Why high-rise apartment supply isn’t solving the affordability crisis, according to new research

New research has found that house prices are rising faster in a handful of neighborhoods in Sydney where high-rise apartments are being built, compared to other suburbs where there is less apartment construction.

The article concludes that a shortage of high-density housing is not the only reason house prices are rising.

More medium-density housing could help increase housing affordability.Oscar Colman

In recent years, increasing housing supply according to demand has been suggested by experts and governments as an important solution to the affordability problem. The new research strongly supports the need for more supply, but highlights the importance of providing different types of housing, not just high-density housing.

Article by economic research group e61 Institute, When Housing Supply Hits the Market: Apartment Pre-Sales and Sydney Price TrendsThe report, released Wednesday, compares past apartment developments with changes in home prices.

Sydney house prices rose 76 per cent between 2012 and 2017, then fell 11 per cent over the next two years. Flat completions peaked in 2018-19, and while prices were falling, new supply was also available for move-in.

But the research reveals many of these flats were sold off-plan years ago, with pre-sales peaking in 2014-15 during the price boom.

e61 Institute research director and report author Dr. “It’s getting harder to argue that all this price growth is due to a shortage of high-density housing,” Nick Garvin said.

“We must consider the possibility that an increase in the supply of housing in one type of housing will have a limited impact on other types of housing.

“And what that means is that it would be useful to think about increasing supply in a different way—for example, more townhouses and medium-density apartments would be a way to increase density overall but grow the stock in a more diverse way.”

Garvin looked at areas where many new apartments were being supplied and found that apartment price growth was lower, as expected.

However, detached house prices tended to increase more in areas where the supply of apartments was high.

The average detached house price in the suburbs, where more than 1,000 new apartments were built, rose 91 percent from 2012 to 2017. But in suburbs where fewer than 100 new apartments were built, the average single-family home price rose only 69 percent during the housing boom of the past decade.

“In areas where a lot of apartment buildings are being built, we still saw very strong house price growth, potentially stronger than in other areas,” Garvin said.

“The demand for living in these areas was generally increasing very much, and the supply of new flats was meeting the demand for flats in the market, and therefore the increase in flat prices in these areas was relatively low, because the new supply was meeting the increased demand. But it could not meet the demand for houses.”

Garvin emphasized that as the population grows, more housing supply is needed, otherwise the housing affordability problem may worsen.

“I can’t look back and say tear down the apartment buildings that were built. It was definitely a good thing,” he said.

“What’s driving Sydney’s price rise?… It’s not just a shortage of supply.”

Garvin said other policy responses to housing affordability, such as taxing owner-occupied housing compared to other asset classes, are also worth examining.

Terry Rawnsley, director of planning and infrastructure economics at KPMG, who was not involved in the research, agreed that medium-density housing and townhouses could help improve housing affordability.

He said they could be built at a lower price per square foot because they might not have a complex site or amenities such as elevators or underground parking. Compared to high-rise buildings, more developers and builders have the capacity to realize them.

“There is definitely a consumer preference [some] people don’t like high-rise living…other people, that’s where they were born, where they grew up, and it makes perfect sense for them to live there,” Rawnsley said.

“The planning system should be about giving people housing choice.”

He acknowledged the backlash to tackling housing affordability in the last federal budget, including negatively diverted investments and changing the tax treatment of capital gains.

“The retreat of the investor segment means there will be slower price growth, which will help housing affordability in the long term,” he said, also highlighting infrastructure financing for new developments.