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A carefully considered and flexible policy setting is needed to boost housing supply as conditions for property development are on the down. Image: Canva.
  • Long lead in times are among the suggestions to improve affordable housing supply
  • Flexibility around site by site negotiations were also considered essential
  • Reducing development costs will not automatically result in a more affordable end product

Research from the Australian Housing and Urban Research Institute (AHURI) has found that more consideration needs to go into policy and planning in order to boost housing supplies.

This is particularly important given the private sector now delivers over 98% of Australia’s annual housing supply, said the researchers quoting data from the ABS. In the 1950s, the private sector accounted for only 80%,

The questions

Titled “Understanding how policy settings affect developer decisions”, the research addressed four research questions (quoted from the study):

  1. What methods do developers use to determine the viability of residential development and set the selling price of the residential product?
  2. What factors determine a developer’s decision to develop and how important are the various inputs to the decision such as required returns, local prices, construction costs, infrastructure charges etc. across a range of different products?
  3. Can new building technologies and processes reduce the total cost of construction, increase efficiency and feed through into improved affordability outcomes?
  4. Given the key inputs to the development decision, to what extent can policy settings influence the cost of development, development returns and therefore housing affordability?

The findings

Among the key findings:

  • Policy settings cannot be expected to have the same impact on every developer and site due to the complexities of the process,
  • Residential developers are looking for a balance of risk and return, with the largest risks coming from changing market conditions,
  • Reducing development costs will not automatically result in a more affordable end product,
  • Reducing DA timelines has a positive impact on profitability outcomes, and
  • Affordable housing contributions required from a development site are needed to be known by a developer well in advance of land purchase so that it can be factored into assessments of profitability and land price.

The research found that the process underlying development is complex and the best results came from balancing desired outcomes and risk:

“We spoke to many developers and found the key to successful development was the ability to deliver the required rate of return while minimising risk,” said lead researcher Professor Steven Rowley of Curtin University.

“It’s not a case of maximising return at all costs; market demand, sales prices and sales rates were considered by many interviewees as the main risks.”

Risks and conservative estimates

Researchers found that the most important input into a profitable development outcome is the end sales price.

Underlying that was the fact that development projects take many years, hence forecasting accurate sales prices at the point of project completion is difficult. As a consequence, developers usually adopt a conservative approach to price estimation.

Cost increases and project delays also have exponentially larger impacts. One example provided was a 10% increase in costs could lead to a 40% reduction in financial returns. On the revenue side, a 10% fall in revenue can mean a 50% drop in internal rate of return.

Reductions in time for a project to be completed can also be stark – but positively so: A one or two month reduction in a 24 month build time can mean the difference between a profitable and unprofitable development. Planning and policy decisions, along with new construction technologies were some of the factors that could affect timelines.

It comes as no surprise that these large impacts, the rising cost of construction more broadly, longer construction times, the uncertain global conditions, and falling house prices are all culminating in a less than ideal environment for delivering new housing supply.

The policy that needs to be delivered

“To operate efficiently and deliver housing supply where it is most needed, the development industry needs a steady supply of sites that are financially viable to develop,” said Professor Rowley.

“This requires long term strategic thinking by all levels of government and a mechanism where investment in infrastructure is shared between government, landowners, and developers.”

Policymakers need to understand that every site is different, and the impact of new policy settings will be determined by the characteristics and forecast profitability of the site, and also prevailing market conditions at the point of sale.

“Just because a site is zoned for residential use doesn’t mean it will automatically be built out, there are many other factors at play,” said Professor Rowley.

The research also noted that mandatory affordable housing contributions are the most likely source of large-scale affordable housing contributions in Australia as many development sites would be able to absorb the costs under a well-constructed and consistent policy.

In order for this to work, researchers noted that carefully designed inclusionary zoning schemes, long lead in times and flexibility around site by site negotiations are essential.

For the full report, please visit the AHURI website.



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