Wrapped in Red Tape

The Government needs to reconsider restrictions on development activity in order to fix our housing shortfall. According to the Australian Government National Housing Supply Council, the country is nearing 250,000 homes too few to accommodate an increasing population and this figure is increasing by approximately 10 per cent each year.

Government measures such as stamp duty concessions and caps on council contributions required of developers are band aid solutions that will have minimal impact on prices and availability in the long term. The only way to improve affordability is to make it desirable for developers to return to the market, and the only way to do this is to make it affordable and profitable for developers to begin new projects.

Large numbers of buyers are looking to purchase in development regions across Australian capital cities and regional Australia, however, high council and government fees are pushing prices for new housing well above existing stock levels so it is not commercially feasible for developers to enter or remain in the market.

For instance, in NSW, thousands of hectares of land have been released in and around the state’s growth regions. This should be paving the way for greater housing affordability and easing the supply/demand imbalance, however, developers are unable to take action due to the crippling fees and taxes faced.

Compounding the problem is the unwillingness of banks to open up lending to developers. Unable to get the finance, hundreds of derelict DA approved sites remain on hold and the Australian property market is grinding to a halt.

Ironically, development contributions, fees and expenses were introduced as an income stream, based on the misperception that developers are making big returns and profits on projects. With the costs of building new property increasing, and ongoing difficulty in securing funding, returns are minimal. In fact, many developers are now running at a loss.

Developers must cover the costs for major infrastructure and service upgrades such as water, electricity, sewerage, gas and civil works. In many cases developers must also compensate for poorly planned existing facilities. Combined with council contributions and fees of up to $20,000, this can add up to $35,000 in expenses per lot, not including land holding costs and interest. It’s little wonder that developers are holding off on beginning new projects and the result is insufficient stock to meet buyer demand.

The only way to address the stock shortage is to increase development activity, and this can only be achieved by easing the expenses that developers face and by making it easier for developers to secure finance from the banks.

Unfortunately the banks are unwilling to lend money as they expect profit margins of around 20 per cent on new developments. When you take into account the costs of purchasing vacant land and then developing a new home while footing numerous federal and state government fees and taxes, this figure is not feasible.

Unable to secure the capital needed to get a project off the ground, developers will remain inactive and the shortage of housing will only worsen, which is driving costs higher and supply lower.

For homebuyers, the result is a market that is harder to enter than ever before. For the industry, this means there is limited stock to meet demand. We are in a situation where the planning system is processing 20 to 40 per cent fewer properties than it was as little as three years ago and it can take up to five years to approve new development from a Greenfield site.

Restrictive supply-side reform must be addressed or else we will face a stagnant market and escalating rents. The worst case scenario will be a need for public housing.

John Starr

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