Is It Time To Rethink Density?


With new forecasts of record population growth across Australia’s major capital cities over the next few decades and affordability remaining a challenge, is it time to reconsider the core principles and policies that guide the management of this growth?

The accepted wisdom that we should be simply directing development and people towards higher density living in our major cities, especially Melbourne and Sydney, is increasingly being challenged by many buyers and households who continue to vote with their feet and move to more affordable locations - including greenfield suburbs, peri-urban locations and regional centres – many of whom are seeking the traditional detached house.

Two recent reports have highlighted current and emerging trends about how our cities might evolve in the future and what the opportunities and challenges might be

Recent population projections by the Victorian Government suggest Greater Melbourne could have a population of nine million by 2056 with a full state population of 11.2 million, up from 6.5 million in 2018. Greater Melbourne is expected to grow by 1.6% every year while the rest of Victoria could grow by 1.0% every year.

How do we deal with this growth?

The CSIRO’s latest Australian National Outlook 2019 (ANO) suggests the country could face a ’Slow Decline’ if we do not take action on our most significant economic, social and environmental challenges.

The report highlights several key shifts that are required to meet these challenges and maintain our high standard of living, including a focus on greater densification of our cities.

“An urban shift will enable well-connected, affordable cities that offer more equal access to quality jobs, lifestyle amenities, education and other services,” the report said.

The report notes that the ‘shift’ could potentially be achieved by planning for higher-density, multi-centre and well-connected capital cities to reduce urban sprawl and congestion, creating mixed land use zones with diverse high-quality housing options and investing in innovative transportation infrastructure.

However, policies that direct most people into higher density housing options in our major cities do not always reflect the needs or aspirations of buyers and households.

Affordability constraints and the fact that many households, especially young and established families, prefer a detached house should be carefully considered when advocating for increased density as a ‘one size fits all’ policy.

While increased densities in our major cities are one way of coping with rapid (and often unexpected) population growth it is worthwhile considering what buyers, families and households want and what the alternatives might be.

Young people are increasingly abandoning expensive coastal cities (where apartments are the main housing option for new property market entrants) in favour of more affordable locations where they can purchase single-family homes.

The reason is simple. Although many younger people who want to live and work in wealthy coastal capital cities, they often have little choice but to become permanent renters, usually in smaller apartments. They are keenly aware that home ownership is critical to long-term financial security and family formation.

In response, four-fifths of home buyers under 35 in America choose to purchase single-family detached houses in the suburbs. Since 2010, around 1.8 million Americans have moved away from the urban core of major metropolitan areas. They have opted, instead, to move to lower-density areas where single-family houses are the norm.

Some commentators have argued that the push for densification of our cities is not the result of market conditions but the concerted efforts by some who want to fundamentally alter the way cities are built.

Arguably, responding to actual market needs and addressing key issues like affordability and declining home ownership figure less prominently.

While not often highlighted, we see a similar phenomenon in Australia where our greenfield and other outer suburbs and peri-urban areas are popular with many buyers and households. However, in these markets, supply falls short of demand.

We are also seeing many regional centres across the country experience rapid population growth.

While increasing density across our urban areas represents one important tool for accommodating a burgeoning population, it cannot be the only strategy when we are dealing with a complex range of issues especially those that relate to how and where people want to live and raise a family.

Rather than looking to simply transform Australian cities and urban areas into densely populated metropolises, we should be more nuanced about how we will build the cities of the future with individual and family choice and market aspirations taking a key role in our thinking.

George Bougias is an economist, adviser and strategist specialising in real estate. He is the National Head of Research for Oliver Hume Corporation, one of Australia’s leading residential property funds and real estate services groups, and leads the firm’s in-house strategic research team. George has extensive experience across both private and public sectors, analysing and advising on Australia’s diverse property markets for government, private real estate developers and corporate and institutional clients. During his time in government George served as an advisor to the Innovation Economy Advisory Board (the Victorian State Government’s highest economic advisory body) and as an economist in the Department of Treasury and Finance and Department of State Development (Victorian State Government). He is a graduate of the University of Melbourne with a Bachelor of Commerce (Honours), majoring in economics, and a Bachelor of Arts, majoring in political science.

Photo credit: Jorge Láscar, via Flickr, using CC License.

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Just a few key points

Density and affordability are rarely something that happens in the real world of these urban cities in which the architectural community are promoting this 'future'. These dense developments result in gentrification if successful - translation: housing for the upper crust of society, and the promise of affordability is flushed down the toilet. Perhaps we should look at the underlying reason architects promote new urbanism (which is just $$$ old urbanism constructed - new) and high density towers. Architects charge a % of construction cost. There are two ways for them to cash in. One is to work on incredibly expensive homes with picky people who will drive them crazy with changes - or build really expensive replicable buildings or high rise towers. Say 10% of three $2 million dollars of homes a year and that's a decent living - but 10% of a $100 million dollar project and yikes, I'd even get out and convince you those towers will be good because density = affordability and the city should back this vision.

Guess what happens to the value of land at 3 units per acre vs. 50 units per acre? If you guessed that it would increase the value - bingo - it will skyrocket that value - and who ever owned that land cashes out, but the rezoning is likely to be the developer who contracted (locked up) the land and a rezone alone is a lottery win. Expensive land = non-affordable housing = gentrification. If the housing is affordable it's likely to look like a 'project' and could be a future redevelopment problem - sometimes very near future.

Now let's look at the real numbers. Suppose at 3 homes per acre the land value is $30,000 USD and at 50 units per acre it's now worth $1 million USD - per acre of land (this would be very typical of Minneapolis existing single family converted to high density). This means the raw land cost per unit is $10,000 USD per home at low density and at high density would be $20,000 per unit. If the area was downtrodden to begin with and redeveloped property could be bought cheaper - shoehorning (minority) families in towers is not the best idea to give people a sense of self-worth anyway.

Lets take a situation in the suburbs. There is two ways to economically sound growth. Historically it's only been about density, so let's do the math. A developer convinces the suburban city that on a 33 acre tract (possible 100 homes at 3 per acre) to increase the density to 5 homes per acre (going from 100 to 165 homes by reducing the lot width from 60' wide to 36' wide). With a 10' side yard for federal fire code standards, this means the home is 26' wide - enough for a garage door - and front door = no streetscape whatsoever. In other words an instant slum. Unusual? No almost all the major builders in the USA have these types of products - zero curb appeal. Let's also assume the housing is affordable. Another assumption - profit is $10,000 per home. The raw land at $30,000 an acre X 33 = $1 million. At 5 homes per acre, the raw land cost per unit is $4,000 per home less (165 vs 100 homes). The extra 65 homes at $10,000 profit is $650,000 divided by 165 total homes = $3,900 or a total $8,000 roughly per home extra profit, or what would be unlikely, a $8,000 reduction in home pricing - where that $8,000 savings goes would be up to the developer - builder. In any case, the 'architectural draftsman' probably made a few thousand in drafting fees because very few licensed architects go for affordable housing (percentage of construction costs thing).

Now lets take a look at another alternative - same 33 acres - and don't change the density, but use new land development design methods to reduce the infrastructure on the neighborhood by 33% - length, not width. Another assumption is the street, walks and utilities in that suburb will be $600 a linear foot. On a 60' wide lot, if fronted on both side of the street, the length of street per lot would be 30' or $18,000 in construction costs (not including site costs) for the street, sidewalks and utility mains alone. But the typical suburban development is about 33% inefficient, meaning not all streets built are fronted on both sides, and thus, there is unintended waste. By re-educating the consulting industry to think differently, and using a much higher level of software (other than the limited and overly complex CAD not intended specifically for land applications) - the 33% waste can be eliminated - leaving larger lots on average for the families. The reduction of infrastructure is $6,000 per home - without packaging families like sardines - instead giving them more space (far less environmental impact). Now with the more width and space, to look at better connection between interior and surrounding exterior spaces... by paying attention to the floor plan to make rooms in dimensions that reduce waste (cutting wood for odd dimensions) - meaning that architectural draftsman at $50 an hour could also learn a few tricks that could reduce the construction costs a few thousand dollars per home without sacrificing livability and function - if anything increasing function and livability.

In other words - density and affordability is most often meaningless. Good design and affordability can change the landscape - but it takes effort in a world where planners are no longer teaching design - instead social engineering, and consultants are complacent with an entire industry slaves to the mindless replication caused by the CAD industry. We lost the ability as an industry to design better.

As a design example, Chevy released the C8 Corvettefor less than $60,000 - the first real disruption in the auto industry in decades - a supercar with incredible standard features in many ways a better design than those costing 4 to 6 times the price - yet similar performance, and I'd bet with cylinders shutting down - much better gas mileage. Magic? No. Special materials? No. Just incredible design. In the USA the annual sales of new cars total retail price (all cars sold) as compared to new housing sold is almost the same gross annual product. The auto industry spends 3% in research and development - the housing industry - no so much.

Design, it's something we used to do before computers, but now it's a button press that some software programmer automated a known process - to advance we need to change the processes, and those that are trusted to design the future environment we all live in. Students go deep into debt to learn a mindless CAD package and not advancements that can't be programmed into an automated button. In the 42 years we have been developing software, it's always the same - potential customers ask - how much faster can I get the job out? Never: How much better of a neighborhood can I create for the families that will live on that tract of land for the coming centuries?

Change the consulting industry, the educational institutions, and dump CAD - and affordability becomes a reality - not a false claim from an architect who will gain $10 million in their pocket to convince you otherwise.