With Australia on the brink of a monumental housing shortage the likes of which we have never seen, the construction of new homes is becoming an absolute necessity. But with many developers unable to see a viable profit margin in new residential builds, what’s in store for our capital city housing markets?
A report from the National Housing Supply Council suggests that we are approximately 178,400 homes short from the required number at present, with this deficit set to increase to 308,000 within the next five years and a scary 640,600 by the year 2028.
And it just so happens that the direst undersupply is playing out in Sydney, where developers are forced to find an extra $200,000 to build a new house on the city’s fringe, compared to their peers in other capital cities.
Developers have dismissed claims made in a recent report by the NSW Planning Department that states Sydney currently has the highest levels of developable land since 1981, saying there is more to creating suitable housing than colouring in areas of residentially zoned land on maps.
In their opinion, the Housing Supply Council’s report paints a far more accurate (and bleak) picture of Sydney’s housing supply woes, with their findings showing NSW has lagged behind mining hubs of Western Australia and Queensland when it comes to supplying new accommodation for its growing population.
The report states that over the next decade, Sydney will fall behind Melbourne in terms of new homes built by a total of 120,000 properties, with an estimated total of 237,400 properties to be constructed.
With prohibitive building costs creating a bureaucratic hurdle for Sydney developers, it’s really not surprising that NSW’s current housing supply crisis is not going to improve any time soon.
Government taxes and the raw cost of land are the two main expenses that eat into developers’ profit margins by as much as $200,000 more for every new home constructed, than what a comparable build would cost in any other capital city.
Building a new house on “greenfield” land in Sydney – land not previously used for housing – costs an average of $560,711, and Sydney is the only Australian city where it’s cheaper to develop an inner city two-bedroom apartment than a three bedroom suburban fringe house.
Although the NSW government insists that things are not as hopeless as what the Housing Supply Council’s report suggests, the developer lobby group the Urban Development Institute of Australia, says there is a “fundamental disconnect” between the government’s report and the reality that Sydney is building 10,000 fewer homes each year than are required.
NSW Premier, Kristina Keneally claims that, “The NSW government has rezoned land for a record 68,636 lots, of which more than 30,000 lots are ready for development right now. This easily exceeds the government’s target to have enough land rezoned for 60,000 dwellings.”
But Stephen Albin, from the Urban Development Institute of Australia said, “It’s more than rezoning land, it’s the provision of services, the provision of roads and public transport and the whole DA process itself. If you are a developer, are you going to invest where there is all this uncertainty?”
Although median house and apartment prices in Sydney showed very little movement for much of last decade, this dwelling undersupply is starting to become evident as values in the harbour city start to outdo other capitals that were once miles ahead of the game. Not to mention the rental situation, with yields beginning to increase significantly as vacancy rates remain tight across the board.
So what does this mean for property investors? Well, in the long term it means opportunity. With buyers remaining comparatively quiet at present due to interest rate uncertainty and a general decline in consumer sentiment, we are seeing some great buying opportunities for investors who want to add to their portfolio or start building one.
We recently purchased a one bedroom, one bathroom apartment in the trendy inner city suburb of Rushcutters Bay on behalf of a client who was seeking strong long term capital growth potential. The large 70 square metre, first floor unit also has a single secure car space and is ideally located in a well maintained, boutique security block. Being double storey it has plenty of living space and boasts a large balcony.
The spacious and sun drenched, fully renovated apartment was secured for $517,000, with the valuation coming in at $540,000, representing excellent buying given the property’s location in a highly sought after suburb close to the main shopping hub of Paddington as well as public transport, parks and the CBD.
This purchase is an excellent fit for the client’s investment objectives as Rushcutters Bay has a history of proven capital growth and with the new fit out already completed, it will provide excellent depreciation benefits too.
George Raptis is a director of Metropole Property Investment Strategists in Sydney. He shares his 22 years of experience in the property industry as a licensed estate agent and active property investor. Go to www.metropole.com.au
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