Housing density has emerged across Australia’s cities, yet home prices keep hitting fresh records

It’s the number one issue around Australia, particularly in our biggest cities, groaning under record population growth — finding somewhere affordable to live.

Whether it’s renting or buying, it has never been more expensive (at least in nominal terms) to find somewhere to call home across most of the nation.

After decades of policies mainly directed at giving out public money to allow people to pay even more — think first home buyer grants and rent assistance — attention is finally turning to other solutions.

The new fad is YIMBYism — the “yes in my backyard” counter to those NIMBYs who want to freeze the heart of cities at an arbitrary point in time.

Roughly a decadent old, the YIMBY movement demands that localities start catering to the needs of prospective residents, not just their existing ones, by building more homes, even if it comes at a cost to the amenity of those who already live there.

And governments are catching on, with recent New South Wales changes to override local planning and heritage controls within 400 meters of key train stations and urban centers poised to take effect.

But, despite the catchy new title, the idea of ​​building up rather than out is not a new one.

I wrote about the benefits of increased urban density and the dangers of NIMBYism in this piece for the ABC in 2011 — does that make me an unwitting precursor to the YIMBY movement?

Although, long before that article, many urban economists (such as my honors supervisor Frank Stilwell) and planners had written extensively about the costs — financial, environmental and social — of urban sprawl.

So, the key tenets of YIMBYism aren’t new, just the catchy label and proliferation of activist groups under its banner. But is the cause more urgent now than it was in 2011?

Some new figures from CoreLogic shed light on that question.

They leave no doubt our cities have densified considerably over the past two decades, long before YIMBYs clamored for it.

Melbourne leads Australia’s densification

Nationally, our capitals are squeezing 40 per cent more people into the same land area than they were in 2003.

That’s against a 35 per cent increase in population over the same period.

So, despite a brief exodus to the regions during COVID-19, all of our population growth and then some has gone into our major cities.

That doesn’t mean there hasn’t been urban sprawl, however.

Sydney’s statistical boundaries, for example, include the Blue Mountains and Central Coast, explaining why it has a lower population density than Melbourne or Adelaide, despite having the highest proportion of apartments of any Australian city — just under 40 per cent of dwellings, compared to Melbourne’s 33.4 per cent.

(Although, even that sprawl has become denser, with the average new home block size in Sydney declining by nearly a fifth over the decade to 2021.)

It is clear from CoreLogic’s analysis of ABS statistics — and hardly surprising — that Sydney and Melbourne comfortably lead Australia for high-density living.

You have to get to 27th on the list before Brisbane’s Fortitude Valley breaks up the domination of the big two metropolises for dense localities.

The big change in the past 20 years has been between Sydney and Melbourne.

In 2003, CoreLogic says the 16 densest localities in Australia were all within Sydney, with only one of the top 20 outside, on the east side of Melbourne’s CBD.

By 2023, while Sydney still dominates with 13 of the top 20, Melbourne now has seven, including the top two — the north side of Melbourne’s CBD and Southbank east.

Melbourne has increased its population density by 45 per cent over the past two decades.

In the same period, Sydney has managed only a 31 per cent rise in density.

You can see the dramatic change vividly in this graph and it could reasonably be argued that is one reason why Melbourne has seen more moderate home price rises than Sydney on average over recent years.

Australia’s densest locality, the north end of Melbourne’s CBD, has more than seven times more people living in it than it did in 2003.

Not that Sydney hasn’t seen some similarly spectacular developments, with sites near the former Olympic village, such as Rhodes, which were eleven industrial areas, going from almost no residents to more than 12,000, and the apartment boom at Zetland in Sydney’s inner- south seeing density soar nine-fold.

But, as you can see from the above graph, one of Sydney’s biggest handicaps to ramping up density is that many of its inner suburbs had already been very heavily populated to start with.

Take Potts Point, Surry Hills and my old haunt Darlinghurst. A decade ago they were all comfortably in the top 10 densest localities, but their populations have slightly declined since and been overtaken by new mega developments.

YIMBYs would argue that it’s anti-development lobbying by existing residents and heritage protections in these areas that have seen their populations stagnate.

To some extent, this is no doubt true.

But, regulatory hurdles aside, it’s more time-consuming and expensive for a developer to buy out an existing apartment building full of owners, demolish it and then replace it with a new building sufficiently larger to both cover the costs and deliver a profit.

To a lesser extent, the same applies when negotiating with the different owners of several standalone houses to acquire enough land for a block of units.

It’s much more economical to buy old industrial land and turn it into a high-rise, plus this has the added benefit of there being no or few existing residents to oppose the plans.

Even on such sites and without bureaucratic delays, it simply takes a lot of time and money to construct a block of high-rise apartments.

‘Supply-first strategy unlikely to result in cheaper dwellings’

And this is the flaw in the arguments from the more extremist YIMBY proponents.

This form of YIMBYism advocates a totally supply-side response favored by sections of the orthodox economics community which take demand as a given and therefore see more output as the only solution whenever prices rise.

This thinking underpins the federal government’s ambition to build 1.2 million new homes over the next five years, as well as state policies such as the New South Wales government’s Transport Oriented Development planning overrides intended to contribute to that goal.

But, when it comes to housing, supply can never keep up if demand expands unchecked, either through high levels of population growth or policies that encourage the existing population to consume more.

ANZ chief economist Richard Yetsenga argues that experience suggests relying solely on new home construction and increased density to fix the housing affordability challenge is “slow and complex” and “unlikely to affect the supply-demand balance in a timely manner”.

“A supply-first housing-affordability strategy is unlikely to result in cheaper dwellings,” he writes.

“The cost of new builds is critical to this strategy because the marginal price of new builds must inevitably be linked to the price of existing dwellings.

“If existing dwellings are cheaper than new ones (allowing for some consumer preference), new build commencements will dry up.

The cost and quantity of new housing development is highly exposed to factors such as interest rates, credit availability, skilled labor availability and materials costs.

“Dwellings are likely to suffer from diseconomies of scale, whereby the cost of new dwellings rises as the number of new builds increases,” Yetsenga explains.

This is a phenomenon we saw during the COVID stimulus period, where surging demand from ultra-low interest rates and the Morrison government’s HomeBuilder subsidy collided with supply chain bottlenecks to fuel the biggest rise in building costs on record, at more than 20 per cent per annum.

Is it any wonder those rising costs eventually fed through into price increases for existing homes, despite the higher cost of debt?

As Yetsenga goes on to point out, Australia has about 11 million dwellings for 26 million people, or less than 2.4 people per household, which does not suggest a massive shortage in physical space to house the population.

Yet a raft of policies interact to encourage Australians to over-invest in their homes and discourage them from freeing up their capital (and spare rooms) by downsizing into smaller dwellings when appropriate.

Among them, the tax-free status of the family home, its complete exclusion from various assets tests (notably the aged pension) and stamp duty discouraging property transactions.

The replacement of stamp duty with land taxes, including on owner-occupied properties, would further encourage the efficient use of land by charging people who sit on under-utilized large blocks in prime locations.

That’s not to say building more well-located homes and putting the needs of would-be residents on a more level footing with existing ones are not useful objectives that should, over time, improve affordability.

But, to again quote ANZ’s Richard Yetsenga: “Pragmatic interventions to manage demand and limit the misallocation of housing may well hold more promise than supply alone.”

Unfortunately such policies don’t have the same support from the well-funded property developer lobby.