Source: Domain

Author: Trent Wilshire

30 Sep 2019

Medium-density housing is undersupplied in the suburbs of Australia’s capital cities. A building boom has helped erode this shortage somewhat, but demand for this type of housing is rising and will continue to grow.

To meet the demand for more medium-density housing, state and local governments need to change planning rules that constrain the building of medium-density housing in Australia’s capital cities, particularly in areas close to public transport.

But governments also need to consult communities about any changes and also communicate the benefits of more diverse housing types. They also need to invest in infrastructure, such as parks, schools and public transport, to meet extra demands from a growing population.

What is “medium-density” housing?

Typically, medium-density dwelling types include townhouses, terrace houses, semi-detached houses, duplexes and manor houses are (this is the definition used in this article, which is in line with the ABS definition).

Some definitions also include villa units and small “walk-up apartment blocks” as medium-density housing.

Medium-density housing is also referred to as the “missing middle”, as this type of housing is considered to be “missing” from cities. The missing middle is an apt description of Australian cities, which are dominated by detached houses.

According to the 2016 Census, 12.8 per cent of the Australian housing stock (1.27 million dwellings) was medium-density. The share of medium-density housing is highest in capital cities and the ACT, and lowest in Tasmania. Melbourne contained the most medium-density homes in 2016, at just under 310,000.

Medium-density homes are considerably cheaper than detached dwellings. According to Domain data, the median price for a medium-density dwelling is approximately 10-30 per cent lower than the median house price house. Other sources also find that medium-density dwellings are typically about 25 per cent cheaper than detached houses.

The main reason for the cheaper price tag is that medium-density homes are on smaller block sizes than detached houses. Medium-density housing uses land more efficiently than detached housing by utilising common walls, smaller set-backs and common driveways. As land generally accounts for most of the cost of a dwelling, particularly in inner and middle-ring capital city suburbs, smaller block sizes significantly reduces the cost of a dwelling.

Medium-density dwellings are also smaller. In 2016, 45 per cent of medium-density homes had 3 or 4 bedrooms, compared to 69 per cent of detached houses.

There is strong demand for medium-density housing, but there’s a shortage in our capital cities

There is substantial unmet demand for medium-density housing within Australia’s major capital cities. The Grattan Institute conducted a survey in 2011 that asked people to consider the trade-off between price, size and location when deciding on what home they would like to live in, while also taking into account their income.

This research found that when the actual housing stock in 2016 was compared to people’s preferred housing stock (once people had considered the trade-offs), there was an undersupply of medium-density housing (and apartments) in Sydney and Melbourne, particularly in middle and outer suburbs.

In Sydney, medium-density housing made up 14 per cent of housing in 2016, but the preference was for 25 per cent of the housing stock to be medium density (a shortage, or undersupply, of 11 percentage points). In Melbourne, the shortage was nine percentage points (a preference of 26 per cent medium-density compared to the actual 17 per cent).

A replication of this study for Perth found a similar shortage across most Perth regions.

The above research, which uses a survey conducted in 2011 and compares this to the dwelling stock in 2016, likely understates the current shortage of medium-density housing.

On the supply side, the share of Australia’s housing stock that is medium-density hasn’t increased by much. This is because the proportion of new medium-density housing built in recent years has only been slightly above the existing dwelling stock. In Australia, 16 per cent of all building approvals over the past three years were for medium-density housing, which is only slightly higher than the existing proportion of Australia’s housing that is medium density (12.8 per cent; see table).

It will take several years of a higher share of new medium-density dwelling construction to make a significant inroad into the shortage identified in the above studies.

Demand for medium-density housing is likely to have grown in the eight years since the Grattan Institute survey was conducted. As congestion has worsened and commuting times have increased, particularly in Sydney and Melbourne, it’s likely that people would place a higher premium on location than they did in 2011. Jobs have concentrated in and around city centres, making proximity to the city and public transport more valuable. Housing preferences have also shifted, with walkability, a key attraction of medium-density living, highly valued.

More recent surveys have also found strong demand for medium-density housing, particularly when survey respondents are asked to consider the trade-offs between location/travel time and dwelling size/price. It’s not just young families looking to break into the housing market who are willing to sacrifice a large backyard for a better-located house. Many retirees also express a preference for this type of housing when looking to downsize in their local area.

There’s been minimal progress in addressing the shortage of medium-density homes

There has been a medium-density construction boom in recent years. Between 2011 and 2017, approvals for medium-density homes approximately doubled in Australia, mostly driven by a significant jump in approvals in NSW, Victoria and the ACT. The increase in medium-density construction is most apparent in Victoria.

While there was a medium-density construction boom going on, Australia’s population was growing rapidly, and there was an even bigger high-rise apartment construction boom underway. As a result, the proportion of all building approvals that were for medium-density homes is only slightly higher than 10 or 15 years ago in most states. So the medium-density housing shortage (as a share of the housing stock) identified above has not been eroded.

What’s holding back the construction of more medium-density housing?

The evidence suggests that there is still a substantial undersupply of medium-density housing, particularly in the middle and outer suburbs of Sydney and Melbourne.

So what’s holding back more medium-density development?

Planning rules, which determine where and what type of medium-density housing can be built, are a significant factor holding back construction. In Melbourne, the planning conditions in the “Neighbourhood Residential Zone” limit the construction of medium-density housing in many inner and middle ring council areas. The requirement that new developments fit in with existing “neighbourhood character” also makes it challenging to build townhouses or semi-detached homes.

In Sydney, the R2 Low Density Residential zone, within which it is challenging to build medium-density housing, covers lots of the city. In Brisbane, minimum lot sizes and heritage protection of “Queenslander” houses limits subdivisions and medium-density housing.

Resident opposition has also held back the construction of medium-density housing (and this “NIMBYism” also influences planning rules). For example, a survey conducted for the Committee for Sydney found that people were less supportive of medium-density developments in the suburb where they live, compared to Sydney more broadly.

Recent examples of community opposition include the NSW Government delaying the start date of its “Low Rise Medium Density Housing Code” in 45 councils due to council and resident pushback. This code makes some medium-density developments “complying developments”, which makes it easier to get planning approval. Another is proposed rezoning in Kingston (a local government area in Melbourne’s south) which is likely to be watered-down due to community opposition.

The structure of Australia’s building industry may also be a factor holding back medium-density development. Foreign investors and big Australian developers have tended to build high-rise apartments rather than smaller-scale medium-density projects. This is in part due to planning rules making it easier to build high-rise apartments in city centres rather than medium-density dwellings in the suburbs. The uncertainties and delays involved in building medium-density dwellings eats into developer margins. Overseas developers have also had more experience building high-rise apartments.

These constraints have meant that most new projects in recent years have been high-rise apartment blocks and detached housing in greenfield developments.

Governments should encourage the construction of more medium-density housing

Demand for medium-density housing is likely to keep growing, underpinned by high land prices, strong population growth, longer commutes and changing housing preferences.

State and local governments need to adjust planning rules to enable the construction of more medium-density housing so that the housing stock shifts closer to what residents of our cities say they want.

But first, governments need to undertake community consultation to hear resident concerns and deliver better public infrastructure such as parks and public transport (and use existing infrastructure more efficiently). Governments also need to communicate the benefits of medium-density housing, such as walkability, better local shopping and entertainment, improved housing affordability, and diversity of housing choice.

The federal government can also play a role by providing infrastructure funding and other incentives to state and local governments that allow more medium-density housing to be built.