Are we squandering infill housing opportunities?

Eight unit Infill project, Alphington

I’ve argued before (here, here and here) that new housing supply within Melbourne’s established suburbs is excessively dependent on small-scale infill housing projects. In the expansive middle ring suburbs, around half of all housing projects provide only one or two additional dwellings, with the great majority providing only one.

It’s therefore important to look at other options, but given it’s carrying most of the burden, it’s also worth asking if infill is being managed as efficiently as it could be.

The exhibit above shows a newly completed infill development at 2-4 Old Heidelberg Rd in suburban Alphington (here are some interior pictures). It provides eight dwellings on an 825 sq m site that originally would’ve been intended to accommodate a single detached house like its neighbour.

That’s a big up-lift in density – if most infill projects yielded this many new dwellings we wouldn’t have a supply problem. But the great bulk are simple dual occupancy developments. This raises the important issue of whether we’re maximising the value we’re getting from the limited supply of precious infill sites.

If projects that could yield four, six or eight new units are only providing one, then that could represent a very high opportunity cost. Given that activity centres in the middle ring suburbs are mostly failing to deliver much new housing, what we ideally want to see is each lot delivering to its full potential – yielding the maximum number of new dwellings that, having regard to its particular circumstances, it reasonably could.

There are of course many “objective” reasons why not all projects can yield as many dwellings as 2-4 Old Heidelberg Rd. Some redevelopment sites are small or inconveniently shaped. Some may have infrastructure inadequacies or access might be hard.

There are also a range of legitimate planning constraints like heritage, over-looking and solar access that might limit the number of units that can be built on a given lot. And the nature of the market in a particular area could mean the highest return comes from building fewer dwellings rather than maximising the total number.

But there are reasons to suspect that “objective” factors do not always, or even usually, explain why a lot isn’t developed to its potential. Consider these two contiguous lots in Elphin St Ivanhoe – although they’re the same size and have a common context, one has six dwellings and the other has two.

The most commonly cited explanation for these sorts of anomalies is the “dead hand” of the planning system. Additional cost and risk is imposed on projects by self-interested opposition from existing residents. Councils often lack the resources and skills to deal with the complexity of sophisticated opposition and, not surprisingly, often take a position more sympathetic to their constituents than to the developer.

There’s a range of measures that have been suggested to tilt the balance more toward redevelopment. These include abolition of third party appeals (the issue got a run in The Age recently), code-based approval systems, more resources for councils, better forward planning, and so on. I endorse this position but there’s no doubt it’s very hard politically, both for councils and the state government.

I think there’s another approach that’s worth thinking about, particularly for the middle ring suburbs. We know infill developers tend to be small and it could be that many simply lack the knowledge, skills, access to finance and appetite for risk to enable them to undertake larger projects. They might not have the wherewithal to push for larger projects in the face of vigorous opposition from neighbours and limited support from timid councils.

Perhaps the project class with the greatest potential for “under-utilisation” is dual occupancy. Landowners carve off a bit of land and sell it, usually for the construction of one additional dwelling. That way they get to stay in their old house and transform some excess land into cash without taking much risk.

That’s a net addition to supply so it’s positive. While in many cases the value of the existing dwelling will preclude more intense development, dual occupancy is a lost opportunity if the entire site could’ve been successfully redeveloped for four, six or eight dwellings. Read the rest of this entry »

Can Melbourne depend on infill housing?

Geography of infill developments in City of Monash, 2000-2006 (source: Phan et al, 2008 - graphic via Grattan Institute)

We know that the inability to increase significantly the supply of dwellings within established suburbs is a key failing of strategic planning in Melbourne. Simply put, there’s not enough housing to make established suburbs affordable for all the people who would like to live in a relatively accessible location.

We also know that activity centres aren’t pulling their weight in the task of increasing supply (see here and here) and that the burden of supply is instead falling on small-scale infill development, much of it dual occupancy projects. So it’s worth looking further at the nature of infill housing.

A study by Monash University’s Thu Phan, Jim Peterson and Shobhit Chandra , Urban infill: the extent and implications in the City of Monash, examined new developments in the municipality over the period 2000-06. They defined infill primarily as projects where two or more new dwellings were constructed on sites formerly occupied by detached houses. A total of 1,483 projects were identified, ranging in size from two dwellings to 178.

The study revealed a number of interesting aspects about this middle suburban municipality.

First, it found new dwelling supply is dominated by small projects. One project built more than 178 dwellings and three built between 40-77 dwellings, however 98% of projects involve just 2-7 seven dwellings (and we can be pretty confident they’re heavily weighted toward the smaller end).

Second, projects are dispersed, not concentrated. As shown in the exhibit, proximity to major trip generators is uncorrelated with location of projects. Just 5% are within 400 metres of a Principal, Major or Specialised activity centre, and only 10% are within 400 metres of a rail station. Moreover, the authors found projects located within 400 metres of an activity centre are smaller on average than those in more distant locations.

Third, developers tend to be opportunistic rather than strategic – they wait for properties to be offered for sale and assess each one on its potential for redevelopment. Thus the geography of infill development is shaped largely by what comes on the market rather than by any sort of deterministic planning policy.

Fourth, the size of lots and the age of the existing house is a more important influence on the location of infill development than proximity to an activity centre or rail station. The average infill site is relatively large (700 to 900 sq m) and the majority of existing dwellings are relatively old i.e. built between 1945 and 1965. Lot sizes close to rail stations are smaller – and hence less amenable to redevelopment – than those further away, probably reflecting the different periods of development.

Thus not only are activity centres failing to expand housing supply in accordance with the precepts of Melbourne 2030, but the great bulk of new housing being built in Monash isn’t located close to activity centres but rather is dispersed (relatively uniformly too judging by the exhibit i.e. non-randomly).The dispersed pattern will worry some, but I don’t see it as a big issue. Read the rest of this entry »

Are real estate agent fees limiting residential mobility?

Real estate commissions are preventing residential mobility (Source ABS)

Despite an enormous increase in house prices over the last ten years, real estate commissions stayed relatively constant as a percentage of selling price. Agents consequently enjoyed a spectacular increase in the dollars earned on each sale even as the volume of sales was expanding.

In its new report, Getting the housing we want, the Grattan Institute notes real estate commissions are so big they’re a significant barrier to residential mobility in most States. This is an important public policy issue – the ABS reports that even though average household size is falling, the average number of bedrooms per household is increasing (see exhibit). Any barriers that constrain households from voluntarily moving to dwellings that better match their size should to be addressed. And the same goes for barriers that limit their ability to reduce travelling costs by moving to a new residential location.

In most industries, when firms start earning super-profits we would expect prices to be moderated by an increase in competition. However as the Institute observes, this hasn’t happened with real estate agents – competition is weak:

This is consistent with the industry elsewhere, too – the UK Office of Fair Trading recently conducted a review of UK real estate buying and selling. It found that while 32% of those who had used a traditional real estate agent believed that the fees represented either slightly or very poor value for money, 64% said that they did not negotiate a lower fee.

In Victoria, as in most States, there is no set commission, giving the impression of a lightly regulated industry. Vendors and agents are free to work out whatever arrangement they wish, whether it be a fixed sum, a sliding scale, or something else. However according to this real estate consulting group, the customary fee paid by vendors in Melbourne ranges from 1.6% to 2.5% of the selling price. This doesn’t include advertising or even a property sign – marketing is an extra cost borne by the vendor.

This introductory “how to” guide on buying and selling issued by Consumer Affairs Victoria implies an even higher commission. It illustrates a lesson on negotiation between a vendor and agent with an assumed commission of 3.3% up to $500,000 and 3.85% thereafter (p 22). That’s a $16,500 commission on a $500,000 property. I think there’s a fair chance the target market for the guide will interpret this illustration as somewhere around the “going rate”.

There’s hopefully an extensive literature that looks at why the cost to vendors has risen so much and why competition is so weak. If there is I’m not familiar with it and I don’t have time to read it anyway. It seems to me, though, that the internet should’ve reduced considerably the cost to agents of finding prospective buyers and that a good part of those savings should’ve been passed on to vendors. It also should’ve made it easier for innovators to enter the industry and set up new lower-cost business models. Read the rest of this entry »

Has the Grattan Institute got the answer to our housing woes?

Housing preferences compared with existing stock and the composition of current housing supply (by Grattan Institute)

I have to say right up-front that I’m disappointed by The Grattan Institute’s new report, Getting the housing we want. It nominally proposes ways of increasing housing supply in established suburbs, but it really just puts up the politician’s standard solution – more bureaucracy, more money, and little explanation (press report here).

In the Institute’s defence, I must acknowledge that it’s taken on a difficult task. It’s much harder to propose practical solutions than it is to analyse problems, identify key issues and propose general directions for action. And the Institute has hitherto done a good job on the latter three tasks with a series of reports under its Cities Program.

The new book by Harvard economist Edward Glaeser, Triumph of the City, illustrates the way solutions attract criticism. The book was lauded for its sophisticated analysis of the benefits of density and the need to remove the many obstacles to redevelopment. But his big idea for an historic buildings preservation quota – meaning that cities could only protect a set number of buildings each year and so would be forced to prioritise – was lambasted by all and sundry as impractical and, worse, naïve.

A lot of critics had a similar reaction to Ryan Avent’s The Gated City. Great analysis of the need to promote density, they said, but potential solutions to NIMBYism like developers compensating neighbours for the negative effects of development were criticised as unworkable and unrealistic. As soon as detailed, practical solutions are suggested, the knives come out!

So the Grattan Institute is putting its corporate head on the line with the solutions-oriented Getting the housing we want. It’s a follow-up to the Institute’s earlier report, the impressive The Housing we’d choose. The earlier report established that there’s a significant mismatch in Melbourne and Sydney between where many people actually live and where they’d like to live (see my earlier discussion of this report).

Opposition from existing residents to redevelopment proposals is a key reason for this misalignment – they don’t see the broader good and they don’t see how redevelopment benefits them. Councils tend to fall in behind residents who’re committed in their opposition to redevelopment.

The new report is on safe and familiar ground when it advocates standard stuff like code-based approval processes for small-scale development. However its headline proposal is more problematic – the Institute proposes the establishment of Neighbourhood Development Corporations (NDCs), with initial financing coming from a proposed new Commonwealth-State Liveability Fund.

The idea is NDCs would undertake large scale redevelopment projects aimed at increasing housing supply. NDCs would be “independent”, not-for-profit organisations that work in “partnership” with all tiers of government, the private sector and residents. The Institute stresses the importance of in-depth consultation and says NDCs could only “go ahead with the support of local residents”. NDCs would have to provide a diversity of housing “in terms of both type and price” and would have “temporary planning powers”.

Disappointingly, there’s not a lot of concrete information in the report on the mechanics of the proposed NDCs and Liveability Fund. And there’s little specific analysis and justification provided in support of these ideas. However the report profiles three examples of existing organisational structures similar to what’s envisaged with NDCs. These are London Docklands Development Corporation; HafenCity Hamburg, and Bonnyrigg social housing estate.

These throw more light on what the Institute envisages. They make it clear NDCs are conceived primarily as mechanisms for managing large sites like E-Gate which are invariably disused, underutilised or owned largely by government. The familiar redevelopment challenges of land assembly, existing uses and resident opposition are usually much more tractable with these sorts of sites than they are with activity centres (e.g. see discussion of proposals for Ivanhoe).

I have trouble enough with the idea that changing management structures is the broom that will sweep away all the gunk that’s holding up supply. But the trouble with having such a narrow ambit is that the potential contribution NDCs can make to increasing housing supply is necessarily more limited. Moreover, it begs the question of whether NDCs are even necessary. Read the rest of this entry »

Would Seaside work in outer suburban Melbourne?

Click to take a "walk" around Seaside, Florida

When I first saw pictures of Seaside many years ago, I imagined that’s what the outer suburbs of Melbourne could look like one day. Click on the picture and go for a “walk” around the Florida village that had a key role in inspiring the New Urbanism movement. Seaside is famous – you might know it from its role in The Truman Show or from its distinctive array of “story book” houses.

Although the houses are detached, you’ll see many of the key ideas of New Urbanism in Seaside, including houses that open up to neighbourly streets and paths, have no garages and are within an easy walk of the town centre. Keep an eye out for walking paths. Given the kind of detached housing that’s being built today in Australian cities, I find it extraordinary that the first stage of Seaside was started 30 years ago!

It doesn’t push all the New Urbanism buttons. For example, the range of dwelling types is pretty limited and there’s not much evidence of transit orientation (it’s not a commuter village). Nevertheless, average density approaches the aspirational 25 dwellings per hectare, well in excess of the 15 dwellings per hectare promoted in Melbourne 2030 and in new fringe structure plans like the one for Toolern, near Melton.

For my money, the key reason Seaside has such broad popular appeal is the two and three storey detached “Hansel and Gretel” houses, with their faux widow’s walks and sometimes extravagant follies. Some architects however find it twee – they wince at the sentimentality and overwrought quaintness of the place.

I think it also appeals because of the determination of the architects to eliminate garages. This enables living areas to be placed at the front within a conversation’s distance of the sidewalk. It captures a half-forgotten notion of neighbourliness and conjures romantic images like promenading.

This contrasts with the practice in Melbourne where both new suburban houses and traditional inner city terraces tend to put bedrooms at the front and the main living areas at the rear (only apartments and older suburban houses seem to have living areas facing the street, although they’re usually set way back from the front boundary).

A parallel with Melbourne though is the limited area of private open space. I hear frequent condemnation of big houses with small yards in Melbourne’s outer suburbs (as if buyers can’t make their own decisions about what size yard they want!) but the area of private open space in Seaside looks positively miniscule. As with apartment dwellers, I’d expect the quality of the public realm is an important offset.

As a possible model for Australian suburbia, it’s important to get Seaside in context. It’s not a big place – it only covers about 50 32 hectares (the part of Fishermans Bend mooted for redevelopment is 200 Ha) and has around 500 houses. (Update: the whole area though, including very similar contiguous developments, is about 100 Ha with 1,000 or more houses – see Comments). Also, it’s essentially a beachside resort for people who are well-off. Many of the houses are rented to holiday makers and in that sense it functions more like the swank residential areas close to Hastings Street in Noosa than the suburbs of Melbourne or Sydney.

Like Noosa, it’s a long way from the nearest major urban centre. Dwellings are architect-designed and costly to build – properties at Seaside have sold for as much as $5 million (presumably ones on the beachfront). Further, I suspect a major reason there are so few cars in the streets is that holiday makers fly in and have no need to drive in what is essentially a self-contained resort. The town centre seems improbably built-up for 500 dwellings and that could be because this is a tourist town, drawing visitors from well beyond Seaside’s border.

I can imagine something like Seaside working on old brownfield sites in Melbourne like Fishermans Bend and E-Gate, but what would happen if it were transplanted to the suburban fringe? Read the rest of this entry »

Have buyers abandoned McMansions (forever)?

It only seems like yesterday we were told Australia had the largest new houses in the world (e.g. see here and here). Now it seems we’ve seen the error of our ways. According to this press report, the head of residential communities at property developer Stockland, Mark Hunter, has no doubt  the era of ever-growing McMansions is over – he expects home sizes to shrink as fast as they grew in the first decade of this century. Mr Hunter is reported as saying three-bedroom, two bathroom houses are the new sweet spot in the market:

With power prices increasing, people want more efficient homes and are happy to sacrifice extra bedrooms, rumpus and media rooms and make do with a single open-plan living and dining area opening onto an outdoor area.

Stephen Albin, the chief executive of the Urban Development Institute of Australia, says the trend to shrinking new home sizes is only just beginning:

I think there’s a massive shift going on and we are at the front end of it. People are starting to realise a five-bedroom house has other costs, from the amount of leisure time you lose maintaining it, to heating and cooling, and you are going to start to find we are at the front end of that shift

He sees a permanent change in Australians’ preferences. “The McMansion’s days are numbered”, he asserts, “just look overseas and see what’s happening”.

In a recent address to CEDA, the CEO of Stockland, Mark Quinn, argued that people are choosing less debt over having five bedrooms and a separate dining room they use once a year at Christmas. People are more patient now, he said, and rather than seek instant gratification they “prefer to wait and have less debt”.

Have Australian fringe buyers really lost their taste for big houses virtually overnight? And is this really a permanent change – is it a “paradigm shift”? Only a few months ago we were debating in these pages home buyers’ preference for seemingly ever-larger dwellings!

I’m hard pressed to see it. Sure, electricity prices – which really could drive a permanent shift toward downsizing – look like they’ll keep rising, but as I’ve pointed out before, there have been massive improvements in the operational energy efficiency of new detached houses over the last ten years. The per capita operating energy required by the average new greenfield dwelling in 2008 was about a third lower than it was in 2000. In fact it was lower than it was in 1960, nearly 50 years earlier, notwithstanding the size of the average new greenfield dwelling more than doubled over this period.

The latest edition of Property consultant Oliver Hume’s Survey of purchaser sentiment in Melbourne’s Growth Areas doesn’t suggest buyers tastes have changed. When the  company asked land buyers what size house they intended to build, the proportion who said greater than 279 sq m was the same in June 2011 (30%) as it was in December 2010 (Oliver Hume say the actual size buyers end up building is about 50 sq m smaller). Read the rest of this entry »

Are too many houses empty?

Earthsharing Australia - Suburbs with highest proportion of properties withheld from rental market (last col)

Earthsharing Australia highlighted this week what could be a major housing supply issue in Australia’s major cities: the number of houses sitting vacant at any one time. Properties will inevitably be vacant from time to time – that’s necessary for an efficient market – but the issue is whether there are structural factors that mean too many are unoccupied for too long.

Earthsharing has attempted to quantify the number of unoccupied dwellings in Melbourne. It claims speculators are the reason why five per cent of the city’s housing stock – or 46,220 dwellings – sit empty and unrented at any time. It says the REIV’s Rental Vacancy rate is commonly referred to in media coverage as the ‘housing vacancy’ rate, but Earthsharing’s own:

Estimated Speculative Vacancy Rate (of 4.9%) is more than twice the REIV’s Rental Vacancy rate for the same period of 1.7%…….Recent increases in house prices have been driven by speculation, not a housing shortage. Property buyers are restricting the supply of housing by holding their properties off the rental market.

The Estimated Vacancy Rate for some suburbs was much higher – in Docklands it was 23% and in East Melbourne, 19% (referred to in the exhibit above as Estimated Genuine Vacancy rate).

Earthsharing’s findings are contained in a report released on the weekend, Speculative Vacancies in Melbourne 2010, which measured the number of houses (excluding the area covered by South East Water) that consumed less than 50 litres of water per day, on average, over a period of six months in 2010. The presumption is dwellings using less than this amount must be unoccupied, given that average daily consumption during the period of the study was 140-160 litres per day. The further assumption is these dwellings have been withheld from the rental market for speculative reasons.

Earthsharing’s Speculative Vacancy rate could be conservative. Unoccupied dwellings with an automatic sprinkler system or a serious leak might consume more than 50 litres per day and hence be under-counted. On the other hand, its methodology could over-count the number of unoccupied dwellings. There’s some evidence consistent with the latter view – of the 46,200 properties identified by Earthsharing as “withheld from the market”, only 15,237 consumed zero litres of water over the six month period, and hence could be regarded as unambiguously vacant.

In fact there are many reasons why a property might be occupied but nevertheless average less than 50 litres per day over six months. Apart from rental dwellings between leases, some properties are unoccupied because they’re being sold by one owner-occupier to another. There are city properties owned by country people who use them regularly but relatively briefly e.g. a weekend every fortnight. Then there are single person households who travel frequently or for extended periods, as well as “couples” where each party has their own home but they favour one.

It might be possible to refer to these sorts of properties as “under-occupied” in the same sense that empty nesters rattling around in four bedroom houses is “inefficient”, but it would be a big stretch to label them with a pejorative like speculative. These aren’t properties that are being withheld from the rental market. In short, Earthsharing’s methodology doesn’t seem very robust.

But having said that, I suspect there are far too many non-rental properties that sit unoccupied for unnecessarily long periods. Let me emphasise that I don’t have any objective data to support this contention, but if it’s right, it would add to pressure in the rental market. Consider that within 500 metres of my place (I live 8 km from the CBD) there are four properties I’m aware of that have sat vacant in recent years for twelve months or more. Read the rest of this entry »