RBA makes the case for 20-storey apartments in Sydney

Planning controls -- and not demand -- have pushed the price of apartments in Sydney up by more than half of their construction costs, Australia’s central bank has found.

The average sale price of an apartment in Sydney was $873,000 in 2018, when the Reserve Bank estimates it cost $519,000 to build. The difference of $355,000 -- or 68 per cent -- is the result of red tape prohibiting the development of taller apartments in areas where the demand is high.

That’s the headline takeaway from the Reserve Bank’s research discussion paper, The Apartment Shortage, which measured the excess demand for apartments in Australia’s largest cities.

Buildings are going up, but not where needed

The analysis found similar patterns in Australia's other east coast cities, though they were not nearly as pronounced. Melbourne apartments sold for $588,000 on average a couple of years ago and cost $491,000 to build. The difference of $97,000 amounted to a margin of 20 per cent.

Brisbane property prices by comparison fared far less lucrative. An average apartment sold for $470,000 when it cost $460,000 to build, the difference of $10,000 working out to be a cost margin of just 2 per cent.

People wanted to live in the city, but apartments were being built elsewhere, authors Keaton Jenner and Peter Tulip wrote.

“Even though the excess demand for apartments is greatest near the centre, building patterns do not reflect this,” they said.

“Recent and planned construction in Sydney is located predominantly in middle and outer suburbs.

“In Melbourne and Brisbane the effect was unevenly spread throughout the metropolitan areas.”

Taller apartments would circumvent excess land costs, the authors wrote, but they warned these savings would be eroded if the buildings became too tall.

“For short buildings, land costs amount to hundreds of thousands of dollars per apartment,” they wrote. 

“As building height increases, however, the per-apartment cost of land declines while construction costs increase.”

They said doubling the typical height of apartment buildings in Sydney from ten to 20-storeys, at most, would help eat into the 68 per cent margin and make city housing more affordable.

Inner Sydney apartments should be taller

Sydney’s inner suburbs would benefit the most from relaxed height restrictions due to the high land costs, the authors wrote. 

They studied property prices in the five years until 2016 and found surpluses as high as $450,000 in eastern suburbs, Leichhardt and North Sydney in NSW.

“It would be economic to raise building heights by 20 storeys or more above their current heights,” they wrote.

Other big cities are in a better position

Melbourne and Brisbane did not need to revise their planning controls because land is less expensive, the authors wrote. 

“Apartment buildings in those cities are already close to the economically efficient height,” the authors said. 

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