Submission to the Senate Economics References Committee Inquiry into affordable housing 20 August 2014: De-risking development of medium density housing to improve housing affordability and boost supply

This submission addresses the problem of housing price inflation, the chronic under-supply of new housing stock, and the resultant decline in housing affordability for low and middle income households. It specifically focusses on the supply of medium density housing (multi-unit development) in Melbourne, although we believe that the observations made about housing in supply in Melbourne are relevant in other urban centres and to other types of housing supply. In terms of medium density housing (MDH) our concern also extends to the poor quality and design. Why the market tends to deliver generic apartments of poor quality and design which are uncompetitive with lower density housing and amenity despite planning objectives, and how this apparently intractable problem can be overcome is the topic of this submission...

De-risking development of medium density housing to improve housing affordability and boost supply

Housing price inflation is a national concern given the serious decline in the number of low and middle income households able to purchase housing. In addition housing supply lags well behind demand. In Melbourne, urban consolidation policies explicitly seek intensification to promote housing supply but planning regulation is often criticised for being a significant cost driver for medium density housing. It is assumed that easing supply constraints will improve affordability. We suggest that laissez-faire planning exacerbates affordability issues because this approach fails to address the basic economic problem: the current inability of the market to efficiently match supply and demand in order to progress an orderly and de-risked development process. The role of “exchange” one of the four housing market sub-systems identified by Burke (2012) has until recently generally been ignored but our examination reveals significant economic transaction costs that manifest as development risks that impact on affordability. Fortunately these can be mitigated, but only if there is a more consumer driven supply response.

Making apartments affordable: Moving from speculative to deliberative development

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, the authors found high search costs, demand risk, problems with exchange, and lack of competition present key barriers to achieving greater affordability and limit the extent to which ‘speculative’ developers can respond to the preferences of would be owner-occupiers of apartments. The existing development model, which is reliant on capturing uplift in site value, suits investors seeking rental yields in the first instance and capital gains in the second instance, and actively encourages housing price inflation. This is exacerbated by lack of density restrictions, such as have existed 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...

Case study 3. A subtropical urban community. Medium to high density residential typologies

Subtropical Urban Communities Project Urban design and residential buildings The Centre for Subtropical Design has researched design concepts for livable subtropical neighbourhoods characterised by higher-density, mixed-use, family oriented housing by conducting a design charrette and analysing the proposed designs to evaluate how well these typologies might support economic, environmental and social sustainability. http://www.subtropicaldesign.org.au/index.php?option=com_content&task=view&id=125&Itemid=163 The QUT Team produced designs (Case Study 3) within the research framework of the design charrette.

An Uber for apartments could solve some common housing problems

Speculative property developers, criticised for building dog boxes and the slums of tomorrow, are generally hated by urban planners and the public alike. But the doors of state governments are seemingly always open to developers and their lobbyists. Politicians find it hard to say no to the demands of the development industry for concessions because of the contribution housing construction makes to the economic bottom line and because there is a need for well located housing. New supply is also seen as a solution to declining housing affordability. Classical economic theory however is too simplistic for housing supply. Instead, an offshoot of Game Theory - Market Design – not only offers greater insight into apartment supply but also can simultaneously address price, design and quality issues. New research reveals the most significant risk in residential development is settlement risk – when buyers fail to proceed with their purchase despite there being a pre-sale contract. At the point of settlement, the developer has expended all the project funds only to see forecast revenue evaporate. While new buyers may be found, this process is likely to strip the profitability out of the project. As the global financial crisis exposed, buyers are inclined to walk if property values slide. This settlement problem reflects a poor legal mechanism (the pre-sale contract), and a lack of incentive for truthfulness. A second problem is the search costs of finding buyers. At around 10% of project costs, pre-sales are more expensive to developers than finance. This is where Market Design comes in.

Smarten up! Applying market design theory to housing supply

PROBLEM Cost of delivering medium density apartments impedes supply of new and more affordable housing in established suburbs EXISTING FOCUS - Planning controls - Construction costs, esp labour - Regulation eg sustainability

Can Risk Management boost the supply of Affordable Housing Development and Management?

A shortage of affordable housing is a major problem in Australia today. This is mainly due to the limited supply of affordable housing that is provided by the non-government housing sector. Some private housing developers see the provision of affordable housing for lower income people as a high risk investment which offers a lower return than broader market-based housing. The scarcity of suitable land, a limited government ‘subsidy’, and increasing housing costs have not provided sufficient development incentives to encourage their investment despite the existing high demand for affordable housing. This study analyses the risk management process conducted by some private and not-for-profit housing providers in South East Queensland, and draws conclusions about the relationship between risk assessments/responses and past experiences. In-depth interviews of selected non-government housing providers have been conducted to facilitate an understanding of their approach to risk assessment/response in developing and in managing affordable housing projects. These developers use an informal risk management process as part of their normal business process in accordance with industry standards. A simple qualitative matrix has been used to analyse probability and impacts using a qualitative scale - low, medium and high. For housing providers who have considered investing in affordable housing but have not yet implemented any such projects, affordable housing development is seen as an opportunity that needs to be approached with caution. The risks associated with such projects and the levels of acceptance of these are not consistently identified by current housing providers. Many interviewees agree that the recognition of financial risk and the fear of community rejection of such housing projects have restrained them from committing to such investment projects. This study suggests that implementing improvements to the risk mitigation and management framework may assist in promoting the supply of affordable housing by non-government providers.

Project report. A subtropical urban community: Investigating medium to high density residential typologies by Design Charrette

The Centre for Subtropical Design at QUT, in partnership with the Queensland Government and Brisbane City Council, conducts research focused on 'best practice' outcomes for higher density urban living environments in the subtropics through the study of typical urban residential typologies, and urban design. The aim of the research is to inform and illustrate best practice subtropical design principles to policy makers and development industry professionals to stimulate climate-responsive outcomes. The Centre for Subtropical Design recently sought project-specific funding from the Queensland Department of Infrastructure and Planning (DIP) to investigate residential typologies for sustainable subtropical urban communities, based on transit orientated development principles and outcomes for areas around public transport nodes. A development site within the Fitzgibbon Urban Development Area, and close to a rail and bsu transport corridor, provided a case study location for this project. Four design-led multi-disciplinary creative teams participated in a Design Charrette and have produced concept drawings and propositions on a range of options, or prototypes. Analysis of selected prototypes has been undertaken to determine their environmental, economic and social performance. This Project Report discusses the scope of the project funded by DIP in terms of activities undertaken to date, and deliverables achieved. A subsequent Research Report will discuss the detailed findings of the analysis.

Research report. A subtropical urban community. Investigating medium to high density residential typologies. Findings and recommendations from the Design Charrette

In June 2009 the Centre for Subtropical Design at the Queensland University of Technology conducted a design charrette to research design concepts for liveable subtropical neighbourhoods characterised by higher-density, mixed-use, family orientated housing. Subsequent analysis of the proposed designs evaluated how well these typologies support economic, environmental and social sustainability. The study was led by Ms Rosemary Kennedy, Director of the Centre for Subtropical Design and QUT School of Design Adjunct Professor Peter Richards, Chair of the Centre for Subtropical Design Board and director of Deicke Richards Architects and Urban Designers.

A subtropical urban community. Investigating medium to high density residential typologies. Recommendations from the design charrette

In June 2009 the Centre for Subtropical Design at the Queensland University of Technology conducted a design charrette to research design concepts for liveable subtropical neighbourhoods characterised by higher-density, mixed-use, family orientated housing. Subsequent analysis of the proposed designs evaluated how well these typologies support economic, environmental and social sustainability. The study was led by Ms Rosemary Kennedy, Director of the Centre for Subtropical Design and QUT School of Design Adjunct Professor Peter Richards, Chair of the Centre for Subtropical Design Board and director of Deicke Richards Architects and Urban Designers.

Case study 1 : a subtropical urban community : investigating medium to high density residential typologies by design charrette

The public transport corridor bordering the study site runs NW to SE and is perceived as a source of noise and pollution. The key urban planning strategies adopted by this team were: • Acoustic separation from transport corridor noise source, • A regular grid pattern of urban blocks, and • A clear hierarchy of accessible open space throughout the development.

Report : Case study 2 : a subtropical urban community : investigating medium to high density residential typologies by design charrette

The case study site is physically disconnected from its surrounding community by the rail corridor and future bus lanes and is unlikely to be able to sustain its own commercial retail centre. As a result, it may also be socially disconnected from surrounding suburbs. However, it does offer proximity and access to an extensive „natural‟ area, and this is seen as key opportunity for the proposed development to develop a strong relationship with surrounding suburbs...