Global Cities emerge as a consequence of economic activity, political power, knowledge and influence, cultural significance, connectedness and quality of life. Research indicates that from the perspective of global High Net Worth Individuals (as key decision makers), Melbourne resonates primarily from its perceived quality of life, only moderately as a knowledge and influence centre (tertiary education and research), but not meaningfully as a centre of economic or political power.

So why is Melbourne on the cusp of Global City status?

It’s all about global mobility of capital and the emergence of the Melbourne apartment market as an accessible form of investment to the rapidly emerging middle classes in Asia.

Melbourne’s housing markets are increasingly dynamic, perhaps none more so than the apartment sector. The apartment market is a multi-faceted vehicle influenced by a diverse range of factors, which in the off-the-plan context have become dislocated from the underlying real estate fundamentals of the project location.

At a macro level, the Melbourne apartment market is trading in two distinct contexts: a Global Melbourne (across the Central City Region) and a Local Melbourne (City Fringe and Suburban).

There are marked differences in the drivers and operational aspects of the two which must be acknowledged and understood when considering the role of apartments in the metropolitan housing market.

GLOBAL MELBOURNE – A COMPETITOR FOR GLOBAL CAPITAL

The Central City apartment market is increasingly driven by the greater participation of offshore developers, capital and individual purchasers. Globally, apartments are emerging as a conduit to capital transfer and asset diversification traded more as financial commodities as well as ‘safe haven’ instruments as opposed to their fundamental real estate attributes.

The global apartment market is now highly interconnected, operating against a background of diverse geo-political and economic drivers that cross regions, borders and countries.

Melbourne (together with Sydney and Brisbane) is now competing with other Global and emerging Global cities for a slice of global residential capital.

The current phenomenon is more likely representative of a structural shift than a cyclical event, although the prevailing drivers to offshore participation in foreign markets is more pronounced than it has perhaps ever been.

Moreover, it is likely that there will be a transition of this influence from the Central City to the broader metropolitan region, and may yet evolve to become a significant driver of activity in other development forms (townhouses and greenfield).

What must be understood is that this phenomenon is not restricted to Melbourne. International activity is currently a key driver of apartment markets in Global Cities including London, New York, Toronto, Vancouver and Singapore.  Each of these cities is increasingly acting as a host to offshore capital looking for a secure destination.

LOCAL MELBOURNE – THE DEFINING HOUSING CHALLENGE OF THIS GENERATION

In the Local Melbourne Context, Melbourne’s emergence as a neo-World City poses several challenges for local policy makers and the property industry.

Is the objective for a city to attract international capital and participate in the global market to meet the needs of offshore investors, or operate intrinsically to meet the housing (not only investment) needs of its current and future residents? In the contemporary global economy, both functions are critical.

By reference to apartments as a percentage of housing stock in buildings of 4+ levels in comparable cities, Melbourne’s metro apartment market (3.3%) appears chronically immature.

Sydney apartments (10%); Chicago (30%); Toronto and Vancouver (40%) and even Los Angeles (35%) are significantly more mature apartment cities.

A shift to a much more diverse housing supply which includes apartments and townhouses will be critical to the long term economic viability and liveability of Melbourne, and provide a hedge against downside infrastructure and services risk to future generations.

How Melbourne provides pathways to achieve higher residential densities, whilst retaining its famed ‘liveability’ which acts as a magnet for continued international investment (in the absence of our ability to draw investment on the back of global economic and political power), are the defining challenges of this generation.

The required shift in Melbourne’s housing structure will not occur via either public policy or market dynamics in isolation. Political cycles are a consequence of our cherished democracy, however the future productivity, prosperity and relevance of Melbourne as one of Australia’s most significant economic assets is far more important than the short-run political game. Perhaps at no time in Melbourne’s history has it been more important for political and property industry stakeholders to seek mutual understanding of the paradigm shift occurring in the housing markets.

AN UNDERSTANDING OF THE INTERSECTION BETWEEN PROPERTY, PLANNING & ECONOMICS IS KEY

Policy and industry stakeholders must do more to understand the tripartite relationship between property (as the delivery vehicle), planning policy and economics to ensure the aspirations of a city are embedded in strategic fundamentals.

There is a risk of a disconnect between the short-term political aspirations of the day and the long term needs of the housing market and its host city which, if not acknowledged, will undermine the opportunity to forge an city that has enduring high levels of productivity and liveability.

Strategic policy and planning directions must be founded upon a sound evidence base, serve the best strategic interests of the city and its future generations, and be made in acknowledgement of the full range of factors influencing the housing market.

Any failure in this regard can expose a city to a framework that risks an inability to meet the underlying housing and lifestyle needs of the growing population, a lack of housing diversity across the entire metropolis, and further affordability stress in a city already burdened by high housing prices.

The property industry must also react to the changed dynamics to remain relevant in the face of increased global competition, capital flows and non-local factors that are driving some markets.

In the contemporary economy, to which our domestic property markets are wed, innovators will flourish and the stagnant will be exposed. In the apartment context it is observed that the landscape is already changing, and the transition into the townhouse and housing sectors is underway. Future industry leaders will strategically negotiate their way through the uncertainty and increased volatility of the global market, and unlock long term value from sound opportunities.

The role of apartments in achieving a balanced housing market (in the global context) is not yet widely appreciated.

A higher density city (towards 25% housing supply via apartments) will not evolve purely as a voluntary, seismic shift in housing preferences. The strategic framework of a city, together with its property industry stakeholders, must acknowledge that the global shift towards density is not simply a voluntary manifestation of modern lifestyle trends, but a forced response as a consequence of increased costs and friction in our housing, transport and lifestyle.

Living in many of today’s Global Cities is a much harder existence, for the majority of their populations, than we observe through the media or in our travels. The majority of us will not walk the streets of a truly Global City Melbourne in our lifetimes. However the foundations of that future city must be reinforced now if it is to retain its famed liveability. This is after all the key brand attribute that put us on the international map in the first instance and has been a key driver of our economic prosperity.

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• New Residential Zones (introduced July 2013);
• New Development Contributions (pending); and
• Increasing Public Open Space Contributions (pending).

The three statutory changes will result in more immediate and real impact on property development that will shape the future structure of the city. Each of these policies appears to have been designed in isolation – of each other and of Plan Melbourne – notwithstanding the magnitude of their cumulative impact on future housing supply. The new residential zones will cause, by far, the greatest future impact.

The Unforeseen Planning Strategy – Vision vs Implementation

Plan Melbourne establishes an aspirational vision, yet the key success measure for any metropolitan strategy is always its ability to be implemented. Whilst Government sets an “implementation plan”, the private development industry becomes ultimately responsible for the delivery of built form outcomes.

The three statutory changes, in isolation of Plan Melbourne, will have profound effects upon the ability of the development industry’s ability to deliver cost-effective new supply that that will directly translate into detrimental impacts on future residents’ (both as owner occupiers and renters) ability to access housing in high-amenity areas at affordable prices (or rents).

These impacts include:

• Reduced new housing supply, particularly in Melbourne’s higher priced and infrastructure-rich housing markets;
• Higher development costs for new residential projects;
• Higher prices for established housing given increased scarcity; and
• Reduced housing diversity and choice for future consumers.

Importantly, existing residents are unlikely to be significantly burdened by these impacts in the first instance. Rather, existing inter-generational housing disadvantages will become further entrenched by increasing the already high barriers to entry (ie. price) to housing markets.

Impacts of New Residential Zones

The new residential zones (Neighbourhood Residential, General Residential and Residential Growth) are being implemented at the discretion of Councils ahead of the finalisation of Plan Melbourne although the draft Strategy seeks to deliver “the Neighbourhood Residential Zone (NRZ) across at least 50 per cent of Melbourne’s residentially-zoned land”.

The NRZ is the most restrictive residential zone as it limits development to a maximum of two dwellings per lot along with other stricter design constraints. In the first adopted amendment, Glen Eira was able to apply the NRZ to 78% of its residential land. Charter’s research indicates that a range of Councils are currently contemplating the application of the NRZ to between 60% and 80% of their current residential areas.

It is salient that Boroondara (80%), Yarra (77%), Brimbank (63% ) and Whitehorse (79%) are all suggesting application of the NRZ to much higher levels than the nominal 50% benchmark.

The opportunity still remains for the Planning Minister to properly assess the strategic justification of Councils’ proposed zone allocations. Each Local Government Area’s role in the metropolitan context must be considered rather than just Councillors’ political expediency before new zones become implemented given their long-term impacts to Melbourne as a whole.

Plan Melbourne and New Residential Zones

Plan Melbourne’s vision is for 200,000 new dwellings within the Expanded Central City to cater for future demand. This will effectively translate into new supply of apartments. This form of housing supply will continue to overwhelmingly be purchased by investors rather than owner-occupiers until the long term.

As recently discussed by Charter (October 2013 Insight), Central Melbourne’s housing market is becoming dominated by apartments purchased primarily as “financial commodities” by investors (both domestic and overseas). Apartments are increasingly being traded as financial products driven by external factors beyond local housing market and demographic fundamentals. This dislocation between meeting local housing needs and generating commensurate investment returns is most pronounced for some segments of non-local purchasers.

Plan Melbourne also proposes an additional 393,000 dwellings to be delivered into established suburbs, which include some of Melbourne’s higher-priced and infrastructure-rich locations (Boroondara, Stonnington, Bayside, Port Phillip and Glen Eira) which are, as a result, the most fundamentally supportable and suitable apartment locations based on Charter’s rating tool. Most of the highest rating locations are also where the NRZ is proposed to be most aggressively applied.

Inevitably there must be a trade-off between the protection of existing areas and accommodation of housing supply for future residents in locations that are close to jobs and transport.

Unintended consequences of the new residential zones will include a severe limitation of housing choices and higher house prices for future generations but also limitations upon the ability of existing residents to downsize within their local areas and to free-up large sites (often with obsolete houses) to be redeveloped as less expensive new medium density housing for aspiring entrants.

The balance between the needs of current and future communities appears to be unfairly skewed.

Standard Developer Contributions – potential new levies on development

A standard levy on development across Melbourne is currently being considered. Whilst there has been no definitive policy announcement it is likely that a significant charge on all development (including non-residential) will add to the cost to deliver housing in Melbourne’s established suburbs, which will affect the volume and price of new housing, and impact housing affordability.

Public Open Space – increased existing levies on developers

Historically, new development faced a 5% contribution to Public Open Space (POS) to the relevant local council. Increasingly, the 5% rate is being reviewed with a number of Councils recently proposing POS contributions in the order of 7-8%. Various amendments and guidelines are proposing an 8% contribution for all non-exempt subdivisions.

How do these policy changes affect metropolitan Melbourne?

Introduction of new residential zones, higher open space contributions and new development charges will lead to a structural shift in the cost and volume of future housing, erosion of project feasibility and reduced supply across Melbourne into the medium and long term. Careful consideration should also be given to how these three policies will impact on home ownership rates for future generations.

The broader housing objectives contained in Plan Melbourne are unlikely to be achieved with policy changes leading to:

• Reduced housing choice, especially in Melbourne’s most liveable suburbs;
• Reduced opportunity for small scale development (2+ dwellings per lot), that provide critical entry level housing opportunities across Melbourne’s established areas.
• Increased reliance on central city apartments (targeted to investors) to meet Melbourne’s future housing needs given limitations to meaningful supply in established suburbs;
• Increasing development costs which will either be passed to end consumers as higher prices or lead to a reduction in effective supply;

Critically, the changes to the supply-side of the housing market will be occurring at the same time as population growth is anticipated to remain very strong and drive demand for housing. The latest ABS projections (November 2013) for Melbourne indicate 1.2 million more people by 2050 than the level that Plan Melbourne is now premised upon.

As Charter has previously highlighted, policy must be fully informed about the nature and dynamics affecting urban renewal opportunities and the development industry’s capacity to deliver new supply at affordable prices that also reflect appropriate risk-adjusted profit. Planning policy should seek to minimise constraints to housing supply particularly in locations that offer high amenity and transport connectivity so that community benefits associated with urban renewal can be optimised.

1 Brimbank City Council Housing Strategy (October 2013) proposes NRZ to 63% of residential lots.

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