(Worse than turning round housing supply)

There has been a lot of talk about planning reform, improving the efficiency of the planning system and changing the culture of planners to see the production of housing as a public benefit rather than a burden on society.

But the planning systems of the states of Australia are not the only thing to render the National Housing Accord subject to life support.

There are many factors limiting the supply of housing and foremost among them is the feasibility of investment in the production of new dwellings.

According to REA, construction costs around Australia have increased since the start of the COVID pandemic (February 2020) by 33%.

While construction inflation has now eased to 5.4% Australia wide, it remains at above the general rate of inflation – and that is on top of the 33% increase.  The important fact is construction costs have not dropped, simply the rate of increase has slowed.

This was caused by a range of factors:

• Planning approvals are as complicated and difficult to attain as ever.
• Labour shortages (both skilled and unskilled labourers) first arose from the effective expulsion of non-permanent working visa holders.
• Construction based skilled labour is now in acute short supply across Australia and the Government’s Housing Supply and Affordability Council forgot to raise this with the Minister overseeing the skilled migration intake, Clare O’Neill, so they were left off the priority list!
• The reality of the “great resignation” – tradies and labourers leaving the housing construction sector for a quieter and less physical life.
• Materials shortages arose from the effects of COVID on the supply chain-
  • The initial impact of bushfires, then floods prior to COVID;
  • the mega container ship which got stuck in the Suez Canal;
  • uncertainty regarding the passage through the South China Sea;
  • international shortages of structural steel;
  • increased cost of logistics due to transport industry labour supply and the rising cost of fuel.

During the COVID pandemic, planning systems across Australia simply slowed right up.

The problem is, since the pandemic, they have been slow to kick into action and that really matters when interest rates (and therefore holding costs) have gone up.  Time is real money and that adds to the cost of housing delivery.

In the meantime, new greenfield home prices have broadly kept pace with the increased costs of construction in capital cities across Australia, although that was before the powers of the Building Commissioner were expanded to “Class 1 buildings”.

Apartment prices, which dropped significantly during COVID, have only increased by 11% since February 2020 in the capital cities leaving a significant gap. Many builders have left NSW, some have left the industry and record numbers have gone bankrupt.

As of June 2023 – ASIC data shows that 2,023 construction companies across Australia have gone into liquidation since mid 2021 – that’s almost 30% of all businesses that went bankrupt over that period.

This dichotomy between the cost of delivery and the price able to be achieved through sales, combined with increasing fees and charges, most of which have not found their way into new home prices yet (see below), have resulted in developer and builder margins being eliminated, with many continuing just to keep their businesses afloat in the hope of better times ahead.

Taxes and Charges are increasing

In the case of NSW, fees, taxes and charges on the supply of new housing have risen sharply.

• Local Infrastructure Charges imposed by Councils have increased with the removal of caps.
• A new Housing Productivity Contribution was introduced to help fund State Infrastructure (ranging between $6K per dwelling in the regions and up to $12K per dwelling in Greater Sydney). In addition, charges can be levied as a new housing contribution to transport infrastructure (so far only in Pyrmont with the charge being $15K per dwelling) and biodiversity conservation.
• Affordable Housing levies are applied in many Council areas with land that is the subject of re-zoning. Where these are above 3% of Construction Investment Value, it all but kills the feasibility of new housing supply.  This is in addition to a State Government imposition of:
  • A 15% dedication of gross GFA for 15 years to a Community Housing Provider to provide affordable housing, on top of any existing requirement mandated by local government obligations; and
  • A requirement to provide up to 15% in perpetuity in areas which benefit from a Transport Oriented Development uplift (the amount to be determined with reference to impact on feasibility).
• The introduction of new Sydney Water Development Service Plan (DSP) Charges rising as high as $44K per lot in some greenfield areas across Greater Sydney – which effectively imposed a new tax on housing supply and (unusually) also a massive new tax on industrial lands (a tax on employment). It should be noted that the Government reduced the fees and charges from those proposed by Sydney Water – a process initiated by the former government.
• The impact of the introduction of the Residential Apartment Building (RAB) Act which places responsibility on builders, developers and even financiers for the rectification of significant defects for 10 years (both prospectively and retrospectively) and the introduction of “occupation certificate inspections”, along with the impact of the Design and Building, Practitioners Act, which increases the burden on building designers and certifiers to such an extent that many have simply left the industry, adding to delays and costs for consumers.
• The quagmire that is the Cumberland Plain Conservation Plan (CPCP) which has stalled greenfield housing supply for almost 12 months.
• Delays in the delivery of State Government infrastructure in favour of two frolics of infrastructure fancy in the form of the M12 motorway and the new Metro line between St Marys and Badgerys Creek airport, about 10 years before either are needed, while basic infrastructure roads and water infrastructure upgrades to support jobs and houses in Western Sydney surrounding the Nancy Bird Walton airport sit unfunded and undelivered.

Housing project Finance is costly and increasingly difficult to attain

The risk of housing development is higher now than ever before.  If you are lucky enough to get funds from a major bank then you might get 50% of construction funding at 8%.  The rest must come from non-bank lenders which typically charge 15% pa. At these rates, time costs real money.

Further, the ongoing absence of a large insurance player in the 10 year latent defects insurance market which must cover all major defects referred to in the RAB Act, means that financiers carry the burden of effectively under-writing any defect if a builder or developer goes broke prior to the issue of a construction certificate. This has resulted in financiers tightening their loan books and some refusing to fund housing projects at all.

There is a real need for assistance from the Commonwealth for housing supply related infrastructure.  Water infrastructure is desperately needed, including large sums to improve the sewerage and storm water infrastructure on Sydney’s north shore and eastern suburbs so they can increase their contribution to solving the housing supply crisis.

Every state has an infrastructure deficit, at it is simply not reasonable for the Commonwealth to flood the states with immigration without contributing to the cost of the delivery of associated infrastructure.

All eyes are on the Federal Government and the Federal budget in May 2024.