Developers to cop new charge as experts warn apartment prices ‘must rise’ for towers to soar

Developers will be forced to pay a new charge to fund schools, parks and public transport with the state government set to trial the fee in the first 10 of its so-called activity centres, as it considers a universal model for all areas where new housing is built.

Meanwhile, experts and developers told The Age on Monday that the Allan government’s bold plan to fast-track the building of new high-rise towers across the city may not be initially viable unless there is a substantial rise in the cost of apartments.

Melbourne apartment values need to rise before new projects become viable, the sector says. Credit: Wayne Taylor

Prices need to rise by at least 15 per cent to encourage developers to build new high-density homes and add desperately needed stock, said property industry analysts Charter Keck Cramer. Separately, two developers warned there was a large gap between what buyers were willing or able to pay for new apartments – and what they cost to build.

These challenges could complicate the Allan government’s plan to unlock more affordable dwellings near the city’s existing transport hubs and undermine its ambition to build 80,000 new homes a year for the next decade.

Tuesday’s announcement of the pilot development charge – the cost of which has not yet been set​ – is the latest in a series of policies unveiled this week in a bold bid to reshape Melbourne’s housing market.

Hundreds of thousands of new homes will be fast-tracked across 50 neighbourhoods, reshaping the skyline as high-rise buildings pop up across the suburbs. Stamp duty will also be slashed for all purchases of off-the-plan apartments for the next 12 months, in a bid to boost supply and ease the housing crisis.

Apartment construction in Melbourne has collapsed to levels not seen since the global financial crisis of 2009. Charter Keck Cramer research found that just 2100 new apartments were launched in Melbourne in 2023-24 – an 80 per cent decline on the 10-year annual average of 10,200.

Meanwhile, Melbourne’s median home value has fallen from second to sixth out of Australia’s eight capital cities since the onset of the COVID-19 pandemic – and that slump is being blamed for driving investors away from Melbourne’s apartment market.

Charter Keck Cramer national executive director of research Richard Temlett said Melbourne’s relatively low property prices meant many would-be apartment developments were financially unviable.

He said apartment values must rise significantly to give developers the confidence to launch new projects.

“Because building costs have jumped by 30 to 40 per cent, prices have to basically go up to be about 30 per cent higher compared to pre-pandemic levels,” Temlett said.

“And what that means is that even with these incentives in place, there’s certain projects that will still not be financially viable, so [the new incentives were] not going to be a silver bullet.”

In its latest analysis, it found the government would need to build up to 25,000 apartments a year to meet its own target – but new apartments were much more expensive than established units, making them uncompetitive.

“The prices of established units need to recalibrate upwards by around 15 per cent for new stock to be accepted by the market at current price points,” said its report, which described the price discrepancy as a “major handbrake” for delivering new homes.

Meanwhile, the new development charge will be rolled out from January 1, 2027, in the first 10 activity centres of Broadmeadows, Camberwell, Chadstone, Epping, Frankston, Moorabbin, Niddrie, North Essendon, Preston and Ringwood.

Every new home built in these areas will collect a charge that funds roads, public transport, open space and community facilities. A list of each area’s needs will be compiled by the Department of Transport and Planning.

The property industry has long campaigned for reform of the state’s infrastructure contributions – but ​i​s likely to be wary of any additional costs – at a time when they are asking governments to relax the tax burden on the sector and make it more economical to build homes – that will be passed on to home buyers.

Premier Jacinta Allan said communities that built more homes should get extra funding for the infrastructure they need.

“Everyone can contribute, including property developers. It should apply everywhere,” she said.

“Developers already build homes and opportunity, and many already contribute to a system like this – now we’ll work together to make the funding fairer, so growing areas get more support for schools, parks and transport.”

Within weeks, a new industry working group​ will be tasked with com​ing up with a statewide ​infrastructure contribution scheme to replace the pre-existing patchwork of levies that exist in half of Victoria’s local government areas, including Melbourne’s outer suburbs.

In a group statement on Monday, major property groups said the current contribution system was inconsistent and didn’t provide certainty.

“Through this collaborative model we will ensure that not only do we build the homes Victorians need, but also the infrastructure and services that make these communities a great place to live,” they said.

Developers on Monday also welcomed the stamp duty concession, which they have been pushing for since Labor released its housing statement late last year, but predicted it would have a modest impact on housing supply.

Treasurer Tim Pallas on Monday said it was expected to cost Victoria about $55 million in tax revenue and had been limited to one year in anticipation of better economic times ahead.

“We expect that over the next 12 months, the material circumstances of the industry will improve,” he said.

Pallas said was an open question whether the 12-month stamp duty concession would push up property prices by encouraging investors to buy, or lower them by increasing the volume of stock on the market. “I would argue that this will be a net positive for the market,” he said.

Salta Properties managing director Sam Tarascio jnr said Melbourne’s property market had slowed because there was a gap between what buyers would pay and the cost of a new build.

He said the stamp duty concession was not enough to bridge that gap.

“It’s a good thing but it’s not enough, in my view, to stimulate the market to the level that’s required to deliver the stock that we need.”

James Pearce, a partner with prominent architecture practice Fender Katsalidis, said his developer clients were hopeful the stamp duty concessions would give prospective buyers more confidence. Fender Katsalidis is involved in several off-the-plan projects that could launch within the next 12 months, including the high-rise Atlas building in the CBD.

“Even though there is great demand, the market is slightly above what people can pay, so maybe this will just ease some of those price pressures and will help get the market going,” Pearce said.

“The developers need to see something change. They either need to be able to build it cheaper or quicker, or have people be able to afford to pay more ... and I guess the stamp duty concession gives people the ability to pay more.”

Urban Development Institute of Australia chief executive Linda Allison said the 12-month limit on the stamp duty change would reduce its impact on supply as an apartment development “could take five years to get out of the ground”.

“Perhaps they want to dip their toe in and see what the impact on the bottom line is, and see what the impact is to how the market responds?” she said.

The new pilot levy model builds on Victoria’s current patchwork system of developer charges, which a review found to be inequitable, complex and failed to fund projects where homes are being built.

A new working group with the property industry – including representatives from the Property Council of Australia, Urban Development Institute of Australia, Housing Industry Association and Master Builders Victoria – will examine alternative proposals and report back to the government in March 2025 with options.

Councils will also be asked to participate once the local government election caretaker period ends, with no decision on the new model to be made until the report is completed.

Infrastructure Victoria has also called for developer charges to apply to projects across Melbourne and not just the urban fringes.

Analysis by consultants SGS Economics and Planning, commissioned by Infrastructure Victoria, showed the state spends about $50,000 on local infrastructure for every new growth-area home.

However, it found the current Growth Areas Infrastructure Contribution levy – introduced by Labor in 2010 – clawed back just $6100 per dwelling, leaving taxpayers to foot the rest of the bill.

Contributions from this scheme are only collected from developments in the local government areas of Cardinia, Casey, Hume, Melton, Mitchell, Whittlesea and Wyndham and only available for projects in these municipalities.

As part of its housing overhaul, the Allan government will also release $150 million from its pool of funds from its outer suburban levy to fund another wave of projects in seven growth areas on the city’s fringe.

The outer suburban scheme has previously relied on developer contributions to help fund key projects, including a $9 million contribution to the upgraded Merinda Park railway station, $6.4 million for a new school in Melton and more than $1.1 million injected into a new ambulance station in Pakenham.

The Age revealed in May that the Allan government was considering replacing the growth area infrastructure contribution for greenfield areas with a wider liveability charge that would apply across the state.

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