- Only two apartment projects commenced construction in Western Australia in the first half of 2023.
- That constitutes 143 new apartments.
- The five-year average for new apartment projects in WA sits at 17, comprising 1,349 new apartments.
In the midst of a housing supply crisis, just two apartment projects commenced construction in Western Australia in the first half of 2023. That constitutes 143 new apartments, which is only a small proportion of what is needed to meet the state’s housing need now and over the coming years.
Put into context, the five-year average for new apartment projects in WA sits at 17, comprising 1,349 new apartments, according to the latest Apartment Market Update provided by Urbis’ Perth Apartment Essentials data.
The numbers are a stark reminder of the uphill battle that the State Government faces in achieving the infill targets set under the Perth and Peel @ 3.5 million frameworks and Urbis director, David Cresp, advises, that the viability of apartment projects is a primary reason for the low number of apartment starts.
“There is demand for apartments from the increasing number of baby boomers looking to downsize, younger buyers and investors, but apartment developments are just not feasible in many areas of Perth currently.”
David Cresp, Urbis
“You need to be selling apartments at over $10,000 per sqm of internal area and with the average two-bedroom apartment around 80sqm, that presents a sale price of $800,000. For Q2 this year the Essentials data showed that the average price of apartments sold in this quarter was $1.05 million which was the first time that prices had reached over $1 million. There are few locations in Perth where you can feasibly sell a two-bedroom apartment for that kind of price tag.”
Finbar general manager, project coordination, Scott Cameron, says a subdued apartment market has been created through the recent rapid interest rate rises combined with escalating construction costs.
“Over the last couple of years construction costs have increased substantially, but when they first started going up it was at a time when price increases were supported by low interest rates, meaning the market could accommodate those increases,” Mr Cameron said.
“Despite construction cost increases we were starting to see some green shoots emerge in built form development, however rate rises have tapered that outlook.”
Scott Cameron, Finbar
“There is no wave of new developments coming to market as many developers are having to sit on their hands and balance some really difficult decisions. Developers either try and achieve a level of presales to gain sufficient certainty in project funding with a lender, or they inject additional equity and press go now to get a level of certainty around contracted construction costs” Mr Cameron said.
“The problem is, if a developer starts marketing at a certain price point and achieves a very good level of presales, they are then left with significantly less pricing flexibility on the remaining stock if project costs increase.”
Scott Cameron, Finbar
“This leaves many developers in a very difficult position, reducing the appetite for risk and seeing Perth’s apartment supply fall away while the housing crisis continues.”
Dave Wilson, director at Norup + Wilson, also highlighted the risk profile developers are taking on and pointed to the amount of taxes and charges imposed on apartment development at a local, State, and Federal level as a primary cause.
“We recently analysed the costs and charges on a $100 million development and found an additional $11.4 million in taxes, contributions and rates to the various levels of government,” he said.
“Compare this to a subdivision where you’ve got limited GST, rates, and contributions and then if you work in a forecast area your headworks will be refunded from the State.
“The comparison between the two is grossly disproportionate and it will not change unless there is a review of the feasibility for built form compared to what the market needs to get going again,” Mr Wilson said.
According to Mr Wilson, the current situation is the result of previous calls for help going unheard.
“There were warning bells three years ago and they were ignored. That has led to the housing crisis we are currently facing.”
Dave Wilson, Norup + Wilson
Unfortunately, Mr Wilson says the government incentives available are not enough to mitigate the current financial risk of apartment development.
“All of the current policies and incentives are there to encourage affordable housing, which is great, but affordable housing can only be provided if the developer can feasibly get a project off the ground,” Mr Wilson said.
Be bold
Given the current focus on housing supply at a State and Federal Government level, now is the time for much needed action.
All our experts agree that the solutions need to be bold, and it will take time for the market to turn around, suggesting another three to five years of pain before things start to improve.
“Larger developers will be able to continue to navigate the current constrained market but get fewer projects out of the ground, while smaller developers with less cash flow capacity will fail to make it work,” Mr Cameron said.
Mr Wilson agrees, advising that this is just the beginning of a cycle, and it’s going to get worse before it gets better.
“Even if you take drastic action now, there is still going to be a three-to-five-year lag in the results and the longer the government waits the worse it’s going to get.”
Dave Wilson, Norup + Wilson
Mr Wilson suggests streamlining duplicate charges on apartment development would be a positive first step and uses Stamp Duty as a prime example.
“We pay stamp duty multiple times on the same development whether it’s buying the land, selling the land or apartment,” he said.
“We should pay stamp duty on the assessment of the deal, if you buy the land and you sell it then you should get a credit for stamp duty that you pay, like GST in a margin scheme.
“There are so many ways where the government can defer the tax on developers to the end cycle and still take the benefit of council rates, taxes and all of those flow on charges they receive.”
A review of Stamp Duty is among the suggestions also put forward by Mr Cresp.
“There are certain levers the government can pull,” Mr Cresp said.
“We need to consider whether stamp duty should be on projects that are under construction, or whether the Off-the-Plan Duty incentive could be applied once construction has started.
“Do we need a foreign investor tax at a time when we can’t even find buyers to make a development viable?”
David Cresp, Urbis
The foreign investor tax was also raised by Mr Cameron as being particularly intrusive in the WA market, with little revenue currently being generated by the tax due to low sales to that market segment.
“In Finbar’s experience, 80% of foreign buyers are investors who rent the unit out, so not only does the foreign investment help the initial feasibility of a project to commence construction, but it is also one of the biggest drivers in putting private rental product into the market,” Mr Cameron said.
“This is the kind of low-hanging fruit that will help get the market moving again and provide a practical response to the housing crisis.”
Scott Cameron, Finbar
Advocate
UDIA WA has been working to highlight the issues currently faced by the apartment sector and the impact that a lack of activity in this area has on housing supply and diversity in the context of a drive toward infill development.
Along with ongoing calls for tax reform, including the abolishment of the Foreign Buyers Surcharge and making permanent the off the duty rebate scheme, UDIA WA is focused on minimising the cumulative impact of restrictive government policy and ensuring a strategic approach to infrastructure coordination and delivery to facilitate supply being brought to market.
It is promising that the Minister for Planning, Lands, Housing and Homelessness the Hon. John Carey has been willing to take some action since his appointment to the Planning portfolio in June and we hope to see more.
The recent decision to put in place interim measures for public open space (POS) contributions for infill development while a broader POS policy review is undertaken was welcomed.
The interim measures will aim to reduce regulatory burden and cost for infill development and is an important sign that government is listening when it comes to ensuring government policy decisions are considered through a housing affordability lens.
UDIA WA CEO Tanya Steinbeck says that all options must be on the table to reduce the cumulative impact and cost of regulation, taxation and overly complex lengthy approvals processes on the delivery of housing supply across the continuum.
“All levels of government for decades have had their foot on the hose of housing supply, which is now down to a trickle.
“It’s time to work collaboratively to open up that pipeline.”
Tanya Steinbeck, UDIA WA
“We need to support medium and high-density development projects in Perth in order to deliver the choice of housing that our growing population so desperately needs.”
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This story was originally published in The Urbanist magazine, an official publication of the Urban Development Institute of Australia (WA). It has been edited for republication by The Property Tribune.
The Property Tribune thanks the UDIA WA for the opportunity to republish the work, and share thought leadership in relation to urban development and community creation with our readers.
Read the original copy of The Urbanist by heading to UDIA WA’s website under the News tab.
