With high home prices and increasing urbanization, Australian cities are now accepting a dwelling type that could provide affordable housing in established neighbourhoods in dense cities.

Granny flats, also known as laneway homes or Accessory Dwelling Units (ADUs), are finding increased acceptance from governments in many competitive real estate markets. As home prices rise in cities such as Melbourne, granny flats can provide an affordable, adaptable alternative.

According to researchers Dr. Debbie Faulkner and Dr. Paul Maginn, who prepared a report for the Southern Research Centre – Australian Housing and Urban Research Institute, Landcom defines an ADU as a “self contained, but not separately titled, dwelling that is not larger than 60 square metres or 40% of the total floor area” of the existing home. An ADU can be attached to, within, or detached from the existing home.

With recent changes to regulations, granny flats are now legal in all of Australia. However, not all uses are permitted. Victoria, South Australia, and Queensland permit rental of a granny flat only to a dependent or family member, while New South Wales, Western Australia, and Northern Territories permit renting to non-dependents. NSW is now encouraging home owners and developers to get into the ADU game with quick approvals and clear standards for construction.

The NSW government has published a fact sheet, Supporting Affordable Rental Housing – Granny Flats (Secondary Dwellings), which aims to explain granny flat regulations to home owners, and has also established incentives in the Affordable Rental Housing – State Environmental Planning Policy (SEPP).

Vancouver, B.C. offers a glimpse of what many cities will face in the near future. Builder Bryn Davidson calls Vancouver, which features more than 1,000 laneway homes, the “world’s second least affordable city.” Davidson started Lanefab Homes after asking himself how it could be possible to add homes to a city already essentially at capacity, noting that the addition of granny flats “allows sort of ‘hidden’ density to come into these existing walkable neighbourhoods.”

According to Faulkner and Maginn’s report, the ADU development form offers numerous advantages to renters, home owners, and municipalities, as it:

  •  “Integrates relatively easily into the built form within established neighbourhoods in comparison with other forms of affordable housing that tend to be concentrated in a few areas;
  • Increases the overall supply of affordable market rental housing in a cost effective manner;
  • Relies less on large amounts of government expenditure/subsidies to construct new affordable social housing;
  • Provides a supplementary income to low income home owners which can be used to off-set mortgage repayments and costs of housing maintenance;
  • As the cost of construction is considerably less than for conventional housing ADUs rent for less than average market rent levels.”

Disadvantages cited reflect the perceptions of neighbours, as well as the potential of granny flats to house low-income residents. Neighbours fear:

  • Negative effects on property values;
  • Disruption of single-family neighbourhoods with rental properties;
  • Increased congestion;
  • Demand that overwhelms available services;
  • Negative impacts on local design character by cheaply built ADUs;
  • Loss of privacy if an ADU is built on an adjacent property.

Financing the construction of a granny flat can be a major challenge in some cities. Home owners in the US, for example, may not be able to get bank financing, as most banks are risk averse, unfamiliar with granny flats, and do not know how to value the projects. In Australia, however, homeowners can have an easier time.

Making use of home equity is the simplest option, but a construction loan may be possible. For either one, the lender should be privy to council approval documents and a builders contract.

Sonia Woolley, director of Vision Property Group (Qld), Ipswich Granny Flats, indicated that “Without the formal building and plumbing approval from Ipswich City Council and the building contract from a licenced builder the lender will not approve your construction loan. So have all your ducks in place first.”