Are apartments cheaper than houses?

Costs of development, greenfield and infill sites

Australia’s five largest capital cities all have targets to increase the proportion of new housing constructed within established areas rather than on the fringe. The vast bulk of these dwellings will be constructed at medium to high densities i.e. apartments and townhouses.

Brisbane, Perth and Melbourne are each aiming for around 50% of commencements within established areas by 2030 while Sydney and Adelaide are aiming for 60 to 70%. In Melbourne’s case the target of 53% of commencements within established suburbs is a major step-back from the more ambitious target of around 70% set down in 2002 in Melbourne 2030 (also see here).

Yet in four out of five cities, it costs more to build an apartment within established areas than it does to build a detached house with a garden on the suburban periphery.

It costs $156,000 more to build a two bedroom infill apartment in Brisbane than a three bedroom outer suburban house. In Adelaide it costs $93,000 more, in Melbourne $115,000 more and in Perth $137,000 more.

These startling claims come from the 2nd State of Supply Report released by the Australian Government’s National Housing Supply Council earlier this year. The study compares average costs for similar developments in Sydney, Melbourne, Brisbane, Perth and Adelaide.

Infill development is specified as a site of 0.5-1 hectare with 30-50 two bedroom dwelling units in a 5-8 storey building located between 2 and 10 km from the CBD. Greenfield development is specified as an urban fringe development of 100 three bedroom, two bathroom detached dwellings on lots of 450-550 m2, located 30-50 km from the CBD. Raw land values are based on the average price of urban development land in each city location over the period Jan 2007 to Jun 2009

Sydney is the only capital where a fringe detached house costs more than an infill apartment ($7,000 more). While the cost of construction, land development & interest and professional fees is significantly higher for infill development in Sydney, greenfield costs are massively inflated by higher land costs – due mainly to restrictions on supply according to the Council – and higher infrastructure charges.

In contrast, the cost of infill in the other four cities is higher on four out of five key cost categories – construction, land development & interest, taxes and charges and professional fees. The cost of construction in particular is much higher for infill development than it is for greenfield projects.

In Melbourne, for example, it costs $88,935 more to construct a two bedroom infill apartment than a detached house on the fringe. In addition, land development and interest costs are $17,107 higher and professional fees cost $14,559 more, reflecting the more demanding planning processes associated with infill housing. Government charges and taxes add a further $11,982 relative to fringe detached housing.

But the cost of land is not the key factor here as one might suspect. The cost of acquiring land in Melbourne for infill housing is actually significantly lower than on the fringe according to the report (and much lower than in other capitals). The difference might be due to a relatively abundant supply of disused manufacturing sites and to the “Kennett factor” – redundant public sector sites. However this saving is not sufficient to redress the higher costs of other factors, particularly construction.

This report needs to be interpreted with care because it simplifies the complexity and range of development opportunities, particularly in the case of infill projects. Nevertheless the significant difference between infill and greenfield costs suggests that it will be very difficult for Governments to achieve high levels of consolidation by way of infill projects of the type and scale considered in this study.

It might be argued that sites within 10 km of the CBD are not representative of the cost of apartments in middle ring suburbs and in the older parts of outer suburbs. However it is clear from the accompanying tables that land is a minor component of cost compared to construction, particularly in Melbourne.

Clearly attention has to be given to lowering the cost of constructing major infill projects and the Housing Supply Council provides a list of the usual suspects:

State and territory governments have a range of options available to them to encourage development and support the achievement of their infill dwelling targets, including reform of planning provisions and development assessment arrangements in established residential areas, and using government-owned land and development agencies to facilitate development.

However it seems to me that an entirely different approach is needed. Five to eight storey buildings in inner suburbs have a ready market in small (and usually young) households who have no interest in the outer suburbs. But their singular advantage – accessibility to the centre – is not likely to attract the sorts of households who are currently settling in three bedroom, two bathroom houses on the fringe. These households overwhelmingly work within the suburbs. They have (or intend to have) children and want space.

The main focus of consolidation policy should be on exploiting the cost and efficiency advantages of the detached house building industry through developments of more modest density than the multi-storey apartment developments of the inner city and inner suburbs.

This could have two thrusts. First, more small-scale semi detached and town house infill developments within established middle ring and older, outer suburban areas. Second, a larger proportion of new fringe developments devoted to semi-detached and town house developments.