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March 21, 2024 by ash

Australia’s future housing market: what can be done to make it more affordable?

To afford property in the future, Australians must embrace a new reality of higher-density living and shrinking land sizes.

Across the nation, land prices have skyrocketed over the past decade, according to Thursday’s Domain Price per Square Metre report.

Sydney’s median price per square metre is now a staggering $2590 – 41 per cent more expensive than Melbourne, at $1838) – and has more than doubled over the past decade. Ten years ago, Sydney’s median price per square metre was $1122.

Over the past decade, the median house price per square metre has doubled in traditionally more affordable cities like Perth, Brisbane, and Adelaide. Brisbane’s price was $695 in 2013, Adelaide’s was $650, and Perth’s was $950 in 2013. As of now, Brisbane’s price is $1341, Adelaide’s is $1296, and Perth’s is $1410.

But the report also revealed Australia’s property prices would be far higher now had land sizes not shrunk over the past 20 years.

“The average block size has already shrunk over the past 20 years and that has actually helped contain prices,” says Domain chief of economics and research Dr Nicola Powell. “Without smaller land sizes, without the density we already have, overall house prices would be even higher than what they are today.”

The cost of land will only get more expensive in the years to come, she says, meaning that Australians will need to get used to owning less land in the future if they want to own property.

“It’s reshaping what we vision as the Australian dream,” she says. “What our grandparents focused on – the quarter-acre block, the big backyard – is shifting.”

Powell says Australians now own less land per square metre than previous generations, but “land shrinkage” needs to be taken further in order to preserve and improve housing affordability for the broader population.

“Shrinking plots can work wonders,” she says. “The land component is a massive driver of how much you pay for a home.”

Typically, the larger the land size, the more expensive the property. However, Powell adds that location is critical, and the places with the highest price per square metre are not always the areas with the highest median house price.

Officially, Australia’s most expensive suburb is Sydney’s Bellevue Hill, which has a median house price of $9.17 million, according to the Domain House Price Report.

However, when the data is sliced a little differently – and calculated on the sale price divided by the land size – it’s actually Paddington (also in Sydney) that comes out on top as Australia’s most expensive suburb.

Domain’s report reveals that Paddington costs  a whopping $27,400 per square metre (based on its $3.15 million median house price). By way of contrast, a Bellevue Hill house costs $14,149 per square metre, even though the median house price is $9.17 million. This is because houses in Bellevue Hill are typically set on far larger blocks of land than those in Paddington.

Suburbs adjacent to a capital city’s CBD (like Paddington) are considered to be highly desirable, so land comes at a premium and buyers are willing to pay more to live there despite its smaller property sizes, Powell says.

While it may seem grim to watch land values skyrocket and block sizes shrink, Powell says this could be part of the solution to making property more affordable – because when home owners are buying less land, they ultimately paying less for their home.

“The bottom line is, you’re buying fewer square metres,” she says. “If you are buying fewer square metres – say, for example, 10 rather than 20 – the overall collective price is lower.”

PRD chief economist Dr Diaswati Mardiasmo agrees that the strategy for making property more affordable is to increase the amount of high and mid-density housing available in urban areas.

However, it’s not an easy fix. At the heart of the Australian housing affordability crisis is supply; the lack of available land for residential property development is a significant hurdle, she says.

“It looks like Australia has a lot of land available, but that land that people will sometimes point out and say, ‘Why don’t we build something there?’ might belong to the Crown or the federal government, or they might be protected, or the quality of the soil might not be useable or suitable for residential [property],” Mardiasmo says.

“So even though it looks like we do have a lot of land, it’s not the case that we have a lot of land that can be developed for a residential or a mixed-use project, and many people don’t realise it.”

Grattan Institute associate Esther Suckling says local and state governments have strict planning rules that have made higher-density development in the middle and inner rings of suburbs more difficult.

“The number one most important driver in the affordability of house prices is density,” she says. “The Reserve Bank actually estimates that the really restrictive planning rules have added more than 40 per cent to the price of houses.”

Powell adds that higher density does not necessarily mean a lot of high-rises but rather, more options than a free-standing house on a block of land, such as townhouses, or small apartment blocks of three to four storeys.

“We need to provide more homes on the same amount of land, and that’s the key here,” Powell says. “We need more homes, and we can’t continue to sprawl. 

“It’s actually cheaper to retrofit more homes into an area that already has the infrastructure and use the surrounding areas because it’s very expensive to urban-sprawl and build everything you know from scratch.”

This change has already begun, as many governments have taken the initiative to increase property density.

“The Queensland government, in its latest South East Queensland regional plan, is introducing what they call gentle density in many local councils and suburbs,” Mardiasmo says.

“What that means is that, instead of houses, we will start to see maybe three, four, or five-storey apartments – so that instead of just being able to have family on that land, you create a four-story building with [several] apartments in it, then you can house eight or 12 families on that particular block of land.

“It also means you can reduce the cost to the buyer, so it does make it slightly more affordable.”

Mardiasmo says there has been an increase in Australian families opting not to live in standalone houses but in apartments and townhouses.

A Grattan Institute survey in 2018 found that 59 per cent of Sydneysiders and 52 per cent of Melburnians prefer and want to live in higher-density properties like townhouses and apartments.

“There’s definitely an appetite for higher density,” Suckling says.

Mardiasmo adds that, as household size decreases, smaller spaces become more suitable for Australians as more three to four-bedroom apartments are constructed.

“I think the change is actually going to happen quicker than many people think. And developers are becoming very clued into what families need,” she says.