When it comes to more affordable housing, nothing really adds up

A carpenter helping build a new in home is Sydney’s western suburbs. Picture: AAP

While the need for affordable energy is a hot topic, the equally important need for affordable housing simmers along. What the Albanese government doesn’t seem to realise is that simply setting a target for the number of homes to be built over a certain period doesn’t constitute a policy – it’s more akin to arm-waving.

The government boldly declared that 1.2 million well-located homes would be built over a five-year period. This would be achieved with the assistance of a dog’s breakfast of interventions, many of which have been very slow to get off the ground. It involves an annual target of 240,000 homes per year, a number we have never reached even during a few heady years in the second decade of this century. Those were also years when money was extremely cheap and credit widely available.

The reality is that dwelling approvals have been falling for the past three years and the rate of approvals is only at the level that existed in 2012. Given the lag between approvals and building completion, we are likely to experience acute housing shortages for some time to come. There are a number of factors behind the slump in the housing construction market, including the cost of finance, the cost of materials and a shortage of workers and their rising cost. Infrastructure projects have been drawing workers from residential construction. Taking these factors into account, the overall cost of construction has risen by almost 40 per cent over four years.

It is hardly surprising that there have been numerous failures of construction companies as they have been caught by the need to deliver fixed-price contracts combined with rapidly escalating costs. These failures lead to a loss of confidence in the industry generally.

It is common for local councils, particularly those covering middle suburbs in the big cities, to be singled out as the main culprit for the housing crisis. Their reluctance to approve high-density housing proposals, as well as the time taken to vet and finalise them, are cited as a central explanation for the housing shortage. The implicit view is that the rights of the existing residents should play second fiddle to those of new residents, including recently arrived migrants. If state governments have to override the decision-making authority of these councils, so be it. It has been the case in Victoria for some time as the planning rights for properties on major arterial roads in Melbourne are assigned to the state government rather than councils. As a result, houses have been torn down and apartment blocks and medium-density housing built to replace them.

This development has not been without its own problems. It is estimated that 60 per cent of high-rise apartment buildings constructed in the past decade in Victoria have major structural issues, including foundation cracking, insufficient ventilation causing mould, unsafe cladding and dangerous balconies. Owners are often lumbered with the expense of rectifying defects.

The point is that those governments – and Victoria and NSW are at the forefront of this thinking – that have concluded the main solution to the housing crisis is to facilitate high-density housing in suburbs where people want to live are in for rude shock. (For some reason not entirely clear, The Sydney Morning Herald is fully on board with this illusory nirvana.)

It has got to the point in Victoria that there are thousands of development approvals that have been ticked off but not taken up. The business cases of a number of high-rise developments simply don’t add up, particularly as buyers from China are largely out of the market. Indeed, many existing apartment owners from China are trying to exit the market.

In less desirable suburbs, this is causing problems because the expense of building apartments with their high fixed costs would yield asking prices beyond the capacity of potential buyers. This may end up as a major obstacle to the success of the Minns government’s Transport Oriented Development idea in which areas in certain suburbs located near transport links are designated for high-density accommodation.

For wealthier suburbs, developers may be able to accommodate higher costs by building premium-end apartments for well-heeled owners. But this has nothing to do with achieving more affordable housing.

The banks have also become reluctant to provide mortgages for off-the-plan apartment purchases. Developers generally need at least half the units to be pre-sold before making final investment decisions.

As the working-from-home phenomenon persists, the case for the underlying rationale for locating new high-density dwellings close to transport links looks less compelling. The fact is that WFH has been associated with fewer residents per dwelling – there is need for a space to work from home – but it’s not clear this trend is about to reverse anytime soon.

A grab-bag of other factors is also regularly trotted out in the discussion about housing. These include the need to improve the rights of renters, which is likely to make it less desirable for landlords to own and rent out properties; negative gearing and capital gains tax, and; the urgent need to build more social housing.

The discussion is generally highly confused. There are long-term renters. There are renters who are planning to buy. There are people who would be happy to be given social housing accommodation, but there are others who would reject this option. There are big differences across the country.

Notwithstanding the worthy-sounding announcements by various state governments and the additional funding provided by the federal government, the additions to social housing are painfully slow. The factors making construction difficult in the private sector apply no less to social housing.

The reality is that like all markets, housing comes down to supply and demand. Even in the best of circumstances, supply responses are lagged and slow. The major mistake this government made was to underestimate the surge of new migrants that would arrive from 2022; indeed, this surge was facilitated for some time, at least until the end of last year.

It is simply not possible to accommodate more than 500,000 net long-term arrivals in the course of a year and expect the supply of housing to adjust. The fact is that we have many more than two million temporary migrants living here and they must live somewhere. Until the government sorts out the demand side of the equation – it has taken a few baby steps only – we should expect the housing crisis to continue.