Aug 31, 2016

Naive Victorian apartment rules shoot economy in the foot

While apartment approvals in New South Wales are booming, the Victorian government has taken a carefully planned set of steps to slash future apartment approvals to token levels.
Given that Victoria has been erecting many more apartments than NSW and all the other states, this will deliver a severe blow to employment in the state and, in many ways, is a bigger threat to the construction unions than the proposed Commonwealth ABCC legislation.
Given Melbourne has a similar population to Sydney, the Victorian government’s decision to slash apartment building will not only create a Victorian recession but also increase the risk of the nation going into recession within 18 months, as the current pipeline of Victorian apartment projects are completed. NSW cannot carry the whole nation.
In summary, Victorian approvals are set to be slashed because the Victorian government is increasing the cost of building apartments by about $100,000. That means an apartment that currently costs $400,000 will now cost $500,000 and so on up the scale. Whether it was planned or not, the boost to the cost of apartments will make it tougher for first home buyers to get onto the property ladder and force dwelling developments into the outer suburbs, with the greater levels of infrastructure investment that such projects require. Only when the price of apartments rises to cover the higher costs will building restart.
Currently, Victoria faces a glut of apartments, particularly smaller ones, but given the looming price hikes for future apartments the glut is likely to be of a much shorter duration than was originally feared.
I am grateful for the research conducted by Craig Yelland, a director of one of Victoria’s leading architects, Plus Architecture.
The Victorian government requirements that will lead to a lift in the cost of apartment building come in two parts:
  • Firstly, any apartment complex over two storeys must allow more open space and be further set back from the road which means that less apartments can be built on any block. Under the old rules, a block where, say, 367 apartments could be built, now only 213 can be built — a 40 per cent reduction in the yield. The actual boost to the cost of apartments caused by this regulatory change depends on the project, but for most it will boost the cost of each apartment by $20,000 to $40,000.
  • Secondly the Victorian government has introduced around 15 specific building requirements each of which add between $2,000 and $10,500 to the cost of a unit — a combined increase of $62,500. The details can be viewed in this PDFbut by requiring greater window areas and other changes, they lift the minimum size of the apartments and lessen the flexibility.
Combining the two sets of measures adds an average of around $100,000 to the cost of apartments.
Had these measures been introduced at the start of the apartment building boom their blows would have been less devastating. But in 2016, the measures come in the middle of a bank credit squeeze on apartment developments, which is forcing many developers around the nation to use high-cost second mortgage financiers to fund more of their apartment developments. This is also curbing development in NSW.
If the Victorian government had confined its attack on the apartment industry to requiring greater size and higher quality, the blows would not have been so devastating. It would take time but apartment developers would be able to market new stock on the basis that it offered a better apartment and therefore it should cost more.
But to improve apartments at the same time as reducing the amount of apartments that can be built on any one block and to time the moves so it coincides with a bank credit squeeze shows extreme naivety on the part of the Victorian government. Alternatively, it could be a carefully planned move to divert development to the outer suburbs.
One of the reasons why so many more apartments are being built in Melbourne than in Sydney is that in years gone by it was easier to gain a permit. The Sydney apartment market became dominated by Harry Triguboff because few other developers had the patience to go through all the hoops. Now it’s easier to gain approval in Sydney.
The apartment boom has enabled Victoria to overcome the impact on jobs of the recent decline in manufacturing. But coinciding with the cessation of apartment developments, the Victorian government has decided to stop coal seam gas development and deprive farmers of the $100,000-a-year income which Queensland farmers are enjoying. The inevitable rise in gas prices will start to hit the state as apartment developments are slashed.
The almost inevitable Victorian recession will change the national outlook and make a nonsense of the Federal Budget growth sums. The development of lower cost apartments in Melbourne will restart when prices rise by around $100,000 per apartment and the banking regulator allows the banks to once again lend to apartment developers. Meanwhile the value of development land will fall.

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