess stock and downward price pressures.

Evidence of the price volatility created by an increased reliance on units can be seen in a comparison of the Sydney and Adelaide residential property markets performance over the past 20 years.

Average house rent and price growth (relative to incomes) in Sydney, where over 60% of new supply comprises of units, has been greater than in Adelaide, where units have accounted for only 27% of new supply.

Volatility in Sydney has also been higher, with price growth varying 9.4% around the average compared to 7.3% for Adelaide.

Consequently, the trend of increasing medium and high-density development is at odds with providing more affordable housing for owner occupiers.

Unless more houses are provided to the market, or timely delivery models for medium and high-density dwellings are developed, then the mismatch in the timing of demand versus supply is expected to persist.

Continued price volatility could become even more evident in the next few years as more onerous lending conditions have forced many potential investors out of the market.

The outcome will likely be a delay in the supply of new units, potentially causing accelerated price growth and reduced housing affordability.

About Andrew Mirams Andrew is a leading finance specialist who holds a Diploma of Financial Planning (Financial Services). With over 32 years of experience in finance, Andrew has been acknowledged by the mortgage industry with multiple awards. Visit IntuitiveFinance.Com.Au