Australia’s Recipe for Urban Decay

Across federal, state, and local levels, Australian urban planning authorities have emphasized the need for policies that seek to limit urban fringe development and create densely-populated urban centers. This process is called ‘urban consolidation’ and has been a goal of Australian authorities for more than three decades. More specifically, urban consolidation is defined by efforts to concentrate housing, jobs, and amenities around “activity centers” such as a traditional downtown, satellite urban centers, and elongated strategic corridors. These high-density areas are to be separated by green belts of undeveloped land and connected by public transport links such as trains and light rail systems.

Australian planners’ efforts to establish a high-density urban form have been effective, at least from their point of view. From 1981 to 2011, housing stock in Sydney, Melbourne, and Brisbane saw a large shift towards high-density units. A net total of 640,000 new multi-unit dwellings were built during this time, representing an increase of over 115%. This surge forced the proportion of multi-unit housing to increase to nearly one-third of the total housing supply in cities that have historically been dominated by single-family dwellings.¹

As Australia moves toward higher-density cities, what will be the result? Urban planners assert that their policy decisions are thoroughly researched and provide the “best” outcomes, but evidence from Australia’s largest cities tends to refute that claim. Among the numerous issues that arise due to consolidation ideology, perhaps the most disturbing are the severe impacts on housing affordability, poverty, and housing quality.

Urban consolidation policies, by definition, are aimed at choking the supply of new single-family detached housing by limiting urban fringe growth as a means of minimizing the urban footprint. This is intended to drive more and more of the urban population into compact living situations. Thus, by limiting the supply of single-family detached housing and pushing more households into the market for multi-family housing, urban consolidation causes home prices to rise in both markets. As Figures 1 through 5 show, this is exactly what has happened in cities that adopt consolidation ideology. The Australian Bureau of Statistics reports that “the price of established houses in the capital cities rose by almost half (46%) between 2002-03 and 2008-09, with prices increasing at an average of 6.5% per year.”² From 2001 to 2011, the number of dwellings in Sydney costing less than AUD $275 in rent per week decreased by 52% while the number of dwellings costing more than $275 in weekly rent surged by 269%; in Melbourne, the number of dwellings that cost at least $650 per week in rent more than tripled. Homeowners in Sydney and Melbourne have also seen tremendous increases in mortgage payments. In the same ten-year period, there was a seven-fold increase in the number of households in Sydney and Melbourne paying more than $4,000 per month in mortgage payments, while the number of households paying less than $1,000 per month was cut in half.³  At a time when wages and income have been stagnant, this means a severe decrease in housing affordability, meaning fewer Australians are able to afford the highly sought-after stability of homeownership.

Given the profile of buyers and sellers, the market for dense multi-family housing is predominantly driven by investors, landlords, and institutional property owners.⁴ Thus the large majority of occupants are renters, not owner-occupiers, and there is no reason to infer that this ownership pattern will change.  As Australian cities continue to densify, ownership demand – that is, the market for the purchase and sale of housing units – will be driven less by owner-occupiers and more by investors and landlords, who have historically been the dominant players in multi-unit dwelling markets. This latter group of owners responds to market conditions in a different way than the owner-occupier group, and the shift is likely to have a profound impact on economic and socio-political outcomes in the long-term.

In housing markets, there are two groups of consumers: investors, who intend to lease the units after buying, and owner-occupiers, who intend to live in the residences themselves. Owner-occupiers purchase homes for personal consumption; their decision about which home to buy is driven by the quality of the housing, access to transportation and employment, amenities in the surrounding area, and the sense of financial stability provided by owning one’s own home. Investors, on the other hand, are quite different. By definition, investors are driven by profit. They are seeking rental income from tenants as well as appreciation in the value of both the property and the underlying land. They evaluate properties based on the potential cash flows from renting and the price they can receive when they sell the property sometime in the future.

But investors’ motives may become distorted in Australia due to a policy known as ‘negative gearing.’ Negative gearing, in terms of real estate investment, allows any negative cash flow from a single property to be deducted from the investor’s total taxable income.⁵ This gives investors   an incentive to purchase properties where the mortgage payments exceed rental income, especially if value of the property is appreciating. This pushes up the after-tax returns to investors which inflates housing prices even further. It also provides investors with greater incentive to make speculative purchases, which increases home price volatility and instability.

What happens when you throw urban consolidation policies into the mix? As urban planners continue to choke the supply of new land, the price of existing land continues to accelerate upward. When investor profits are increasingly driven by speculating on the land value rather than income from the tenants, investors are more inclined to purchase lower-value properties which require less maintenance and fewer capital expenditures yet enjoy the same increases in underlying land value. By this logic, we could expect that low-income housing would increase in value at a faster pace than higher-quality housing as investors bid up the prices, which is exactly what happened in Sydney’s last real estate boom.⁶ Low-value properties are also more likely to provide investors with the support of negative gearing since they typically provide the lowest rental revenues. But investors, looking primarily at tax advantages, are less likely to improve the properties or even maintain existing structures. Thus, we can see how more and more investors not only have the incentive to compete for low-value housing units, where there is already insufficient supply, but also neglect those units in the long-term. Such market pressures are already noticeable in Sydney and Melbourne, where urban consolidation has been occurring for a longer time, and will certainly arise in Brisbane, in the state of Queensland, as planners establish growth boundaries for its booming population.⁷

But it doesn’t stop there. This problem is exacerbated by the nature of Strata title plans, which have come to dominate the market for higher density housing in Australia. Essentially, strata titling comes from legislation passed in the 1960s whereby each apartment unit or flat on a parcel of land can be owned individually, and thus a mortgage could be taken out in order to purchase individual high-density housing units. This is similar to a condominium ownership structure in the United States, but with a few key shortcomings. Although strata titling allows a few individuals living in high-density areas to enjoy homeownership, it primarily benefits investors who now only have to purchase single units instead of entire multi-family buildings. Even worse, strata titling’s lack of consideration for common areas poses a serious issue in the long run for the maintenance of high-rise buildings and their surrounding neighborhoods, especially in areas of lower income. According to Bill Randolph, Director of the City Futures Research Center at the University of New South Wales, “the strata system may come badly unstuck in lower value areas where investor landlords have little incentive to reinvest in their property and home owners do not have the wherewithal to afford major repair costs.”⁸

Putting it all together, what can we expect to be the future for Australia? Urban consolidation policies continue to push more Australians out of suburban homes and into cramped apartments, where housing markets are dominated by investor-landlords instead of owner-occupiers. The consolidation policies will squeeze the supply of land and force dwelling prices to rise regardless of rental revenue, promoting speculative behavior among investors. Negative gearing and strata titling programs incentivize these investors to neglect their properties, causing high-density areas (especially low-income neighborhoods) to deteriorate. The end result is slum-like conditions, social tension, and perpetual poverty for the neighborhood’s inhabitants. Even in higher-value neighborhoods, a lack of necessary upkeep will erode housing quality, even as prices continue to inflate. This is the reality of urban consolidation; it takes ownership out of the hands of Australians and puts it in the hands of speculative and neglectful investor-landlords. It is nothing short of a recipe for urban decay.

Clinton Stiles-Schmidt graduated magna cum laude from Chapman University where he earned a Bachelor of Science in Business Administration (emphasis in Real Estate and Finance) and a Bachelor of Arts in Economics. His experience includes several internships in real estate investment and development as well as studying abroad in both Spain and Australia. Clinton recently joined Cushman & Wakefield as an Analyst in their Corporate Finance & Investment Banking Group.

Figure 1: Ratio of Housing Debt to Disposable Income in Australia⁹

Figure 2: Weekly Rent Payments in Sydney¹⁰



Figure 3: Monthly Mortgage Payments in Sydney¹¹

Figure 4: Weekly Rent Payments in Melbourne¹²



Figure 5: Monthly Mortgage Payments in Melbourne13

Sydney suburb photo by BigStockPhoto.com.