In the simplest terms, the cost of delivering a new dwelling, such as: • land • planning & design • construction • taxes, charges, contributions • marketing & sales • financing (and time) • holding costs • margin for risk, overheads & profit
Must be at or below what the market will pay for said dwellings. Simple, right?
🤷🏻Developers logically won't build housing projects if not feasible – why would they?
The NSW Productivity Commission recently reported on housing supply challenges in which they picked up the "feasibility gap"(https://lnkd.in/gAQHKbVa). It found the cost of building a new apartment is much higher than the price the market will pay for said apartment. Ergo, far fewer new apartments will be built than needed.
👷🏻♂️The biggest impact on feasibility is construction cost which has grown 40-50% since 2020. What many don't appreciate is a disproportionate impact on dwellings with a higher construction cost base – i.e. mid-high rise – compared to other types such as detached houses or townhomes.
Everywhere but Victoria, greenfield style development is about feasible, but nowhere in the country is scale apartments workable. House prices need to rise in circa 20-30% from already high bases for apartments to approach feasible again – if you can find builders to do it.
In Victoria where house prices have lagged, a 10% increase will make greenfields work again, whereas scale apartments need a 30-40% growth in underlying housing prices for feasibility to return. It's that big a gap.
⏲️How long that will take is anyone's guess.
Prevailing market price is key in the feasibility equation; the depth of market also needs to be considered. For example, it may be feasible to sell a certain number of dwellings at a given price point, but that does not translate to selling an unlimited number of homes in that location.
Meeting needs of most new home buyers is more closely linked to overall borrowing capacity and income than whether a certain area can deliver new stock based on prevailling prices.
Right now, across the country, median income earners cannot afford to buy apartments at scale to meet their housing needs and capacity.
🤔That's why I keep reiterating that the only solution in the short-mid term is a focus on unlocking more feasible housing types at scale – #greenfields and middle-ring townhomes. Or we'll have more people living in the gaps between buildings.