According to a property industry source, there are 8000 empty and unsold apartments, and the rising call is for the government to buy them for public or affordable housing, now with updated graphs including build costs below.
In the four years leading to 2024, 45,000 apartments were built in metropolitan Melbourne, and 8000 of those apartments are still unsold. But why?
The statistic came not from a report (as claimed by The Age) but from a presentation by Richard Temlett, national executive director of research at Charter Keck Cramer and an expert in the residential market, who wanted to educate the industry on market conditions and the opportunities for a government “buyout” of these unsold buildings.
Robert Pradolin from Housing All Australians wrote about this statistic on how private developers could use his organisation’s progressive residential affordability development solution (PRADS) framework to develop the apartments into affordable housing for essential workers.
The model involves developers putting their property up for rent at below market rates for at least 30 years before returning to the market.
This allows the developers a steady income stream and, apart from private sector real estate agents, access to a community housing provider to administer the property to ensure tenancy.
But Temlett told The Fifth Estate he had released the findings with different intentions. The Victorian government’s Plan Melbourne 2017-2050 strategies, as well as its housing statement, signified intent to purchase residual stock – or at least social and affordable housing – but that’s not being done, Temlett said, and he wanted to start the discussion.
“As it applies to the apartment markets in Melbourne, there is a lot of overhang, and that overhang is at a much lower price point [than build costs, which have] increased, and it’s holding back the release of new apartment projects.
And now Temlett is working on educating an industry that is “quite frustrated that the market wasn’t moving like it should”, what the big issues are, and talking to the government on how to move forward.
“It could be a win if the government purchased [the stock on the market], rented it out to key workers, and that would help with rental affordability; it would also remove the stock from the market and allow developers to proceed with their future project.
“Until some of the stock gets digested and absorbed by the market, it’s going to be much harder to raise pricing.”
Temlett said, comparing 2015 and 2025 prices, Melbourne’s apartments need to be about 50 per cent more expensive.
“Developers cannot launch projects when there’s competing stock at a 50 per cent discount, because even though interest rates are coming down, buyers are saying ‘well, why would I buy new stock at 50 per cent more when there’s an established apartment down the road for 50 per cent less’.
“In a balanced market, new stock would typically come in at about 10 to 15 per cent price premium, but right now it’s very wide because of the cost of delivery and the building cost [has] increased and purchasing capacity in Victoria has not increased by that much.”
He added that as soon as the stock is removed from the market, developers would be able to “adjust upwards”.
So, why is the stock unsold?
The first issue was the reputation of these apartments, said Temlett.
“Unfortunately, the media has a lot to do with that, because not all apartments are the same, so there are a lot of headlines saying that they’re defective, they leak and so forth. So, buyers are apprehensive about buying in certain projects.
“The bigger one is also because of where interest rates are at.
Another issue is the lack of government incentives and investment benefits, Temlett said.
The government has increased taxes, and the “mathematics doesn’t make sense right now.”
“In particular, stamp duty relief for the residual stock and cost-of-delivery reforms are essential to unlock new supply and support a more sustainable housing future.”
Falling interest rates will change that, he says.
But having a government buyout was a faster solution and would be a “positive win for everyone”.
A Melbourne specific issue
According to Temlett, Sydney didn’t face the same issues as the city was a “more mature market” than Melbourne. The demographic of Sydney had more owner occupied buyers, whereas Melbourne had more investor grade buildings and “a lot of stock unfortunately is investor stock.”
“It’s in the CBD, it’s in Hawthorne, it’s in Box Hill, it’s in Footscray, hanging around.”
In Sydney, he said much more stock was owner occupied and “not hanging around”.
It’s not an issue in any other state, certainly not on the scale that it is in Melbourne.”
“It’s not that they are leftovers because no one wants them. They are leftovers because Victoria was closed for two years. So, investors, either because they bought them off a plan or walked away and forfeited their deposits, because they couldn’t [wait], or they were going to lease them out.
Source: CoreLogic, Charter Keck Cramer
The need for ICIRT ratings
According to Temlett, many consumers of media believed all developers are the same, and that one negative headline could catch most developers in the crossfire.
But the reality is that many developers have brand names they want to protect, and so they would rectify defects and fix compliance issues, and it’s unfair that they also get caught.
In Sydney, buyers are offered the ICIRT rating, an initiative by former building commissioner David Chandler, which gives more confidence to buyers about the quality of the construction.
Temlett says the company’s surveys showed that buyers wanted sustainability, but that when “push comes to shove, they are asked to pay 20, 30 or 50 grand”, they don’t go ahead unless they are wealthy.
Temlett said there are discussions about a similar system to ICIRT in Victoria.
“Any sort of objective rating tool that gives buyers more confidence about the quality of the product is essential.”
Upzoning could be a solution to affordable housing
Upzoning and allowing developers density bonuses could be an avenue to encourage development, because it doesn’t actually cost the budget more money, Temlett said, and might deliver a density bonus in exchange for 30 per cent affordable housing.
An example of this would be Nightingale Housing’s Merri-bek development, which utilised PRADS principles.
“I think the great Australian Dream needs to evolve; there needs to be more than one dimension. [Currently], there’s only one dream.”
There could be a great Australian dream for a student, a widower, a couple with no kids or a couple with kids, he said
Further density
But he doesn’t think we will ever have too much housing.
Planning changes [also] take one to two market cycles to come into effect, which is every seven to 10 years, so it’s likely an undersupply will remain.
“We need planning reform, tax reform, labour reform and immigration reform to fix the housing market. The planning changes coming through are good, but by themselves, they won’t move the dial enough.
Your caption of the final graph is very poor. An explanation of the increase in Build to Rent developments is needed.