Developers and financiers are driven by a logical desire to avoid a sudden drop in demand. They therefore under-supply market demand. But there is another more orderly and safer way to better meet our housing needs. What about a developer’s service charge?
Australia’s speculative apartment development industry is in a post-Chinese slump, COVID19. This provides some breathing space to lay the foundations for an industry that can meet the demand for affordable and sustainable homeowner products. The time has come for governments to support with all their weight the alternative to the speculative product: deliberative development.
Deliberative development is where a group of future owner-occupants come together to undertake development, eliminating the developer-middleman and their profit. Promoters directly engage architects, builders, etc. and design for their collective needs.
To celebrate the 10the anniversary of the movement in Australia I posted short video animations explaining speculative and deliberative development.
In this article, I reflect on the gains and opportunities of SD. But first, I consider the speculative development of apartments.
Before COVID, a third of Australians lived in apartments. Only a fraction of them were owner-occupiers; these are mainly found in the luxury market.
Hedge apartments are massively built for investors looking for cheap products and aiming for capital gains. Homeowners demand better design, convenience and quality. These attributes rarely come with an affordable price.
The other big problem with speculative apartment development is that the cycle of housing boom and bust is more extreme.
When investors exit the market – as they did in 2017, when the Australian financial regulator’s measures to cool an overheating market and the Chinese government’s imposition of capital controls – development finance evaporates. New apartment projects have been put on hold.
Projects already under construction struggle to sell unsold inventory or, if they have just been completed, face settlement defaults. The cranes on the horizon are immobilized. Construction jobs are being lost.
The supply of apartments is always lagging behind the demand to mitigate the risk of a sudden drop in demand.
When a sudden change occurs, some developers are taken aback and cannot avoid the losses. This means that we have an under-supply punctuated by very short periods of over-supply followed by an absence of supply. Businesses collapse, workers leave, skills are lost and all we have to show is bad housing.
Public policy often increases demand to encourage housing supply, but no financier will risk their money if there is a risk of oversupply.
It is a self-regulatory system, which protects financiers and developers, but it does not provide the housing we need.
The build-to-sell model does not meet our needs. Tenants need to build for rent to provide quality and safety. Homeowners need quality without the cost of luxury. Deliberative development is part of the solution for owners.
Instead of boom and bust, we need a steady state system that builds on demand, which the system can to a greater extent if it builds for homeowners. We need a system that can ensure the sustainability and affordability of housing.
We don’t need a millionaire developer factory that periodically shatters the livelihoods of workers in industry.
The first 10 years
Over the past decades, there have been multiple instances of deliberative development, primarily in Melbourne. They were unique pieces. This is not surprising as the groups obtained their accommodation and continued to live. About 10 years ago, Tim Riley managed a small townhouse development for himself, his family and his friends.
He acknowledged that others could benefit if he continued. Real estate authorities continued to manage nine unions and build 60 housing units. Its first apartment development is underway.
The other person was Jeremy McLeod which was spurred by the failure of The Commons as a deliberative development. It was built but only after the project was sold to a speculative developer when the group was unable to secure funding due to GFC.
He then founded Nightingale Housing. Nightingale is not a purely deliberative development but has many elements, such as providing the apartment at cost.
But in the Nightingale 1.0 model, it was the licensed architect-developer and not the future residents who assumed the development risk. This model turned out to be non-scalable and Nightingale evolved into a non-profit development company. It now occupies the space between for-profit developers and non-government social housing providers.
What have we learned over the past 10 years?
As Tim Riley puts it, there is “no romance without finance”.
The financiers were unaware of the model and were reluctant to support anything that did not come straight out of the development manual. Nightingale and its social impact investors changed that.
Impact investors want social and environmental returns in addition to financial returns. They recognized that these models reduced the main development risks and therefore were ready to make the metrics work. They have been busy integrating the idea.
If they haven’t brought in the most funds, far from it, Social business finance Australia is a finance pioneer who has provided extraordinary leadership in systemic change.
Nightingale has been inundated with potential owners and interest in the model is strong. However, the interest in obtaining multi-residential units at cost price did not translate into DIY groups (UrbanCoop being the notable exception).
Australian and international evidence points to the mismatch between those who need better affordability and those who have the money and know-how to complete a project. But well-to-do households are pioneers who harnessed social and financial capital and proved it was possible.
If you want an apartment with about 15-20% off the market, that fits your design wishlist and collectively has about 30% of the investment cost to contribute, why wait? Form a group and find a development manager (this can be Property Collectives, Nightingale or Hipe V. Hype or other companies embracing collaboration).
The government could lend equity to young and less wealthy households to promote the supply of affordable housing. They could prioritize deliberative development when clearing excess land and, like the Germans and their well-established Baugruppen model, put deliberative development ahead of the planning plan. The government could examine how the GST and stamp duty discourage subdivision.
Baby boomers need to unlock the suburbs. Baby boomers looking to downsize can catalyze deliberative development. They can aggregate their land with their neighbors to facilitate a modest increase in density and support excellent design (this is called green the gray fields). As German examples of deliberative development show, baby boomer equity can give a boost to young households who cannot contribute capital to projects, but have future income to contribute.
Match demand and supply
The approach of apartment developers to finding buyers dates back to the last century. It is costly and risky. With some government support, a digital platform to support a corresponding housing market could take us, both technologically and economically, into an era of stable housing provision.
Speculative developers could move from risky speculative ventures to risk-free ventures providing cash for housing (watch this short video explaining the corresponding markets). Such a platform is the forum for individuals to find others with whom to join in undertaking deliberative development.
Australia’s housing system does not provide enough affordable and quality apartments that also meet the need to decarbonize the economy. It is an economic system subject to shocks. It is time for the development of apartments to change and quickly. It is time for governments to embrace innovation and move out of late twentieth century development.
For those interested in Australian deliberative development over the past 40 years and its lessons, see Sharam, A. 2020 “Deliberative development”: the Baugruppen movement in Australia and the “challenge of greater social inclusion Housing studies, Vol 35, 1, pp. 107-122.
Dr Andrea Sharam is Senior Lecturer at RMIT, School of Property, Construction and Property Management, RMIT and Investor in the Clare Cousins ââEvergreen Project at Nightingale Village
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