Unpacking the true cost of vertical housing

The conversation around Australia's housing crisis often circles back to a familiar refrain: we need to build more homes.  

However, the reality on the ground paints a more complex picture where the push for vertical housing solutions like apartments is increasingly seen as misaligned with market demands and affordability.

The high cost of high-rise living

The mismatch between what is being built and what the market can bear is stark.

Apartments, once touted as a solution to urban density, are proving to be both expensive and inadequate for the needs of most homebuyers and tenants.

The construction cost for entry-level apartments in many urban centres across Australia has skyrocketed to approximately $10,000 per square metre, pushing the price of a modest 100m² apartment to over a million dollars.

Price points over $15,000/m² for half-decent new apartments are now increasingly common and are even higher still for quality locations in Sydney, Melbourne and on the Gold Coast.

Regardless of price these apartments are often too small, lacking sufficient storage and parking, and do not align with consumer preferences, particularly when compared to the more spacious and cost-effective detached homes.

Consumer pushback and market realities

The market's response has been unambiguous.

Potential buyers, already stretched thin by the current economic climate, are balking at these high apartment purchase costs.

This chart shows that a new ‘cheap and cheerful’ apartment will cost a punter just over $1 million in southeast Queensland.

This works out to be around $10,500/m².

Yet a new house and land package in a middle-ring suburban infill location will set a buyer back $995,000 or around $5,000/m².

So, half the price of a poxy new apartment.

And if the new house and land package is an outer suburb the purchase price drops to under $750,000 or around $3,250/m².

Why would one pay so much for a 100m² apartment versus a new 200 to 225m² detached house on a 450m² in a middle-ring and/or suburban setting?

It made sense when the cost of a new apartment was 20% or more under the price of a new home in the same region, but not when it now costs twice as much, sometimes more, to buy a new apartment versus a new detached house.

Also, the current situation is exacerbated by banks tightening lending standards and valuers not meeting developer expectations, further complicating the financing landscape for new apartment projects.

Even developers who navigate these hurdles face substantial sales and development risks.

A broader impact on housing supply

The focus on building apartments is not just a problem of high costs; it also contributes to a broader issue of housing undersupply.

As most buyers opt out of the apartment market, there remains a significant, unmet demand for more suitable housing options, such as detached houses on small allotments or dual occupancy homes.

This bottleneck is evident in the persistent underutilisation of apartments, with high unoccupancy rates – on average 35% across southeast Queensland for example - in new complexes, further straining the already tight housing market.

Future directions: flexibility and local solutions

Addressing this mismatch requires a shift in both planning and policy.

Encouraging the development of smaller, more affordable homes and allowing homeowners to maximise returns on existing properties could help alleviate some pressure.

Moreover, adapting infrastructure charges and development fees to better reflect the end sale price and location could incentivise the right kind of development.

Examples from Western and South Australia, where backyard homes and ancillary dwellings are encouraged, show promising results in increasing supply without compromising community standards or quality of life.

In conclusion, while building more homes is part of the solution to Australia's housing crisis, it is crucial that these homes meet the real needs of consumers in terms of affordability, size, and quality.

As southeast Queensland and other regions grapple with these challenges, a more nuanced approach that embraces flexibility and local solutions may offer the best path forward.

About Michael Matusik Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive