Why high-rise accommodation will not solve our housing shortage
When I first arrived in Australia from a relatively small town in the UK, the high-rise developments that were starting to dominate the inner-CBD skyline provoked a sense of excitement. The thought of residing in one evoked pictures of sweeping views, a kind of modern-day luxury “hotel” with a concierge and rooftop gym. I was still coming to terms with the local real estate landscape, and my concept of what created an ideal ‘home’ for an Australian buyer was biased in the extreme.
I had numerous preconceived ideas formed by my experience of the UK housing market – one of which was the difficulty in adapting to the thought of living in a weatherboard house. To my UK “cold climate” brain, living in a house made of wood was a concept that should have died out with the war. I now deal with a proportion of property buyers who will only consider a weatherboard dwelling – no doubt tying it in with their own concept of what makes a “home” – usually envisioning an attractive Californian bungalow or single-fronted Victorian.
My first ‘real’ experience of high-rise accommodation didn’t disappoint. It was the Royal Domain development in Melbourne – one of the upmarket dwellings close to the top floor, and I was granted a private inspection. The apartment itself was fairly ordinary – had I walked through at ground level and been given the asking price, I’d have baulked at the offer. The fittings and fixtures were lacking in quality for the buying demographic it aimed to attract – not that you would have noticed, the main attraction was the view. I joked to the agent at the time that should I live there, I wouldn’t bother with a TV – I’d buy a good pair of binoculars instead. It promised to be far better entertainment.
The million-dollar-plus price tag was one thing, the owners’ corporation fees another. Some $18,000 a year – clearly to be expected, considering the block size and additional onsite features – but despite the agent spruiking the development’s “investment potential” it didn’t require real estate experience to assess it was about as good an “investment” as a retirement home.
The apartment above sat vacant – it had been purchased by an offshore businessman from China who only occupied it for events such as the grand final or Melbourne’s spring racing carinval. The market for this particular type of property was discretionary at best, and anything but consistent.
I’ve written numerous columns addressing the inadequacies of our high-rise culture in addressing the need for affordable accommodation. The reason I do so today is in response to a debate I had with the ACTU’s Matt Cowgill, who took up the challenge to express the broadly shared logic that increasing supply per se is the answer to a growing demand for affordable, well-located, accommodation.
Matt used different priced potatoes to demonstrate his well established economic theory of ‘supply vs demand”.
“There are three types of potatoes: kipfler, desiree and regular. Kipflers are expensive and not that common, whereas regular potatoes are cheap and plentiful. Desirees are somewhere in the middle.
“What would happen if some kind of bug struck the supply of kipflers, halving it overnight?”
Matt pondered, and in doing so, demonstrated that potato lovers would turn their demand to the closest equivalent – whether it be settling for a ‘regular’ type or moving from a ‘kipfler’ potato consumer to a ‘desiree’ potato consumer.
Needless to say, Matt’s theory is that property markets are connected and therefore fulfilling the needs of the “affluent” will reduce competition at the lower end of our market arena, making sure supply is readily available for the intended price demographic. In this particular discussion, we were using the abundance of new tower blocks in Melbourne as the proposed property type.
The theory when used with potatoes is sound – if I were shopping in my local supermarket and a certain brand of vegetable I needed for my evening meal were unavailable, I would settle for the next best thing – whether higher or lower priced – and make do. If a good supply were available I might choose a more expensive brand, thereby leaving a greater supply of the ‘regular’ type for those shopping with a lower budget. My choices, if consistent enough and mirrored for a long enough period of time by a large enough demographic of consumers, would evidently bear an effect on the price – the assumption is more supply equates to lower demand and a lower price.
Why doesn’t the theory hold with our current CBD high-rise supply of property? And more importantly, why are a large proportion of our towers sitting empty, with vacancy rates in the region of 8% to 10 % (SQM) and rents that hardly offer “affordable” value when compared with the established terrain?
Let me offer my own analogy: If a devastating tornado hit my local neighbourhood and I found myself without a roof over head I would also ‘make do’ – however, that’s not the reality of our buying market. Most home buyers work devilishly hard to save an initial deposit and therefore expect to see their somewhat pre-conceived idea of value represented in their purchase.
Whether you think a property buyer’s demands are unrealistic or not is irrelevant – we’re talking about a consumer market, not desperate homeless individuals who are prepared to bid on any old thing just because it fits into their budget. Therefore, if additional property is going to fulfil the needs of home buyers (or, for that matter, renters – assuming renters are also looking for a ‘home’), it needs to be done with that intention initially.
I’ve since inspected numerous high-rise/high-density developments, both in the CBD and the inner-and middle-ring suburbs where new apartment blocks are commonly five stories or more. Some are impressive in design – however, the majority are a huge disappointment. The quality of construction often shows “cracks”, and has clearly been developed to a strict “squeeze as many in as possible” budget.
The reason I’ve walked through so many is because I deal with clients from all ranges of the property buying spectrum – covering budgets of $300,000 to more than $3 million and spanning a broad range of individual buyer types. The overwhelming conclusion remains that this type of property was not built with the home buyer in mind, and due to the lack of diversity in supply, fails to attract many local investors, either – a point I’ll expand upon below.
A proportion of buyers come to me with high rise (and a view) solidly envisioned, however even if they have a discretionary budget to allow a purchase in one of the better-quality developments, once presented with the alternatives their finance will allow – such as a period terrace or townhouse – along with an assessment of the fees and drawbacks high-density apartment living necessitates, their initial preference pales in comparison.
Obviously, most local home buyers prefer houses to apartments – and for the high-rise price tag of a two-bedroom apartment, there’s far more bang for buck in established accommodation that doesn’t come with the additional risks of the view being built out, a queue to get out the car park during peak-hour traffic, the extortionate owners’ corporation fees and 150 immediate neighbours, the majority of whom are renters.
For lower-budget buyers, our older established apartments seem to have been built with the home buyer in mind and are therefore more attractive – usually offering larger floor plans in smaller block sizes. Therefore when home buyer apartment shopping does occur, this is the type of accommodation that’s generally preferenced. Home buyers can get better bang for their buck.
As for first-home buyers shopping with a budget in the $300,000s – let me quote from one such buyer who had a vision of her first home being in an inner-city high-rise or high-density development due to her desire to situate in the CBD.
“The latest trend in Melbourne is to build tiny New York-style apartments and then charge amazingly high prices for them. Most of the places advertised in or near the city for $350,000 or less are in student housing buildings and boast two small cupboards that might just accommodate a single bed each, and a slim hallway which doubles as a kitchen and living area... In this sub-$400,000 price range, a L-A-R-G-E two-bedroom apartment is considered to be 44.5 square metres, which would make an excellent studio apartment or a reasonable one-bedroom apartment.”
The author is now fully aware that $350,000 for the “new” (or even 10 year old) supply on offer is not value for money – yet a few suburbs out, in a different market all together, she can afford an established comparatively larger apartment with good proximity to shops and train station, with the substantial cash advantage of avoiding the high owner corporation fees that fund a swimming pool she’d have probably have been too busy to use. It just required a little guidance to open her eyes to established alternatives she is prepared to settle for.
If by chance she had found a high density ‘L-A-R-G-E’ apartment suited to her lifestyle, she may have come down with a bump when trying to acquire finance – it’s well known banks have strict lending criteria for first-home buyers trying to purchase small apartments in high-density accommodation. Each lender has its own restrictions relating to internal floor space, and most require a larger deposit to offset the risk. Clearly the banks recognise high-density accommodation is not always easy to offload in a default situation.
Well, as I pointed out last week – individuals who can afford to invest in property are hardly leaving lower priced stock for the home buyers on a compromised budget. Because of our current negative gearing tax benefits – the best established property in our inner suburban market that does appeal to the first-home buyer demographic is a hotbed of investor demand, with over 90% opting to place their dollars in this sector. Investors understand, if they purchase properties home buyers also desire, the value of their property is likely to attract interest throughout all stages of the “property cycle” and therefore speculation is rife. First-home buyers are caught out at every inner-city hurdle – they face restrictions for new, and somewhat unequal ‘deepest pockets wins’ competition for established.
So who is benefiting from the abundance of new and proposed high-density developments? Well, the typical investor of new accommodation is the foreign demographic who face no restrictions when purchasing off the plan. In China – unlike Australia – older developments are poorly constructed and undesirable for home buyers; however the newer developments are highly.
Investors of these developments are seeking a good yield – however, a percentage of foreign investors also allow their property to sit vacant – once again it’s a cultural bias with the mindset of keeping the interior in ‘as-new’ condition for a future sale.
If someone can explain to me how building apartment blocks which are nether affordable or desirable for a large proportion of home buyers – and despite our tight rental market, contain a large proportion of units left to sit vacant – can bring down the cost of accommodation. I’d be the first marching the streets in favour of the plan.
As it is, it seems they were never built for home buyers in the first place. A couple of years ago when the boom of Melbourne’s’ high-rise construction kicked in, the City of Melbourne’s website described the new developments as being “relatively small one- and two-bedroom apartments largely targeted at the student market and owned by investors.” So has high-rise combated affordability for a diverse property shopping demographic? No – because it was never built with the intention of doing so. Our property market is no longer about home buyers – it’s a money-making wheel, with every Tom Dick and Harry hoping to make a buck in the process.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.
