Developers and financiers are driven by a logical desire to avoid a sudden fall in demand. So they undersupply the market demand. But there’s another more ordered and safe way to better meet our housing needs. How about a developer’s fee for service?
The speculative apartment development industry in Australia is in a post-China, COVID19 slump. This provides some breathing space to put in the groundwork for an industry which can respond to demand for affordable, sustainable owner-occupier product. Now is the time for governments to put their weight behind the alternative to speculative product: deliberative development.
Deliberative development is where a group of future owner-occupiers come together to undertake the development, cutting out the developer-middleman and their profit-take. Proponents directly engage architects, builders etc and design for their collective requirements.
To celebrate the 10th anniversary of the movement in Australia I have released short video animations explaining speculative and deliberative development.
In this article, I reflect on the DD gains and the opportunities. But first I consider speculative apartment development.
Prior to COVID a third of Australians lived in apartments. Only a fraction of these were owner-occupiers; these are found mostly at the luxury end of the market.
Speculative apartments are overwhelmingly built for investors wanting cheap product and aiming for capital gains. Owner-occupiers require better design, amenity, and quality. These attributes rarely come with an affordable price tag.
The other big problem with speculative apartment development is that the housing boom and bust cycle is more extreme.
When investors leave the market – as they did in 2017 when Australian financial regulator’s measures to cool an overheated market and the Chinese Government imposition of capital controls – development finance evaporates. New apartment projects hit the backburner.
Projects already under construction struggle to sell unsold stock, or if just finished, face defaults at settlement. Cranes on the skyline are stilled. Construction jobs are lost.
Apartment supply always lags demand to mitigate the risk of sudden falls in demand.
When sudden change occurs, some developers are caught short and cannot avoid losses. This means we have under supply punctuated by very short periods of over supply followed by no supply. Companies collapse, workers exit, skills are lost and all we have to show for it is bad housing.
Public policy often pump-primes demand to encourage housing supply but no financier will risk their money if there is any risk of over-supply.
It is a self-regulating system, which protects financiers and developers, but it does not deliver the housing we need.
The build-to-sell model does not fulfil our needs. Tenants need build-to rent to deliver quality and security. Owner-occupiers need quality without the luxury price tag. Deliberative development is part of the solution for homeowners.
Instead of boom and bust we need a steady state system which builds to demand, which the system can to a greater extent if building for owner-occupiers. We need a system that can deliver sustainability and housing affordability.
We do not need a developer’s millionaires factory which periodically smashes the livelihood of workers in the industry.
The first 10 years
Over the last few decades there have been multiple cases of deliberative development, mostly in Melbourne. These were one-offs. This is not surprising as the groups obtained their housing and got on with life. About 10 years ago Tim Riley managed a small townhouse development for himself, family and friends.
He recognised others could benefit if he kept going. Property Collectives has gone on to manage nine syndicates and build 60 dwellings. Its first apartment development is underway.
The other person was Jeremy McLeod who was spurred on by the failure of The Commons as deliberative development. It was built but only after the project was sold onto a speculative developer when the group could not obtain finance as a result of the GFC.
He went on to found Nightingale Housing. Nightingale is not pure deliberative development but has many elements, such as providing the apartment at cost.
But in the Nightingale 1.0 model it was the licensed architect-as-developer and not the future residents that took on the development risk. This model proved unscalable and Nightingale has evolved to become a not-for-profit development company. It now occupies space in the missing middle between for-profit developers and non-government social housing providers.
What have we learnt over the last 10 years?
As Tim Riley says there is “there’s no romance without finance”.
Financiers were unaware of the model and reluctant to the back anything that was not straight out of the development textbook. Nightingale and their social impact investor backers changed that.
Impact investors want social and environmental returns in addition to financial returns. They recognised these models reduce key development risks and so were willing to make the metrics work. They have been busy mainstreaming the idea.
While they have not contributed the most funds, indeed far from it, Social Enterprise Finance Australia is a financing pioneer which has exercised an extraordinary level of leadership aimed at systemic change.
Nightingale was inundated with prospective homeowners and interest in the model is strong. The interest in obtaining multi-residential at cost however has not translated into DIY groups (UrbanCoop being the notable exception).
The Australian and international evidence points to the mismatch between those who need improved affordability and those with the money and know-how to pull off a project. But wealthy households are pioneers who brought social and financial capital to bear and proved it can be done.
If you want an apartment at a discount of around 15-20 per cent to market, which incorporates your design wish list and collectively have about 30 per cent of the capital cost to contribute, why wait? Form a group and find a development manager (this could be Property Collectives, Nightingale or Hipe V. Hype or other firms embracing collaboration).
Government could loan equity to young and less wealthy households to foster affordable housing provision. They could prioritise deliberative development when disposing of surplus land, and like the Germans and their well established baugruppen model, give deliberative development a leg up in the planning scheme. Government could look to how GST and stamp duty discourages sub-division.
Baby boomers need to unlock the suburbs. Baby boomers seeking to downsize can catalyse deliberative development. They can aggregate their land with their neighbours to facilitate a modest increase in density and support great design (This is known as greening the greyfields). As the German deliberative development examples demonstrate the equity of baby boomers can provide a leg up to young households who cannot bring capital to projects, but who have future income to contribute.
Matching demand and supply
Apartment developers’ approach to finding purchasers is so last century. It is costly and risky. With some government support a digital platform to support a housing matching market could take us, both technologically and economically into an era of stable housing provision.
Speculative developers could evolve from risky, speculative ventures into de-risked businesses providing housing on a fee-for-service basis (watch this short video explaining matching markets). Such a platform is the forum for individuals to find others to join with to undertake deliberative development.
Australia’s housing system is not delivering sufficient quality, affordable apartments that also address the need to decarbonise the economy. It is an economic system prone to shocks. It is time for apartment development to change and quickly. It is time for governments to embrace innovation and get development out of the late twentieth century.
For those interested in Australian deliberative development over the past 40 years and its lessons see, Sharam, A. 2020 ‘Deliberative development’: Australia’s Baugruppen movement and the `challenge of greater social inclusion Housing Studies, Vol 35, 1, pp.107-122.
Dr Andrea Sharam is senior lecturer at RMIT, School of Property, Construction and Property Management, RMIT and an investor in Clare Cousins Evergreen project in Nightingale Village