Brendan Coates On The Upzoning Shift That Could Reshape Property Prices

Why does it so often deliver neither? Or neither?

We're joined by Brendan Coates, Housing and Economic Security Program Director at the Grattan Institute.

With a background spanning the Australian Treasury and the World Bank, Brendan brings a macroeconomic lens to housing policy and has led major research into how planning rules shape affordability, productivity and the way our cities function, drawing on findings from More Homes, Better Cities and related work.

He challenges the assumption that protecting neighbourhood character should trump adding more homes and lays out what meaningful reform could actually required. Welcome to the elephant in the room. This is the podcast where we love to talk about the big things in property that never usually get talked about.

I'm Veronica Morgan, real estate agent, buyer's agent and buyer's agent mentor, co-host of Foxtel's Location, Location, Location Australia, author of Auction Ready and co-host of Your First Home Buyer Guide.

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Brendan Coates, it's been a few years since we've had you on the podcast, and we have missed you. It is great to have you back. We're looking forward to this conversation today.

Thanks, Veronica. Thanks, Chris. It's good to be with you.

Obviously, your report, more homes, better cities. I mean, what's your take on, obviously, there's been a lot of reforms, particularly in New South Wales. Victoria also just even recently is starting to announce more changes. I mean, on the reforms around sort of low, medium rise and transport orientated sort of development.

Like, is this sort of where you were hoping the sort of supply change was going to go towards and how are we heading towards, I guess, where it needs to get to?

Yeah, Chris, I think I'm more optimistic about housing in Australia now than I have been for a long time, which is to say the governments are actually acting on the evidence. So the Victorian and New South Wales governments are acting to get more housing built by relaxing those land use planning controls.

I'd say in the common, in the media landscape, New South Wales is seen as being the leader, but our work would definitely say the Victorian reforms are much more ambitious.

In fact, I would probably go as far as to say the Victorian reforms are the largest economic reform I've seen any state government undertake in Australia in the last 20 years. So there's a lot of potential here.

It's also just happening at the same time as it's become way harder to build housing because construction costs have gone through the roof. And that's the tension here is in the short term, it's going to be really hard to get more housing out of the ground.

But in the long term, governments are actually acting on precisely the things that they need to to get more housing built.

So that's two states. And I guess if we focus on Sydney and Melbourne, that's the significant proportion of our total population that's covered by your research or covered by these reforms. A lot of existing homeowners believe that density or increasing density will erode their property values or quality of life, right?

So when you say that governments are working on the evidence here or acting on the evidence, what does the evidence actually say?

So like we're looking at planning systems, which are necessary. Planning is needed to sort of mediate the public realm and coordinate infrastructure so that you then have a world where you can build housing and you open your front door and you drive your car into the street.

There's a road that's been built there. You can connect your home to electricity and water and sewage and everything else. And when you send your kids off to school, the school's been built. So they've got somewhere around the corner to go to.

I think what we see here is that it's a regulatory system, though, that has just got way too far over its skis in regulating what people can do with the private land that they own. So these systems say no to new housing by default and yes, only by exception.

Our numbers show that 80% of residential land within 30km of the centre of Sydney and nearly 90% in Melbourne is zoned for three storeys or less. It's not just Melbourne and Sydney though. Three quarters of land in Brisbane, Perth and Adelaide is owned for two stories or less.

And in those smaller states, it's things like minimum lot size. You can have a site that's, you know, six case in the Adelaide CBD and you can't subdivide it to anything less than say a thousand square meters.

And in a world where land is ultimately becoming scarcer as our populations grow and we become wealthier and we demand more of it, then constraining what you can do with that land has a really big impact on housing affordability and availability.

And so when we think of planning systems, a lot of the commentary is often about process, like it took me 12 months to get my planning permit. But the bigger impact is actually the bans rather than the burden.

So the fact that we just make it illegal to build a lot of the housing typologies that people want to see. in our major cities.

Now, not everyone wants to live in a townhouse or an apartment, but certainly there's enough evidence to show that quite a lot of people would happily live in those housing typologies if we had more of them. But at the moment, we don't allow them.

And therefore, if we only think auction is a freestanding home in an established suburb on 600, 700 square meters, or a house and land package on the urban fringe, which by the way, the typical house and land package on the urban fringe of one of our major cities, the land size is normally 400 square meters.

So the great Australian dream of the quarter acre block is already dead. It's just a question that we haven't caught up in the middle suburbs.

I've seen a lot of subdivisions, well, in Sydney, anywhere in the outer suburbs that are sort of down to even 250 square meters.

But what I think is sort of interesting and what goes through my mind is that if we look at the way our cities are currently, you know, a lot of your arguments is around, you know, people want to live in certain areas.

So we've got to be building enough housing in those areas to accommodate the people who want to live there, right? So why is it that most people want to live in lower density areas with a heritage overlay? Could it be that it's actually because it's lower density with a heritage overlay?

And if you took those factors away, what guarantees are there that the area still will be desirable?

I think that's getting the causality slightly the wrong way around, Veronica. I think what people want is that a lot of cases, they want access to areas that are close to the city with good access to jobs that often are located in the city, particularly if you're in professional careers.

Access to transport, access to amenities, and all of those things. And those things are prevalent in the areas within 10 to 20 kilometers of the centers of our major cities, right? That's where the most attractive places are.

And what we see is that those are precisely areas where we don't build anymore or very little new housing. So there's this missing middle. Once you get beyond 10 Ks from the city, very little housing has been built in pretty much all of our five largest cities.

There's studies that have been done that show that when you do allow upzoning for either apartments or townhouses, it doesn't really affect the existing property base. So if you're an investor, I think it matters to a degree with the quality of what gets built next door. So I buy the argument that

An economist will tell you that there's the idea of externalities, that basically if you put up something next door that's kind of crappy and it's concrete that sort of bleaches and bleeds and it's not very nice, then that has an effect on the streetscape.

I think what our work shows is that the most important priority is allowing a lot more of that gentle density. It's often two to three story townhouses where if you have a street of, say my street, it's got like 50 homes on it. give or take.

And I should say, Australian cities are some of the least densities of their size in the world. So if Melbourne was as dense as that paragon of walkable urbanism, Los Angeles, within its first 15Ks, they'd already have 400,000 extra homes in that area.

So we are an outlier globally, and it's hard to imagine that's just preferences that people want to live in 800 square meter blocks and above. What it seems to be to us is the planning rules.

And so if you have just that example of say my street with 50 homes on it, if five of those get turned into four townhouses, you increase the density of the area by 40% and the street still looks the same. You've still a leafy green street.

That's the stuff where it drives amenity more so than the home itself in most cases.

There is a couple of streets in inner city suburb in Sydney called Alexandria. I don't know if you've actually checked it out. And I've always thought it was such a really good example of exactly what you're talking about, where side by side, you've got sort of regional Victorian terraces.

Then you've got sort of a unit complex, three stories. Then you've got, you know, a few townhouses and then a warehouse conversion. And they're all sort of side by sides or tree lined. And it's seamless. It actually blends very, very well. It's very well designed. I haven't seen that complex.

executed so well many places. In fact, it's the only one I can think of at the top of my head.

When you look at one of the charts in your pack, which will include in the show notes too, if anyone's interested in this work that you've been doing, there's one chart that sort of showed that density or construction of more dwellings in each of the capital cities, you know, five Ks out from the city, 10 Ks, 15, 20, so on.

And the Melbourne story is interesting because it seems like there's heaps within the first five kilometres over the last 20 years, right?

So heaps of construction of new dwellings, which we all know about the Melbourne story with apartments, and then sort of nothing in that five to 20, 25K radius, and then heaps of outer suburbs being built.

But it's sort of interesting because I wonder what you have to say about that because Melbourne's story is a problem. There's a legacy of a depressed apartment market for the last decade or so.

I guess what's the incentives for A, developers to build and B, for buyers to purchase when you've got some examples like that that don't seem to have been particularly successful?

Well, it depends how you define success, Veronica. And I realize this is a podcast that's often listened to by people who are investing in property. Like that is a big part of your market.

And I think one of the things I've always liked about what you guys both do is you present them with a range of viewpoints and a broader policy conversation rather than just the sort of a narrow specifics of investment itself.

But there is a tension here, which is that I look at the Melbourne market and Melbourne now has the second most affordable housing of any jurisdiction in Australia on a price to income ratio. That to me is a roaring success. That is literally what we want.

And people can have different views on this, but Melbourne house prices used to be the second most expensive in Australia versus the median incomes of Australians. And now they're, I think, the second cheapest. Whereas in Brisbane, in Adelaide, in Perth, our housing crisis has gone national.

Their house prices, nominal house prices have risen. They've doubled since 2019. So Melbourne is cheaper for two reasons. The big reasons that we see is one, they have built a lot of apartments in and around the CBD. And that has absorbed a lot of the demand, additional demand.

You know, if you go into Melbourne on any night of the week, the place is absolutely pumping because international students, for example, just as one example, enormous numbers of them live in the CBD.

When I go to Sydney, they're living in share houses around Randwick rather than in sort of apartment buildings that have been built in the area. The second reason Melbourne is so much more affordable compared to Sydney is is that you can still buy a house and land package on the urban fringe.

Yes, it might only be on a 400 square meter block or smaller, but it's going to go for six, $700,000. The equivalent in Sydney is 55 Ks from the city and it's going to cost you 1.2 million.

The tension is so true. It's so right. So I look at that as you could say that's a great success story because people can get into the market. The problem is, though, once they get in, they often go backwards financially.

And I know lots of people who've invested in apartments in Melbourne, who some of them held them for 10 years or more. And those apartments, if they sold them today, would be selling for less than what they paid for them.

It's a success story maybe for someone who wants to get in now, assuming that, oh, we've got a new equilibrium, maybe they'll actually get some growth over time. But particularly for apartments where first home buyers will outgrow them relatively fast, they're then trapped.

So how do we reconcile that in terms of a success story?

Well, but it goes to this core premise, right, is that I want housing to be more affordable, which means I don't want prices to rise.

Right. You want to stabilize them.

That's right. And so, you know, the example that's often put is, say, Auckland did a big up zoning in 2016, city of 1.5 million people. So the site is Adelaide, basically. House prices now have diverged. House prices are lower relative to inflation now in Auckland than what they were in 2016.

They're going less slowly in inflation. House prices in the rest of New Zealand outside Auckland are up 40% in real terms. Now, if you're an investor, you probably would have been better off investing in the city that wasn't Auckland.

But if the objective is to make housing more affordable and cheaper, because these artificial constraints mean that homes are selling for much more than historically what they've cost to produce, then Auckland is a great success story and Melbourne's hopefully trending in the same direction over time.

Obviously, the zoning's first element, right? Planning, reform, you know, so it could happen like FASA, you know, patent-booked sort of designs that auto-approve sort of styles of property that, you know, a lot of, you know, New South Wales has sort of released. I'm not sure about Victoria, but... Victoria has it too.

Yeah.

I mean, is there issue though, like, and I don't know how we're going to get through this, right? So like the cost to buy the land, hold the land, all the taxes, all the government costs, and then the build costs, right?

And the competition for labor and resources, Olympics to roads, to trains, to international just demand for that talent. And then the build costs have obviously gone up so much, right? Which doesn't make it feasible. How is this ever going to get built? Do prices have to go up?

Do building prices costs have to come down? And if they don't come down, do we not really solve anything in the immediate term? Only once the feasibility will make sense. Or does the government have to make changes? How are we going to get more built, I guess?

yeah so this is i think is the main contribution chris veronica of our work compared to what's come before is that we have literally assessed the feasibility to build more housing on every single site that exists in melbourne and sydney so we have modeled the built form controls that apply across the both cities today how much so let's say you've got an 800 square meter block how much floor space theoretically you're allowed to build on that now if it's a

In an activity center, you might be able to build, you know, 4,000 square meters of floor space because you can go to 10 stories or something. If it's in an area zone for townhouses, you might be able to build 1,000 or 1,200 square meters of floor space.

We then estimate with data, which we're very grateful we got from Cotality, who are an affiliate of Grattan now, they supported us with that data, what it would cost to build those apartments or townhouses and what they would sell for.

right so the whole gamut so think of it as like a monet painting i don't know if you remember the line from clueless that basically we're like look at a monet planning from 10 meters away that's what our modeling will tell you would you either of you two or any of your investors uh listen to this podcast go and buy the corner site just down the road on the basis of our modeling and say you can definitely build five townhouses on that site in melbourne

I wouldn't do that. But from 30,000 feet, it tells you a really powerful story about what you should expect to see happen over time. And what came out of that work is probably three things.

First of all, when you look at what lots of different housing typologies sell for now versus what they would cost to produce, including land acquisition, infrastructure charges, developer profit margin of 18%, all of the costs, then the costs of building those things

is a lot less particularly in Sydney for a lot of housing typologies than what you can sell them for. That's what that idea of the zoning tax comes from that you've talked about with Peter Jewell from the CIS before. Much bigger in Sydney than it is in Melbourne.

In Melbourne, it's actually typically $100,000 to $200,000. In Sydney, in a lot of areas, it's $300,000 plus.

Secondly, we went through and estimated with the reforms that the Victorian New South Wales governments have done, how much are they actually adding to the capacity theoretically for more housing or what share of that is commercially feasible?

And the upzonings in Melbourne, they've upzoned for the equivalent of 1.6 million extra homes theoretically could be built, of which about 500,000 are commercially feasible. So they're both permitted under the planning laws today and they're profitable. In New South Wales, it's about 900,000 because New South Wales reforms are not as ambitious.

But then thirdly, what's profitable? The thing that is most profitable in our cities right now are three-story townhouses. Because they're stick builds. You don't need any special equipment. Two guys, a dog and a ute can get materials delivered to site and you can build them.

You might need a concrete pour for, say, the foundations. But you're not competing with the labor that's building tunnels for metros and freeways.

And there are also the housing typology where the demand is highest because it's the typology that meets the needs of families who are priced out of that 800 square meter block in Melbourne might go for 3 million bucks within 6Ks or 7Ks of the city. And Sydney is probably going for six.

Every time I go to Sydney, it's like going to Disneyland. The prices just don't seem real when I go up there. But so when you do that analysis, Chris, what you see is where the commercial opportunities are. And in Melbourne, it is townhouses.

Very little of what is being done in their activity centers, which is like the denser, you know, the idea of a 20-story apartment building in Brighton, which catches the press. Very little of that's commercially feasible right now for all the reasons you outlined. Construction costs are up 40% since 2019.

In Sydney, things are so bad that if you allow more things to be built, a lot of them are profitable, even with the construction costs, because Sydney, it's almost like a dam with so much water pressure behind it.

They've held back the extra demand for where people want to be, but if they allow it, a lot of it's profitable, including those apartment buildings.

Yeah, so in Melbourne, it's a lot of building these. I mean, and that sort of planning controls, particularly it's going to be in areas that are a bit more of the affluent areas, right? So the more premium areas.

And then it's sort of getting past the NIMBYism within that sort of suburbs to say, hey, we're comfortable with three level townhouses. But at the moment, they're not, right? Because I don't think a lot of the zoning says you can go three.

Yes. So you can now go three storey in everywhere except the neighbourhood residential zone where you can go two. Under the townhouse code, the council cannot deny the permit on the basis of the bill form control.

So the bill form controls say setbacks, height limits, you know, a bunch of things that basically imagine a theoretical box that you're allowed to build within. And if you build within the box, the council can't say no.

But that's Victoria, right? So New South Wales, I don't think you can go three though, can you?

No, New South Wales, the big thing that's missing with their reforms, Chris, is that they're doing 40-story apartment buildings, and that's capturing a lot of press. But what they're not doing is allowing gentle density.

So if you have an 800-square-meter site in Melbourne that's not in a neighborhood residential zone, so say general residential, so on the street that I'm on, you could turn that into five townhouses.

in a pretty straightforward way, kind of as of right, essentially, with very little discretion from the planning, the council planning officer. In Sydney, that same block, you'd be lucky to be allowed to subdivide into two dual occupancies. And that's where New South Wales has just missed a trick.

They have not done what Victoria has done in allowing gentle density across the city.

Which is a real shame, actually, because, you know, I think of lots of areas, I mean, I'm in the inner city and I think of lots of areas where that would benefit from that.

It's funny, when I first started in real estate, which is going about 26 years now, I was in the Inner West Council, it was Leichhardt Council back then, and they increased the finished land size requirement for a subdivision.

So there were lots of double-fronted weatherboards that would be knocked down and turn into a pair of houses, right? I won't call them townhouses because they were Torrens title. And then they said, oh no, you've got to have a finished land.

And so a lot of those would have been like on 160 square meters, 140 square meters finished size. And then they said, right, minimum size to subdivide is 400 square meters. Otherwise it's got to be a strata subdivision. So this messiness comes into the whole thing.

And that, again, it just pushes land prices up. So when you've got the 400 square meter block of land, it's magic, right? You can do things with that, but it's not that valuable if it's slightly less.

But a lot of larger houses were retained as a result of that on their 330 square meter blocks of land because it was no longer feasible to turn them into two. So it actually changed what could have actually created more housing back then.

That's right. And land is the key input here. Like Australia's housing crisis is about the scarcity of land, right? And, you know, density, whether it be townhouses or apartments are essentially technologies of converting land into more floor space. So more people can live in a location.

And I think the media sort of commentary or the image you have in your mind if Australian cities have to densify is that it's mainly going to be like 20-story apartment buildings in Brighton.

I think what the experience of Auckland and a lot of other cities show is that you can actually get a lot of density just with that sort of

gentle density three-story townhouse kind of or walk like you want to say townhouses there's like a multitude of different housing typologies that i mean like row houses and lots of different things but all fit inside that envelope that of a three-story with setbacks on either side you know on a lot and that's i think the future for australian housing for the next few years

Why is this three-story such a big element? Like, why does it not work feasibility if you go two levels? Is that extra space, that extra level creates, makes it more feasible?

Oh, well, I'll give you the example of, say, my house, right? So, you know, my house is 100 years old. It's had a reno done to it, but it's an older renovation. And the reno itself, sort of the dwelling, probably isn't worth that much, whereas the land is worth a lot.

So if you allow two stories... Which probably means you get three townhouses or four townhouses on my block. It's probably not profitable to say knock down my house or many of the houses around it.

Because you've got like, if you're doing a redevelopment, you're buying the house, competing against someone else you want, like me, who's choosing to live in this house now. you're then destroying those capital improvements. So you're several hundred thousand dollars in the hole before you start.

And then it only makes sense if you can then make greater use of the land to generate enough floor space that you can sell to make the whole project stack up at a profit, right?

And that's why in any street, the first homes that get knocked down are always the kind of the crappiest, the ones who people have done the work.

Whereas if I renovate my house and put a pool out the back and a big, you know, living space, entertainment area, like then my house becomes the last one in the street that gets turned into townhouses, right? Because the capital improvements are worth too much.

And so here's the thing, Chris, is between the two and three, it's not so much, don't get stuck, I wouldn't get stuck or want your listeners to get too stuck on the idea that it has to be like three stories as one house. It could obviously be three different homes.

The point is it's just, it's enough floor space to be able to sell to make it worth knocking down the existing dwelling of whatever quality it is. So that could be a bunch of three stories where a nonna lives on the ground floor in a three bedroom or two bedroom unit.

And then you've got younger people living on the walk ups on the second and third levels. It could be three stories up and down. We've lived in those kind of homes before and actually they worked pretty well for us.

But it's basically what tells you there's demand for that people want it is because they're willing to pay a lot of money to buy that hot property or to rent it. much more than it would cost to produce it.

Until recently in Melbourne, and we still don't in Sydney, we don't allow that to happen.

In the past, it has happened in inner city areas in Sydney. And so I know that type of dwelling or mix that you're talking about. I've seen three-story townhouses. We've got Victorian terraces, we've got attic conversions, they're three-story.

You've got smaller unit blocks where there might be a two-story dwelling and a single-story dwelling or three single-story dwellings. And there's quite a lot of that stock that probably developed around 20, 25 years ago, not in recent times. And back to your thing about...

You know, we're talking about desirable places to live and what people will live in in order to be there. So there is a demand for that type of stock.

And because Chris lives up the northern beaches and he's, you know, he's sport with space, he's got no idea what we'll give up on to live close in.

From my point of view, I look at that and think, well, that sort of solves some problems around land amalgamation because a lot of these sort of rezonings rely on the neighbors to all bandy up in order to sell to a developer who's going to then build a six or eight story apartment block.

Whereas if you're saying what you're saying there is with a larger block, one block,

family home for argument's sake, potentially could be turned into two, three, four, maybe five, depending on how big the block is, dwellings, then obviously that makes it a lot simpler as well to sell to a developer if you're a single landholder, right?

That's right, Veronica. So half of all residentially zoned blocks in Sydney and Melbourne are larger than 600 square meters. Half? Wow. Nearly two thirds in Brisbane, Perth and Adelaide. And that's kind of gets to this point with the juxtaposition between what we allow in the inner suburbs versus what people choose.

Review of preference, people are choosing to live 50 Ks from the center of Sydney on a less than 400 square meter site because that's what they can afford. And it's still costing them a million bucks because land's really expensive.

So that tells you what they might be willing to pay to live 15 kilometers from the city in a three-story walk-up. Like, don't get me wrong. Like everyone wants, if they could, would happily live in a two-story home on 800 square meters within 10 Ks of the city of Melbourne city.

Which is why those properties are so in demand and why prices have risen.

That's right. That's why they are in demand. But what's in demand is the access to that space. And so it might be worth $3 million to someone to live in a house of that size within 10 kilometers of the center of Melbourne.

But that land would, a developer would pay much more for that land than $3 million to knock down the existing house and turn it into five townhouses. And that tells you, because they can find buyers for those five tiny houses. And that tells you that the market is there for those housing typologies.

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If you're considering a property move such as buying your first home, upgrading, renovating, or investing, the team here at Alcove would love to help you think through your decision and get the finance right. Please go to alcove.com.au to reach out. So in Mossman in Sydney, right?

So basically Melbourne seems like they're leading the way, right? You know, activity centers, you know, lots and lots of places. Wait, it was rezoning basically everything. They're already pro-development down there for a long time. So it's like just a tweak really for them.

But in Sydney, it's sort of gone heartland of NIMBYism, right?

really strict controls you can't build anything unless it's high density or greenfield right and we're not building anything it seems like they've tried to fix it with just saying hey you can build as high as you want around these pockets but they're really missing this change to you know bigger blocks to allow you know more dwellings on them right they're not just duplexes i mean like in muslin for example this is 65 muslin street like it's

It's a prime street. It's surrounded by, you know, five, $10 million homes. And there's like an eight-story sort of apartment block going up, right? And I guess everyone in Mossman's up in arms, right? Because why would you want an eight-story apartment block looking over your back fence, right?

Like, you know, if you're doing it, why? So do you think that this is the solution the council should be, not, hey, we don't want development here, but we want to just, you know, bring in lots of three, four level buildings

townhouses duplexes like that's what we're gonna and we don't want any of this bigger stuff like there's a compromise here that they're sort of trying to fight the change and saying this is not what we want but they're not also willing to give up sort of and saying this is what we want if that makes sense

I think what we've seen is driven by perceptions of the politics of NIMBYism, not in my backyard, right? And I think one of the reasons that conversation broadly, Chris, Veronica, has changed over time is because, you know, housing has gotten so dire in Sydney that you can no longer say...

Up until recently, you could say, I'm pro-housing, but not in my backyard and say, we should just build more greenfields 50 k's from the city.

My sense is the politics has become much more bipartisan in Sydney now, where both the Premier Chris Minns and the opposition leader Kelly Sloan are talking about allowing more density in inner suburbs, because it's no longer credible to say to younger people in particular,

oh, you just got to go to the greenfields because the greenfields is not a viable option if you want to work anywhere near the city.

Whereas in Melbourne, the politics is a little bit less bipartisan, partly because you've got a three-term Labor government and maybe the Liberal Party thinks they're a bit more ripe for the taking and they probably are in terms of the election this year.

But it's also that you can still buy a house and land package 30Ks from the city and that's a viable option. So when we're thinking about the politics here, I think New South Wales seems to have made a decision. We're going to upzone in very particular locations.

They've got this housing development authority, which basically says you can apply for a spot upzoning. So a warehouse in the inner west can go from being a two-story warehouse to a 40-story apartment building.

My argument would be, yes, gentle density is more likely to be amenable to the community because it's more gradual change. You know, once you're three doors down from the house, you literally cannot tell it's a set of townhouses rather than a freestanding home.

Whereas if it's a 10 story apartment building, that's very obvious. And the other part of this is there's a tension in the economics. If you talk to a lot of committed urbanists, they would say, oh, we want human scale development, anything between four and six story apartment buildings.

They are the least feasible form of housing to build in our cities.

Because as soon as you get above three stories, you've got lifts, you've got a sink basement, car parking, reinforced concrete basements, the fire rating goes up, their height, their more stringent building regulations for lots of like, think of mascot towers, right? All of that sort of stuff.

So we ran a scenario where there's an area in Sydney, it covers 9% of Sydney covered by what's called the low and mid-rise housing policy. Anything for up to six story apartment buildings, for three story townhouses, up to six story apartment buildings.

And we run a scenario that's like, okay, if you allow different housing typologies on each of these sites, what share of them are profitable? And more than 40% of those sites, if you build a three-story townhouse, it's profitable to build today.

10% of those sites are profitable if you're building a four-story apartment building. Less than 20% for a five-story apartment building. Less than 25% for a six-story apartment building. And so to get for as many of those sites to be as profitable as the townhouses, you've got to go to 10 stories.

So there's a tension between what the community might like to accept which is walkable, four-, five-storey, gentle apartment buildings, which, yeah, you can see them from eight blocks away, but not from two kays away, versus what the economics will tell you can get built.

So this sounds like there's an alignment, though, that the NIMBYs, shall we call it, or even just the residents, existing residents of an area, would find the three-storey requirement so much more palatable

And you've got developers who have been voting with their feet anyway, because the big question, and we've asked it many times in this very podcast has been, you've got all this rezoning, why aren't we seeing more and more development?

And we know that developers got one chance at maximizing the profit for a site. It's a one shot, right?

So of course, if they've got the capacity to wait, they're going to wait for more favorable market conditions or zoning or costs or whatever it is that they're waiting for to make sure that they maximize the profit.

So in this particular argument, well, why haven't the Yimbys grabbed onto this one, you know, in terms of a way to actually support and champion this type of rhetoric?

So I think they have, the Yimbys have in Melbourne. So the Melbourne reforms are this idea. And so we're essentially running an experiment. New South Wales is running an experiment about spot-up zoning for 40-story apartment buildings. Victoria is running an experiment where we principally allow three-story townhouses everywhere.

We'll see which one yields the most housing, and we'll also see which one generates the larger political backlash. But it would strike me, you know, from our perspective, we need to allow some version of both.

Not necessarily spot-up zoning 40-story apartment buildings, but allowing taller apartment buildings around major transport hubs where that demand exists. But saving Melbourne, the townhouses are feasible now.

The activity centres, which is up zoning around these 60 train and transport hubs, a lot of that doesn't look like it's feasible now and probably won't start to be feasible for another five years.

But you probably need to allow that typologies now so that in five years' time, when the economics improve, you see a lot of it happen. In fact, if Melbourne had done what they've done now 10 years ago, I think you'd be seeing an explosion of development. It's just that the market has changed.

The costs are so much higher and apartment prices haven't risen.

Do you think we've got enough supply of labor to build these sort of Turner? Because it's a different whole way of going about development, right? Like, you know, does the big players want to play? You know, do they want a hundred

four or, you know, four townhouses, like 400 sites that they're selling, or do they want 10 buildings? And it's a different type of skill set, right? To play in this and want to make a profit on the townhouses.

And secondly, like often these areas, like they have a lot of established homes that are renovated that they don't really want to knock down. They're quite cost to...

sort of, you know, because they've all gentrified, they've all renovated, they've all seen a lot of value in renovating it because they can't afford to upgrade. And so they've decided to make it their sort of forever home. And the turnover rate's really tight. You know, they've been living there a long time.

They've got the equity to do. Is that also stopping it? Or even though, you know, your numbers just prove that even if the capital value, the cost to buy these lands, even though they've got expensive houses on it, still makes sense just because there's a real lack of supply.

Yeah, well, that's why. So we're using the numbers of what each of those homes would sell for today, including the renovation. So to the extent that Cotality's data correctly reflects the valuation of particular homes, and the only ones it's going to miss is where a renovation's happened since the home is transacted, right?

So they'll underestimate some of the acquisition costs for some of those sites, but I don't think enormously so. But that's why, say Melbourne, they've unlocked capacity, extra permitted capacity for a million townhouses. Only 400,000 of them are profitable to build.

Because my home, I don't know if we've not looked at the data, whether it classifies my home as being profitable or not. Probably not because it's not a, you know, in terms of the quality of the homes in the street, it's kind of the median, right?

But there are homes that have been lived in for a long time and haven't been updated. And they're the ones when they go up for sale, they'll be bought by a developer. The key here is that you're using the kind of workforce that builds greenfield homes.

It's stick builds, you know, it's pretty simple. And there's actually good work that shows when you allow this kind of density, you get a boost in productivity.

So in Auckland, estimates are that construction sector productivity has risen 8% since the reforms, partly because firm size gets a bit bigger and you get more competition between firms. But these are small firms.

I think you guys should do a podcast on, given these reforms, on what it would be like to do more of this kind of development yourself. I'm not sure if you've done one recently.

Because what the Auckland experiment showed is that you get a lot of small developers building a lot of small sites. Now, people use the townhouse code.

Developers can use the townhouse code to build 100 townhouses on a bunch of sites if they've consolidated five blocks or if it's an industrial site that can be turned into, that's zoned appropriately. But you're right, it is a different market than the big guys, the Lendlease, Frasers.

They don't want to get involved until you get 100 homes. But one of the things that's always struck me, Veronica, Chris, is you can get a house and land package with, say, Metricon, the largest home developer in Australia. Yeah.

where they will, there are 15 different designs and they all use, I'm making this up, but like the same eight windows that they import from China and they import 20,000 of them. And it's way cheaper than say, if you're going to do an architectural renovation.

So I've got friends nearby who are knocking down their house and doing a metric on home that's half the price of renovating the existing home. They will not get involved on any site if you need planning approval.

And so I think one of the questions is there's probably going to be an industry start to sprout up of offering these kinds of things at scale.

Because if there's no discretion in the system and that's discretion is toxic for deploying capital at scale with good design and bulk buying of your materials, my guess is you'll start to see more players just offer essentially kits of here's how you can turn into four townhouses.

The market, I expect, will just start to deliver that because once the discretion's gone, You can deploy those kind of designs at scale, which is kind of what the patent books are trying to do in New South Wales and Victoria.

Exactly. I mean, it sort of lends itself to that. I mean, you've used Auckland as an example, obviously, of what's possible. Are there any other cities that have done this?

Yeah, there's a few different ones. I think Auckland's the clearest case because it's the one where we saw a big upzoning, like 75% of the land area of Auckland got upzoned. Other places have done it. Lower Hutt in New Zealand's done it as well. Seattle, Minneapolis, Zurich.

There's also a lot of examples in, there's a really good risk study out of New York where parts of New York boroughs have been upzoned and they actually track exactly which sites got built on. And it's really striking.

They estimate like how much extra floor space theoretically you're allowed to build pre and post reform. And the probability that a site gets built out perfectly aligns with the amount of extra floor space. So let's just say you've got a three-story walk up in somewhere in Brooklyn. I'm just going to use Apple.

If you're allowed to go to four stories, nothing happens. If you're allowed to go to 10 stories, then it gets demolished because you're destroying the existing capital improvements and you're making it work. So it just reinforces that the economics are, they're real.

I'm just thinking that if you were going to block a land in Rose Bay, right. And, or Mossman in Sydney, for example, You don't really want to sell it for townhouses right now. A, because they can only do duplexes on it, right? And it's really expensive for them to renovate it, right?

A, cost of build. B, the quality of reno they're going to have to do in those areas. They don't want to leave because they're sort of in the area. So they would love to downsize, but that stock hasn't been sort of existing and they only want to downsize after some stupid offer.

with the site. So they're just gonna just sit on this property, right? So there's extra bedrooms there. It's a really old house because there's not enough fat in it to them to the developer to overpay dramatically than what it's worth to sort of force their hands.

However, if you change the zoning to sort of three levels, And then they all of a sudden get this really amazing offer and then that sort of encourages them to sell. So if the developer doesn't want their site, then who else wants their site? You know what I mean? They're stuck.

Is that sort of your take as well? Obviously people in Rose Bay are selling because their site makes sense to a developer. But if you haven't got a site that makes sense to a seller and it's got an old house on it, another developer is not going to come by.

The only person who's going to buy that house is someone who can afford to do a big reno to it, right? So you're not giving an alternative option to that person selling.

Yeah, that's right.

And so one of the problems we have at the moment is that because sites that are developable, that are permitted to develop, are scarce, that leads to the kind of strategic bidding up of those sites by developers and the kind of strategic behavior we were talking about before, where people might sit on a site thinking, I can maximize my value long term, right?

In a world where you make development opportunities really abundant, a lot of that goes away.

So for example, if you allow three-story townhouses across all residentially zoned land in Sydney, we estimate in our two zoned areas alone, which is the most prevalent zoning, there are more than 400,000 sites that could be profitably redeveloped. The average turnover of a home, you know, call it 10 to 15 years.

Maybe it's more like 20 because these are probably above average value homes. Even if it's every 20 years, that's 20,000 sites that are coming up for sale every year where I might be competing as someone who wants to live in that house against you, Chris, as the developer and Veronica, you're another developer.

Now, you guys aren't going to buy them all, but I'm pretty confident you'd buy enough to build what you want to build. And so there is a challenge.

One last thing I'll say, there is a challenge in Sydney or in Melbourne where people think because of the upzoning, they're going to get this huge windfall. What our work shows is in some areas that is true.

Like you've seen the stories in the Finger Review of eight owners banding together and selling a site for half a billion dollars or whatever it is. But it's all driven by the economics.

If you're zoned for a site in Melbourne that can now build six-story apartment building, you shouldn't expect you're going to get an offer from a developer because from the developer perspective, you'd have to pay them to buy the site because they will lose money if they develop it at the moment.

So the more sites you have available, then the more likely you're going to get that extra housing unlocked and see a lot of development happening. And that's how we get a market working that's currently kind of stuck because...

We don't allow people to build on a lot of sites and so those sites are scarce and they're expensive.

I've mentioned this many times before on this podcast that I do have a lot of empathy for people who are stuck in these rezoned areas, the tod zones in particular, up on the North Laughlin North Shore. And some people may have no sympathy for people who have a leafy

A lovely big renovated home on a leafy block and a leafy street in Roseville or somewhere like that may have no sympathy for them, but they're stuck if they want to sell their home because no one can develop just their lot. They've got to wait for the neighbors.

If they want to renovate their home, well, what's the point? You're basically wasting money because one day it'll go as a development site. No owner is going to come, single owner is going to come by your home because they know that basically you're going to get units being built up all around you.

So there's a real, the way in which, and we've said this many, many times, and I've spoken to a lot of people that are caught out by this, that that's the way this sort of heavy handed approach in New South Wales has sort of created that because you don't have that, the gentle densification.

So I'm on board. I love your idea, right? So is New South Wales going to take, are they listening to the Grattan Institute on this?

Well, like, we'll see. We're certainly trying to make as much noise about it as possible, which is why I've come on your show to talk about it as well as everywhere else where I can. I think we've got an election coming up in New South Wales.

The question will be whether they want to expand on where they are today. I think our message is you will struggle to hit the kind of housing targets you say you want to meet.

You will struggle to sort of deliver the more affordable housing that you say you want unless you go down this path. It's really hard to see. They're just leaving such a big opportunity on the table.

And just Veronica, on the point that you raise about people in Todd areas where there's ups and downs around them. Look, I have sympathy to the extent that at the moment we make it also hard for people to move.

So stamp duty means that if you want to move to some, like if your preference is you don't want to have apartment buildings around you. Well, look, I respect that. That's the choice people very reasonably make.

And you should be able to vote with your feet to move to somewhere that that doesn't happen or where that's less likely to happen. It probably means that you'll find it hard to find somewhere close to the city.

If we're also going to have more affordable housing, it's going to be hard for you to be close to the city and have that experience. But if we get rid of the stamp duty costs so you can more easily move, then that would make that situation much better.

It's the same conversation we've had before about,

know as families grow they should be able to move house rather than having to renovate their existing house because you get stuck in a house that no longer is right size for you for a whole bunch of reasons it's not just because development's going up next door it's because your life could change you get divorced you know we had twins two years ago so that renovation is a real prospect for us at some point or at least it's need whether we can afford it's a different story

We've got Paul Scully on next week, so we will hit him with this.

But I'm looking at their patent book on the New South Wales website, and I think it's just kind of highlighting this point that this is a missing problem with the New South Wales reforms versus Victoria, which are way more pro-development and probably going to get more supply come because feasibility is way better.

And you look at the pattern book, there is literally no designs that are three-story. You know, you've got the two-story duplexes and townhouses and you've got the big apartment blocks. And it sort of highlights at that point.

But, you know, I think these duplexes, like the quality of the architecture they've got on these pattern book designs and the quality of the builds is amazing, right? So I do think that developers would be looking at these sites going, you know, the Ram Weeks and the sort of the big flat of,

locations but at the moment they can only get two on a site right they can't get three stories and they can't build like four townhouses because of the code so is that sort of the shift they just need to make you know they've got the patent books they just need this sort of next level of

And then you will see a lot more feasibility. And then a lot of people in these suburbs that have got old houses that are aging, developers are going to start knocking on their doors and saying, hey, yeah, I want to buy this because it's an old house in a good street.

And the local residents before they wouldn't have been comfortable with it. But now they're like, I don't want what's happening in Roseville to happen in my suburb. We need to build more supplies. So this is our solution. So the community will be on it as well.

Is that sort of the story you want us to sort of paint to Paul Scully, I guess?

I would paint to him, the questions I would ask him are, one, why haven't you gone down the path of more dental density? Why have you stopped at jaw occupancies, which in Kuringai Council, to subdivide the minimum lot size is 1,000 square metres, which just seems crazy to me, frankly. Secondly, will you...

override council controls that stop this from happening right now? Because that's the constraint is they haven't gone down the path of overriding councils in the way that Victoria have.

And then three, would you commit to doing something like the patent books, but for those kind of gentle density, three-story row houses and terraces that, you know, clearly so many Sydneysiders would love to live in if they were made available?

I thought they have overridden the councils and all the councils have had to come up with an alternative plan, but ultimately they've had to prove that it's still aligned and it's still very pro-density. I think that's why they've all been freaking out, I thought.

There's different programs here, Chris, and the trouble is with this kind of conversation, you get into the weeds because the minutiae of planning matters. So there are three main programs in New South Wales. There's transport-oriented developments.

That's the one where they said, we will just draw lines on maps and up zone, or you can come up with your own plan. And each of the councils have come up with their own plan. And the Inner West one passed late last year, and that was a great outcome.

Then there's the low and mid-rise housing policy, which is anything from sort of like three, two-story duplexes up to six-story apartment buildings. But they haven't overridden the local council's restrictions on things like floor space ratios. And in some cases, existing state controls that apply.

And so we show that that policy is much less effective than it could be. And then third, they've got what they call a duplex policy, which is what it says on the tin. It allows duplexes. But a duplex is not the same thing as allowing five townhouses on an 800 square metres.

You put those three things together and that's why the reforms are so much, frankly, they're missing a lot of the opportunity for those reasons in ways that Victoria is largely sold for.

We'll give you the credit when we ask the questions, Brendan. We'll make sure that they are in our repertoire.

Have you got a property Dumbo for us, Brendan?

Look, I'd say that the Dumbo for me is just that we've let... We've outsourced this incredibly important regulatory system that determines where people can live and work to a planning regime that is just... It's not just about NIMBYism increasingly. My view is it's not the politics of the NIMBY brigade. It's actually...

a set of ideas in the planning profession that are very resistant to the idea that markets work and that there are trade-offs.

So I'd say the big one is that the Dumbo is that we've outsourced for the last several decades where people can live to a planning bureaucracy that doesn't measure the outcomes of what it does.

And I should say, just because you're having Paul Scully on next week, the New South Wales reforms are a big step. They're the most ambitious that the government in New South Wales has done for decades. They just need to go further.

When you say go further, from my point of view, I actually think it actually is that missing middle, effectively. We keep talking about the missing middle, but actually it's a much softer, as you say, gentler alternative. So I'm actually on board.

I wasn't quite sure how I was going to feel at the end of this conversation, but you've won me over, Brendan. So thank you so much for coming back. We have missed you. We look forward to some more robust conversations with you in some future time.

Thanks very much, Veronica. Thanks, Chris. Very happy to come back on. It was nice not just to talk about tax this time. Thanks so much.

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