Housing: where to now?

What would you rather have right now? An approved 150 unit inner city development site? Or an approved 150 lot greenfield land subdivision anywhere within the urban footprint? The answer says much about future challenges for housing development in Australia.

The rapid deceleration of the apartment market in Australia should come as no surprise. The speculative frenzy which saw investors commit to off the plan purchases in such volumes drove an unprecedented wave of apartment development in Australia's capital cities. More than 80% of most of these projects were sold to investors, not owner occupiers. Many of those domestic investors – driven by FOMO – were leveraged often at 90% or more of the purchase price. Plus there were foreign buyers lining up and in no short supply. Competition was intense and prices rose rapidly. Despite warnings, buyers continued to rush the gates, egged on by boosters, marketers and some who just plain lied.

One of those lies – in my opinion at least – was that Australia's "love affair" with the detached suburban home was over. The future, we were confidently assured, was one where the inner city apartment 'lifestyle' would be the preferred housing option, for a range of demographic, work and lifestyle reasons.

One such headline was from the ABC: "Apartment living is now a fact of Australian life. Meet the families going up, not out" (ABC News, August 2018). It led with a 'typical' young Sydney family renting an apartment in Sydney's Neutral Bay. (The irony of a family living in Neutral Bay being labelled 'typical' was obviously lost on the author). Or this piece from The Melbourne Age: "The high rise of apartment living in Australia" (August 2018) which claimed: "Just as Melbourne's laneway bars have spread to the rooftops, the city's residents are heading skyward into apartments, leaving behind the traditional Australian dream of the quarter-acre block with a house and backyard."

The worst examples came from real estate media channels, like this piece from Open Agent: "Why apartment living is the Australian dream" which made the outrageous claim that "Living the Australian dream is no longer a two storey house with a grand backyard. City areas generate more money for the economy than any other region in Australia. High density areas provide greater opportunities for work and lifestyle, meaning these areas also attract high-rise apartment living." That's right, a small apartment with views to another adjoining apartment block is the stuff of our dreams.

Manipulating the evidence was easy enough. Yes, there was growth in inner city living as urban renewal enhanced the appeal of inner urban areas and more people – especially those in the 10% to 15% of metro wide workers with jobs in the CBDs – sought to live closer to their work. A graph like this might suggest rapid growth across a long period of time.

But rarely was this growth put into context with broader metro wide growth. Here is the same inner city population data, in the context of wider metro area population growth.

When tightening credit met with rising oversupply, the crunch came. Values are falling across the board but the worst is found in the apartment market. Domestic investors have retreated and foreign investors departed. Approvals for new apartment projects are in free fall (albeit from very high highs). Some projects are being mothballed mid construction, while (according to a Financial Review report earlier this year) around a third of current approvals haven't and won't commence.

Prices for many new apartments – especially those designed for speculator appetites - have fallen below their contract value. The scale of the rapid rise and fall of apartment approvals is highlighted in this Macrobusiness chart: