Australia is likely heading for a federal election in May 2025, and as always, housing affordability will be a major talking point. Sadly, these discussions often end up more about rhetoric than effective policy change. However, at some point, a solution will have to be found.
For property investors, who typically hold assets for decades, it’s important to consider how potential government actions and interventions could impact long-term property returns.
The government is rewarded for not taking meaningful action
A few years ago, I wrote a blog discussing how all three levels of government heavily rely on the property market for tax revenue. For example, government taxes and charges are estimated to account for around 30% of the cost of new housing. Stamp duty and land tax account for between one-third to half of all state tax revenues. The property market is an important source of tax revenue and rising property prices tend to translate into rising tax revenue. This means they have a vested interest in not making housing more affordable. If they could magically solve the housing affordability issue overnight, it would probably result in a significant loss of tax revenue. With this in mind, we need to question how committed any government truly is to fixing the housing affordability issue.
Setting aside this vested interest, there have been several proposed solutions, and it’s important to consider how these might affect property investors.
Will ‘activity centres’ work?
The Victorian government has announced plans for 50 high-density “activity centres” across Melbourne, with the first 25 already identified. These centres will be strategically located near train and tram stations, mostly in the city’s south-east, with the goal of delivering over 300,000 new homes by 2051.
In 2018, Sydney implemented a similar urban planning initiative, designating 15 Urban Renewal Corridors for revitalisation. This plan aims to accommodate 725,000 new homes by 2038.
The overarching goal of these urban strategies is to increase housing density in areas already serviced by public transport, featuring a mix of mid-rise (10 to 20 stories) and low-rise (4 or fewer stories) apartment buildings.
Impact of higher density on property values
Peter Tulip, a former economist at the Reserve Bank of Australia, has spent much of his career studying property price behaviour. In a recent paper, Tulip and his colleagues looked at the effects of high-rise developments in Sydney suburbs such as Chatswood, Forest Lodge and Green Square. They found that property prices in these areas closely followed the trends of nearby suburbs, both before and after the developments, showing no significant negative impact on the neighbourhood’s amenities. This suggests that concerns about tall apartment buildings harming the character of local areas are often exaggerated.
Tulip argues that there’s no empirical evidence to support the idea that development reduces the quality or character of neighbourhoods. In fact, he believes higher-density development can foster economic growth and enhance local amenities without significantly affecting property values. Based on this research, it seems clear that increasing density likely won’t harm property values. In fact, it could even improve the overall amenity of an area.
However, it’s important not to jump to conclusions. While the potential for redevelopment in established suburbs can increase the land’s productive value, leading to some price appreciation for property owners, not every case may play out this way. I’ve heard stories of property owners holding unrealistic expectations, hoping to sell to a developer for more than what is financially viable. When this happens, they often get stuck in a stalemate, and no development happens at all. So, while there’s potential for growth, don’t assume it’s a guaranteed win for everyone involved.
Just build more homes!
The only real solution to housing affordability is to increase the supply of housing. While increasing density in established suburbs can help, it has its limits. Given Australia’s vast landmass, we could expand urban sprawl and build more low-density homes.
However, the challenge lies in building the necessary infrastructure to support this growth in a timely and cost-effective way, requiring significant investment. While this approach is feasible for most capital cities, Sydney faces unique constraints due to its geography, with water and national parks limiting expansion. As a result, Sydney will be forced to focus on increasing density, which will, in turn, raise the productive value of land.
While increasing housing supply could, in theory, slow property price growth in established suburbs, this depends on adequate infrastructure being in place. If new housing is not supported by sufficient infrastructure, the appeal of living further from the CBD will be diminished due to longer travel times and congestion. In that scenario, properties closer to the CBD will continue to command a premium.
How will robo-taxis impact property prices?
At a recent event, Tesla unveiled its Cybercab and Optimus robot, products that could soon revolutionise how we travel, offering comfort without the stress of traffic. Driverless rideshare services like Waymo One are already operating in some cities in California, and it’s likely that driverless taxis and rideshares will arrive in Australia sooner than we think.
This raises an important question: how will this affect property values? Would you mind a 1.5-hour commute if you could use that time to work or relax? While it’s too early to say how this will impact property values, it’s worth noting that the tyranny of distance may become less of an issue. However, inner-city, blue-chip locations offer more than just proximity. They provide a unique vibe, community, and culture that many people value.
There’s little bad news for property investors
Australia will need to increase density in its capital cities to accommodate our growing population. This is an irrefutable necessity. However, there will almost certainly be opposition, so the extent of additional housing is uncertain. That said, evidence suggests this is unlikely to negatively impact existing property values. In fact, it’s likely to contribute towards property price growth.
We can build more homes and expand our already sprawling capital cities, but travel times and congestion will become a bigger issue as we’re simply not building enough infrastructure fast enough. While technology may offer some relief, living close to the CBD will still be in high demand in the decades to come.
In summary, I believe this is good news for long-term owners of investment-grade property. That is, high-quality property will continue to command a premium.
Land taxes will affect property investment as the high cost of holding onto a property can make the investment not worthwhile. The cost of residential property is driven by building costs and government taxes, both of which keep increasing. Additional supply can help, but at the end of the day developments will not proceed if they are not viable.
I think that is true for property in general, Peter. However, regarding “investment grade property” specifically, compounding capital growth will (should) always substantially offset holding costs in the long run, particularly if held for more than a couple of decades.