De-risking development of medium density housing to improve housing affordability and boost supply

Abstract

Housing price inflation is a national concern given the serious decline in the number of low- and middle-income households able to purchase housing. In addition housing supply lags well behind demand. In Melbourne, urban consolidation policies explicitly seek intensification to promote housing supply but planning regulation is often criticised for being a significant cost driver for medium density housing. It is assumed that easing supply constraints will improve affordability. We suggest that laissez-faire planning exacerbates affordability issues because this approach fails to address the basic economic problem: the current inability of the market to efficiently match supply and demand in order to progress an orderly and de-risked development process. The role of ‘exchange’ one of the four housing market sub-systems identified by Burke has until recently generally been ignored but our examination reveals significant economic transaction costs that manifest as development risks that impact on affordability. Fortunately these can be mitigated, but only if there is a more consumer-driven supply response.