RDP 2020-04: The Apartment Shortage 5. Variations in Apartment Shortages

5.1 Where is the Shortage Most Severe?

Where new housing should be located will be determined by site-specific factors such as the price of land, alternative uses and so on. Nevertheless, the gap between price and cost at a regional level should be important in determining the broad contours of development. Figure 4 shows the effects of building restrictions at the ABS's Statistical Area 3 (SA3) level for Sydney, Melbourne and Brisbane.[9] The effect is calculated by taking the difference between the average sale price of new apartments and the cost of supply within each region. We focus on the cost of building up, which is typically lower than the cost of building out.

To reliably estimate at a local level, we average prices and costs over a longer period of time, from July 2011 to December 2016. As discussed in Section 5.2, the average effects of building restrictions were somewhat different over this period than in 2018, especially for Brisbane. Sale prices are SA3 averages from CoreLogic, with the same filters used as in Section 4.1 and Appendix A.1. To estimate marginal costs, we first calculate average cost per dwelling from the ABS Building Approvals collection for each SA3. In measuring construction costs at a local level we are allowing for apartments in expensive areas being larger and of higher quality. We then make a series of adjustments to convert these raw average construction costs to marginal costs. Specifically, we make a 5 per cent allowance for cost overruns (our estimate of the average difference in costs in the ABS Building Activity Survey and its Approvals collection) and an adjustment for the difference between marginal and average costs. The adjustment from average to marginal costs varies by region within each city, and depends on the average building height of recently constructed apartments. For instance, we scale up costs, in accordance with Equation (2), in Sydney Inner City by 9 per cent (where the building height of the average apartment is 13 storeys) and in Hornsby by 4 per cent (6 storeys).

We make additional adjustments for margins, financing costs and legal and marketing fees, which collectively add another 37 per cent to our estimate of marginal cost. Finally, we make an allowance for infrastructure charges, which adds between $10,000 and $20,000 per dwelling, depending on the city. SA3s with fewer than 200 sales or apartments approved (such as Manly in Sydney or Keilor in Melbourne) are not shown.

Figure 4: Apartment Shortage by SA3
July 2011–December 2016
Figure 4: Apartment Shortage by SA3

Sources: ABS; Authors' calculations; Centre for International Economics; CoreLogic data; Industry consultation; Urbis

The map of Sydney shows the effect of restrictions to be small on the outskirts, moderate in the middle ring and large near the centre. The largest gaps between demand and cost occur in inner areas of Sydney, such as the Eastern Suburbs, Leichardt and North Sydney. In contrast, prices near the centre of Melbourne and Brisbane are close to costs – even though relative travel times and amenities are comparable to inner Sydney. These differences seem to reflect differences in building patterns. As Figure 5 shows, apartment building in Brisbane and Melbourne has been concentrated in the centre, whereas most of Sydney's apartments have been built in middle-ring suburbs. As noted in the introduction, a large location premium, as in inner Sydney, can only be sustained with supply restrictions.

Figure 5: Apartment Completions by Distance to CBD
Cumulative share of city total, 2013–18
Figure 5: Apartment Completions by Distance to CBD

Sources: ABS (unpublished); Authors' calculations; CoreLogic data

The dispersal of apartment building in Sydney is sometimes supported on the grounds that it is less costly to build in outlying suburbs, where land is cheaper. However, home buyers place a lower value on apartments that are far from the city centre and they will readily pay the higher costs of central locations. Recent development in Melbourne and Brisbane accommodates these preferences. Housing on the outskirts is worth providing, but it is an imperfect substitute for the housing that home buyers are most willing to pay for.

Regional disparities within Sydney may get more severe. The NSW Planning Department's ‘Sydney Housing Supply Forecast’ projects that a ring of six local government areas some 40 to 65 kilometres from the city centre (Blacktown, Camden, Campbelltown, Liverpool, Penrith and The Hills) will account for 36 per cent of new housing built over the next five years, although these areas only account for 24 per cent of the Greater Sydney population.[10]

Each of the three maps shows areas in which the effect of building restrictions is small or negative. Although measurement error and other noise may be a factor, we would expect construction activity to vary due to non-regulatory factors in these areas. Perhaps more importantly, these observations show that our overall results are consistent with planning restrictions being important at the metropolitan level while not binding in some areas. Moreover, they demonstrate that there is nothing in our estimation technique that forces the effect of building restrictions to be large or positive.

5.2 Changes over Time

Figure 6 extends the estimated effect of building restrictions from Table 1 back in time.

Figure 6: Prices, Costs and Effect of Height Restrictions
Per apartment
Figure 6: Prices, Costs and Effect of Height Restrictions

Note: (a) The effect of building restrictions for each city is the average sale price of new apartments less the estimated cost of building up

Sources: ABS; Authors' calculations; Centre for International Economics; CoreLogic data; Rider Levett Bucknall; Urbis

We use sales data from CoreLogic from 1997 to 2016 and apply the same filters as discussed in Appendix A.1. That means the price series represents the average sale price of new apartments. We do not control for changes in characteristics. After 2016 we assume prices grow at the same rate as CoreLogic's hedonic unit price index for the relevant city.

Our marginal cost estimates, discussed in Section 4.1 and Appendix A, are calculated using building completions data from 2013–18. We extend these estimates back to 1997 (the earliest period for which data are available) using the other residential PPI for each state. We evaluate marginal costs at the trend building height of the average apartment for each city, as discussed in Appendix A.2. We make the same proportionate adjustments for developer's margins, financing costs, marketing and legal fees.[11]

Over the past decade, we find that the effect of height restrictions has increased substantially in Sydney while remaining moderate in Melbourne. The small estimate for Brisbane in 2018 is unusual relative to previous experience – for most of the past two decades apartment prices in Brisbane have substantially exceeded costs. The differences in recent price movements seem to partly reflect differences in supply. Shoory (2016, Table 1) shows that the apartment stock has been growing relatively slowly in Sydney, moderately in Melbourne and quickly in Brisbane.


We cannot disaggregate further – for example, to the suburb level – without disaggregated estimates of construction costs. [9]

The 2019 ‘Sydney Housing Supply Forecast’ data can be downloaded from the NSW Department of Planning, Industry and Environment website at <https://www.planning.nsw.gov.au/Research-and-Demography/Sydney-Housing-Supply-Forecast/Forecast-data>. [10]

We assume that the GST raised costs relative to the PPI by 10 per cent in 2000. The CoreLogic price data include GST (in principle) and do not require adjustment. [11]