Apartments selling for massive markup due to planning rules, research claims
The average new apartment in Sydney sells for $355,000 more than it costs to supply the home, according to two Reserve Bank economists.
A discussion paper by two staffers at the central bank claims buyers shell out $873,000 on average to snap up a new apartment in the Harbour City, even though it only costs $519,000 to supply it.
The massive markup equates to 68 per cent of costs and is attributed by economists Keaton Jenner and Peter Tulip to a shortage of apartments due to restrictive planning regulations.
“The wedge is 20 per cent of costs in Melbourne and 2 per cent in Brisbane,” the economists write.
“Why don’t builders and developers exploit these profitable opportunities? The standard answer is that planning regulations stop them.”
Several think tanks and research organisations, including the Productivity Commission and Grattan Institute, have also found that land use restrictions contribute to higher property prices by limiting the supply of housing.
Mr Jenner and Mr Tulip’s paper attempts to quantify this effect, using price and cost data from CoreLogic and the Australian Bureau of Statistics.
They argue that excess demand for apartments has increased substantially in Sydney over the past decade, fluctuated without trend in Melbourne and declined in Brisbane – all while planning regulations have imposed height restrictions on apartment buildings and made it difficult to build in certain suburbs.
As a result, the economists claim, the average new apartment sells for $355,000 more than the cost of supply in Sydney; $97,000 more in Melbourne; and $10,000 more in Brisbane.
“We think it is fair to describe these effects as huge in Sydney, moderate in Melbourne and unimportant in Brisbane,” the economists write.
According to their calculations, the apartment shortage is most severe in Sydney’s inner suburbs, including Leichhardt, Northern Sydney, and the city’s eastern suburbs.
The economists claim that doubling the number of apartments we build annually would reduce apartment prices by an extra 2.5 per cent a year, as it would increase the nation’s housing stock by roughly 1 per cent.
They note that interest rates, taxes, financialisation, and immigration also contribute to higher prices by increasing demand. But they go on to say that “high demand only results in very high prices when supply is inelastic”.
Record-low rates more important
Grattan Institute household finances director Brendan Coates said “it is pretty clear that planning rules are a big driver of the cost of housing in Australia” – though he said it was far from the only factor and record-low interest rates had a larger effect.
But economist Cameron Murray, a post-doctoral fellow in the Henry Halloran Trust at the University of Sydney, said the paper didn’t stand up to scrutiny.
Rather than base their calculations on a solid dwelling supply metric, the economists inferred a supply shortage from the difference between the cost of building an extra storey in an apartment building of average height, and the selling price of an average apartment in that building. (Dr Murray has written a lengthy critique of that method in this paper.)
They then attributed that supply shortage to planning restrictions, citing previous research by other economists.
But Dr Murray said that didn’t pass the pub test, especially given prices and rents are currently falling.
Like Mr Coates, he said interest rate cuts had been the most important factor in driving up the price of property in recent years.
“And if it was true, what they say … then the property lobby that has been pitching this line for decades has essentially been lobbying for something that is going to radically reduce the price of the product they sell, and the value of the land that they own,” he said.
“Essentially, they’ve been lobbying to enact policy changes – large-scale rezoning – that are going to send all of their projects under development completely broke.
It cannot be true. The directors of these property development companies should have been kicked out by their shareholders decades ago, if this was a plausible story.”
The research paper comes after data from property analysts CoreLogic revealed prices fell for a third consecutive month in July – falling 0.6 per cent nationwide, 1.2 per cent in Melbourne, and 0.9 per cent in Sydney.