With all the focus on the planning systems, our political leaders have failed to contemplate the depth of the causes of the housing supply crisis. The costs of construction have risen by over 35% and they are not reducing now (a lower rate of inflation simply means the prices are rising at a slower speed).
Interest rates are high resulting in higher holding costs and less certainty from new home buyers. Red tape takes years to remove and it is quickly being replaced by new costs associated with building for climate change.
The dire state of our planning and building regulatory systems, that have been bent to suit short term political will across Australia, has created an even bigger problem for policy makers than the obvious one of the chronic shortages of housing supply.
The banks and financiers who fund property development and construction are now factoring in a massive margin for the risk associated with approval processes or the planning assessors’ response to NIMBY objectors. It is almost impossible to achieve the full permissible development potential from any given block of land without going to court. In short, financiers are withdrawing their funds from the sector or adding a risk premium that renders development within the existing planning controls unfeasible.
Even for good developers with a long and strong record of performance, banks are limiting the availability of finance. That means the balance of the property development and construction finance must be sourced from equity financiers or secondary lenders at rates north of 15%. This typically results in a blended finance interest rate of 12% per year.
This is why delays in progressing approvals through the planning systems are so costly.
The situation has become so bad that financiers are shifting their focus to other asset classes. The Super funds offer platitudinous nods towards affordable housing and “impact” but have also made it clear that unless they can secure a return on investment which is several percentage points above the inflation rate, they are not interested in investing in affordable housing. This should have been clear from the start as Super funds have a legislated obligation to maximise investment returns for members and not just invest in feel-good quasi socialism.
The conundrum for policy makers is this: even if they fix the planning system, speed the assessment process up, fast track certain categories of development and focus 100% on housing supply, the financiers will remain reluctant to provide the finance necessary to build the new homes we so desperately need.
With interest rates now high and construction costs continuing to rise due to shortages in engineering, skilled trades, and even labourers, the financiers will need some form of government underwrite of their finance or they will simply shift their funding priorities and support projects and asset classes with less risk.
The introduction of the Residential Apartment Buildings (RAB) Act and the Design Build Practitioners Act in NSW has further reduced the appetite for funding here in NSW. It is ironic that measures introduced to support confidence among consumers are now making life a misery for new home buyers by increasing costs and slowing down the process of approvals.
The issue for financiers is it is now becoming clear that if a builder or developer goes broke, the financier takes on the responsibility for any defects in construction work for the next 10 years. This results in financiers doing legal gymnastics to avoid liability, or simply shifting their funds to focus on other states where this liability does not exist.
Without finance, the property development and construction sector does not work.
There must be a way to ensure quality, force the poor developers to improve or leave the industry out, without adding multiple layers of red tape which effectively adds costs to the vast majority of developers and builders who have never been a problem. But that has not yet been found in NSW.
This is emerging as a massive issue for Anthony Albanese, Jim Chalmers, and Julie Collins and the National Housing Accord.
It is also an issue for the State Premiers and their Housing Accord commitments – particularly Chris Minns. The States are each taking significant strides to improve the planning systems’ efficacy and efficiency, but developers can only develop new property if it is financially feasible to do so.
There are no easy solutions here.
We must focus on planning reform, reducing red tape and changing the culture to drive housing supply over and above all other planning goals. But getting the banks to lend is simply a case of mathematics. If you can’t show a profit after all costs are paid, along with a premium for risk, they won’t lend you the money. You are left with land, sometimes with a DA consent, but no money for construction.
Demand stimulus measures are always popular, but they stimulate inflation and rising prices. Tax subsidies or direct payments to assist developers overcome the financial constraints may seem unlikely, but they already effectively exist for social and affordable housing in the form of the Housing Australia Future Fund.
With a Federal election due between now and September 2025 (at the very latest), the housing supply crisis is getting worse, not better. Supporting the states with infrastructure funding to assist them in dealing with record immigration levels the Commonwealth have encouraged is one way the Albanese government could assist. Unfortunately, the Minister for Infrastructure, Catherine King recently cut infrastructure funding for a range of projects, including (among many others) the M7/M12 interchange supporting the Western Sydney Airport precinct.
Worse, apparently no-one told the Minister for Home Affairs, Clair O’Neil, that there remains a chronic shortage in the property construction workforce, so she left them off the priority list of skilled migrants (what is the National Housing Supply and Affordability Council doing?).
The National Housing Accord is a Commonwealth initiative – indeed – it is Prime Minister Anthony Albanese’s initiative. There is a lot to do in 2024, but unless Commonwealth Ministers and their agencies and advisory bodies start taking responsibility for prioritising housing supply growth across all sectors (and not just social housing), the Prime Minister will be left red faced come the next election.