Stendhal, the famed 19th Century French Realist, once observed that “only great minds can afford a simple style.”
Today in Sydney real estate, it is perhaps fairer to say that even “great minds cannot afford any style.” The fact is, there are now some 26 suburbs in Sydney where houses have an average price of $2 million and the median house price is sitting at just over $1.2 million, almost completely unobtainable for the man on the Clapham Omnibus.
We are talking here specifically about Sydney and to a lesser degree Melbourne which have become two of the world’s most desirable cities. So what can be done to solve this Gordian knot of a problem that is housing affordability?
It’s not simple because as the adage goes, “it’s hard being popular.” We have become victims of our own success, exacerbated by an antiquated planning system and a very slow and adversarial approval process. Additionally, in Sydney we also have a finite supply of land where we are bound by national parks, the Blue Mountains and the Pacific Ocean.
So, let us look at what exactly comprises the market price of a home. There are three broad categories: construction costs, land costs and fees and charges. Of course, we also need to make a profit which goes on top of these fees and charges.
The land costs, which add up to approximately $180,000 per unit in a middle-ring suburb in Sydney should be the most elastic part of this equation but for two key reasons are not. Firstly, we have a sluggish approval process which often takes three to five years to gain permission to subdivide land or develop a building. Secondly, zoned land is a limited commodity, confined to a geographical basin.
That leaves the plethora of fees and charges like GST, stamp duty, contributions to council and many others which add up to roughly 30 per cent of the gross price of a residential home.
Let’s break down some of these larger costs per apartment:
- GST: $80,000
- Utility connection fees: $36,500
- Voluntary planning agreement charges: $29,000
- Section 94 contributions: $22,000
- Electrical and sewer augmentation and undergrounding: $19,000
- Land tax on land at 1.6 per cent for six years: $17,300
We also have stamp duty at $9,000, development approval, construction certificate, and long service council levies at $4,300, rates and footpath hire for delivery and tree protection at $3,400, amendment fees at $1,400; affordable housing levies…the list goes on.
If we sum all these fees and charges together, we can begin to understand the simple mathematics behind dwelling affordability or put more appropriately, unaffordability in the Sydney market today. On a typical $800,000 apartment we are looking at an eyewatering $240,000 worth of fees and charges per apartment. For an apartment building with 100 units, that’s about $24 million.
So, if the three tiers of government could live without some or all their taxes, we could deliver an $800,000 apartment to the public for around $600,000. Taking this a step further, if the government could put the land up for free and we removed all the fees and charges, we could provide this same apartment for a mere $380,000. Now that’s beginning to sound a lot more affordable, isn’t it?
It might sound far fetched, but it is possible. The Gordian knot of housing affordability is solvable, and perhaps “great minds” today can still afford a “simple style” – albeit without land costs and taxes.