Melbourne’s housing crisis exacerbated by stringent planning policies

In brief

As the demand for housing continues to outweigh supply in Victoria, Melbourne planning schemes must adapt by accommodating greater built form in appropriate locations, build-to-rent developments, and other sustainable development solutions to meet the needs of Melbourne’s growing population.

Background

The housing crisis is not new. Rapid population growth, the rising cost of living, and a decline in the average household size have amalgamated into a demand for more housing at an affordable price. However, the spike in development costs and restrictive planning policies pose a serious risk to the future of development in Melbourne. To protect the city from developmental stagnation and help resolve these issues, the Victorian government ought to consider introducing a range of planning policy amendments. 

Causes 

On 9 May 2023, the Australian Government announced that permanent migration for 2023-2024 will be capped at 190,000 spaces. However, over 300,000 migrants have been forecasted for that period, with 70% expected to head for Sydney or Melbourne. As a result, it is anticipated that this population increase will require Melbourne to generate 1.3 million new homes in the next few decades.

Were it not for restrictive planning regulations and objectors, it is estimated that approximately 1.3 million additional homes could have been built over the past 20 years in Australia. Due to height and storey restrictions, and council refusals to permit mid-sized development in residential areas, development has slowed significantly, leading Victoria to fall short of what will be required in the next twenty years by 282,694 homes. As a result, Melbourne’s ‘middle ring’ has been underutilised in the face of a surging populace, with gaps emerging in the inner suburbs where new builds are being restricted to heights of two storeys. 

However, a large body of Australian and overseas research observed by the Centre for Independent Studies shows that planning restrictions have significantly increased the cost of housing by up to 69% in Melbourne. Therefore, while planning restrictions have been put in place deliberately to ensure consistent liveability, amenity, and sustainability for different land uses and occupants within them, it could be said that planning systems are prioritising the interests of current residents rather than those predicted to arrive in the future.

Solutions

As development costs have skyrocketed in the wake of COVID-19, it has become increasingly difficult for developers to invest in build to sell projects. This has been exacerbated by a decline in offshore buyers, high interest rates and market uncertainty. Accordingly, the focus has turned to build-to-rent developments (BTR) as the solution to meet the surge in demand for housing across the state. BTR developments are one or more buildings constructed or substantially renovated for the purpose of providing multiple dwellings for lease. By increasing the quantity of multi-storey buildings with these kinds of projects, Melbournians can capitalise in areas deficient in land use density. 

Similarly, as the BTR sector grows, Victoria could benefit from introducing other forms of housing. For example, ‘co-living’ spaces present a viable solution for residents struggling to find affordable property close to the city. ‘Co-living' homes consist of various private and shared spaces like kitchens, living rooms, and laundries and have been popularised in major cities like London and New York.

While these projects depend on funding from local and international investors, the anticipated increase in levels of migration to Melbourne indicates a promising market for developers. Those unable to buy a house may begin to compete for affordable housing or apartments, increasing the demand for these solutions.

Also, given the necessity of BTR in tackling the housing supply issue, developments in Victoria may be eligible for reductions on taxable land value of up to 50%. The Federal Budget announced on 9 May introduced a tax reform which brings BTR developments in line with the reduced holding taxes for foreign investors associated with other long-term property investments. 

However, while demand and reform provide incentive for developers to embark on BTR projects, Councils have often imposed permit conditions which limit the use of the land to BTR only, despite being assessed under standards set by planning controls for freehold residential apartments. In doing so, it restricts landowners from later selling units within a development. If responsible authorities continue to issue permits for BTR developments subject to a land use condition, it should follow that developers should receive some uplift or similar benefit to account for their loss of opportunity to sell in the future.

Moreover, despite the forecasted influx of people into Melbourne, recent focus has been placed on expanding heritage overlays in areas that may be more useful as centres for further development. Several heritage reviews have come to fruition in some of Melbourne’s inner suburbs that do not necessarily align with the Government’s ongoing concern for housing supply. For example, a multi storey carpark in Carlton was listed earlier this year in the Carlton Heritage Review. The decision was criticised by residents for encouraging vehicle use and restricting future development of more sustainable land uses. While it is important to protect architectural heritage and maintain the fabric of Victoria’s built environment, controversial protections like the Carlton carpark are at risk of being seen to contradict the present needs of society.

Conclusion

The problems associated with the housing crisis will likely be exacerbated in coming years with development desperately needed to stem the increasing demand for housing in Melbourne.

Planning controls in Melbourne’s ‘middle ring’ should contribute to more of the heavy lifting by supporting development where it is needed most. For example, areas close to major arterial roads, train or tram lines provide prime opportunities for multi storey development. Planning policy should also integrate specific provisions for BTR developments and other sustainable development solutions as government and developers alike shift their focus towards economical solutions to meet the demands of rapid urbanisation. 

Accordingly, we think a re-evaluation of planning provisions and policy in Victoria is necessary to encourage more efficient and sustainable uses of the limited residential spaces in and surrounding the suburbs of Melbourne.