I’m a developer. Here’s why Jacinta Allan’s high-rise plan won’t get off the ground

I’m the chief executive of an established property development business – the kind of company Jacinta Allan is appealing to in her push this week to build more mid-level and high-rise apartments in the “activity centres” of established suburbs.

But despite this strong desire, we won’t be building these sorts of apartments any time soon. Why not? Because this sort of development is not feasible to build and sell, especially at scale, and won’t be for a while yet.

Large-scale housing development in “activity centres” is good in theory, but the numbers don’t stack up.Credit: Paul Rovere

It costs at least three times as much to build a square metre of a new apartment compared with a good-quality townhouse, or four times more than a new detached home. This means the only apartments that generate a suitable return on investment are premium, boutique apartments targeted at wealthy downsizers.

A generational shift is occurring towards accepting denser living, but we are a long way from new apartments being the solution to the housing supply problem. Two major hurdles stand in the way: the market and the economics.

First, the vast majority of buyers still want at least three bedrooms in their next home (or 2.5 bedrooms for first home buyers). Buyers also overwhelmingly don’t want these bedrooms to be in an apartment building.

This explains the growing chasm between the Victorian government’s aspiration to build thousands of “well-located” homes in established suburbs and the reality of delivering them.

Apartments large enough for families don’t come cheap. Credit: Domain

The aspiration is a worthy one. Who wouldn’t want new homes to be close to transport, jobs, open space and amenities? Who doesn’t want young people and key workers to enjoy the great suburbs and towns that exist across our state?

A key barrier to this is illustrated in a Westpac Housing Pulse survey from March, which showed that only 26 per cent of buyers in Melbourne were seeking an apartment or unit. This matches similar surveys over the years, including Infrastructure Victoria’s oft-referenced Our Home Choices report of 2023, which showed just one in five people living in a greenfield suburb would consider an inner-city apartment or townhouse if the price was comparable (which it is not).

This dynamic would probably be different if apartments were significantly cheaper than detached houses, as in other parts of the world. But here is where the difficult economics creep in; across Australia, new apartments cost significantly more to build or buy than an equivalent new townhouse or detached house. The price of materials, high building standards, and labour costs all contribute.

Construction costs have risen so much that developers now need to sell apartments at the rate of $14,000 per square metre or more for a project to be feasible – about 40 per cent higher than selling rates before COVID. This translates into a small new one-bedroom apartment of about $650,000, a two-bedroom apartment of 70 square metres at nearly $1 million, or a reasonably sized three-bedroom “family” apartment at about $1.5 million or more. These are not prices that are attainable to the bulk of median income earners, let alone first home buyers and lower income earners.

Townhouses in Cheltenham, the kind that home buyers prefer and are far cheaper to build than apartments.Credit: Joe Armao

Contrast this with townhouses in established middle ring suburbs or a detached home in greenfield areas, which offer the same number of bedrooms and more space at almost half of the price. For example, a new three-bedroom townhouse in a middle-ring suburb such as Keysborough would cost under $800,000, as would a new four-bedroom house in a greenfield suburb such as Clyde. No wonder these have been the most desirable housing types for owner occupiers in the recent past.

The apartment market is now almost entirely skewed towards premium, downsizer apartments, with entry-level units all but evaporating from sale. That is why we have gone from building about 25,000 apartments a year in Melbourne in the mid-2010s to just 4000 a year.

Higher apartment sales and production during that time were also driven by foreign investors who underpinned high-rise towers, along with local investors. Both have been discouraged to invest in Victoria by a combination of government taxes and policies.

With this week’s planning announcements focused on 60 activity centres across Melbourne, the Victorian government is selling an affordability dream to young people that cannot be realistically delivered. Speeding up planning in these activity centres will deliver little benefit if the result is a housing product that costs too much and doesn’t meet the utility of buyers.

Temporary off-the-plan stamp duty savings of $40,000 do not make up for the extra $700,000 a young family needs to find to buy a relatively small three-bedroom apartment in the middle of Brighton, no matter how desirable the area might be.

Governments should prioritise unlocking housing types that are more attainable and desirable for consumers in established areas, can bring moderate density that is faster and more feasible for developers to deliver, and also cost the least in new infrastructure. Middle ring townhouses are the sweet spot.

The state can work with developers and landowners to identify large sites that can support mid-density housing in these areas and remove the barriers to development from public authorities. Walking back the dreaded windfall gains tax – where planning changes substantially increase land values – for residential projects in established suburbs would pay huge dividends in opening up land supply.

There are many pockets in existing suburbs that can deliver swaths of new homes that don’t require 12 to 20- storey apartment buildings. But they will need a departure from some firmly held planning and tax beliefs.

The recent announcement of unlocking more greenfields is another positive, but is not enough by itself. The Precinct Structure Plans program to unlock these new areas needs to ensure public authorities do their part to ensure this land can actually be developed, sooner. And these developments need to be coupled with a proper share of infrastructure spending to resolve the usual criticisms, such as missing public transport or local amenities. I expect doing so would cost a fraction of what is being spent on the Big Build projects.

Victoria’s planning bureaucracy seems to measure success not on the number of new homes they enable, but on how many of their pet policy reforms can be adopted. For every positive change, such as streamlining approval time frames, they can’t help adding several new requirements that increase compliance or development costs, such as proposed new development infrastructure contributions.

Too often they ignore industry advice on what will actually work, instead waving us away as purely self-interested. The consequence of this ideological and mistrustful approach is clear to see in the ever-reducing number of new homes being built.

The government needs to incentivise developers to build the kinds of homes people want, in places they want to live, that they can afford. This approach would deliver a far more positive impact than holding firmly to a utopian but uneconomic ideal of how people should live.

Max Shifman is the chief executive of Intrapac Property and the immediate past president of the Urban Development Institute of Australia.

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