Slow planning approvals to push Sydney property prices higher

Nov 28, 2019

By Matthew Hyder, CEO Legacy Property

Like a cool wind sweeping through a hot valley, the price declines that defined the Sydney property market from July 2017 to May 2019 brought welcome relief to buyers. With the cooling temperatures came a sense of hope that the prospect of owning a home in Sydney may once again become a realistic goal for many.

And whilst the 23-month decline has certainly eased pricing pressure, people would be wise not to become too attached to lower prices. Creeping up on Sydney is a housing supply issue that nobody is talking about it. It hasn’t yet made the headlines. And that’s because its cause – which is tied up in the murky arena of state and local government bureaucracy – is not easy to spot.

But when this supply gap hits the Sydney market from around 2021, it will place immense upward pressure on property prices. Any relief in housing affordability gained in recent years will quickly be eroded and the scenario for home buyers may be even worse than before.

So, what is taking place inside our government agencies that will cause this problem in the years to come?

Key points

Slow planning approvals are putting downward pressure on supply
Caused by an unnecessarily complicated planning system in NSW
Effects will be felt from 2021 when current supply dries up

Slowest planning approvals in recent history

Ask any developer who is active in the market right now and they will attest that property development approval processes through state government and local councils are the slowest they have ever experienced. I’ve been working in property development for almost twenty years and I’ve never seen planning approval times this slow. It’s also the first time I’ve witnessed a government so disinterested in up-zoning parcels of land in order to support the creation of more dwellings in urban areas.

Even when a developer does manage to gain the support of local and state government, the process of getting a new project approved is significantly delayed. One of the most frequent holdups is the state agencies that need to be consulted about applications. While this is legitimate to ensure appropriate planning outcomes, these agencies have no incentive or obligation to act in a timely manner and are plagued by bureaucratic processes and under-resourcing.

The impact of this slowdown is evident with new DA approvals down a massive 54 per cent since the peak in August 2016 (8,200 per month in August 2016 compared to 3,800 in September 2019) .

This is not a deliberate decision by government to reduce housing supply. Rather, it is an administrative issue brought about by the unnecessarily complicated planning system that exists in NSW. The onerous requirements and statutory contributions – many of which require extensive negotiation – can push out rezoning and DA approval times to as much as four to five years for un-zoned land. This time and uncertainty is making it incredibly difficult to respond to housing supply pressure. By comparison, planning systems in other states such as Victoria are far easier and faster to navigate.

Adding extra burden to the already slow approval system is the tremendous number of infrastructure projects taking place across Sydney. WestConnex, NorthConnex, Light Rail, Metro Northwest, Sydney Metro City & South West. The list goes on. This is fantastic for greater Sydney as the city needs far better transport and infrastructure to cater for residents. The issue lies in the extra work the infrastructure is creating for the Department of Planning and local councils, who need to work through the impact of these developments on their communities as well as the planning requirements that accompanying them.

The other challenge for local councils is the current requirement by the Depart of Planning to align their Local Environment Plans (LEPs) with the six District Plans. This is a good initiative, however many councils are not using this as an opportunity to update their housing studies to ensure zoning, density and building heights allow for the provision of additional housing to meet current and future requirements.

Not a problem…yet

Of course, none of this is an issue right now because there are less people shopping for property in the current climate. There are a few reasons for this, but the most notable is that reduced bank lending in recent years has held a lot of people back. Additionally, there is still excess stock in some areas as a result of the development boom that took place between 2013 and 2017.

This supply won’t be available for long as new residential construction has reduced significantly meaning new supply is greatly limited. As you know, the price decline that we witnessed between 2017 and 2019 didn’t come about because people didn’t want to buy property. But rather because of APRA’s regulatory changes that forced banks to pull back significantly on lending. People still wanted to buy – they just simply couldn’t get the approval they needed or they weren’t able to get approved for the amount of debt they were expecting. The result was fewer buyers who could afford less, which resulted in the median price declining.

Of course, now that APRA has eased its restrictions and banks are lending more freely again, people are making their way back into the market. We’re seeing the impact of this already with auction clearance rates steadily improving since their lowest point in late 2018. What’s more, sale prices are showing signs of recovery with the CoreLogic Home Value Index confirming a 1.2 per cent rise in dwelling values for October, representing the fourth straight month of rising prices[1].

This environment is ok for the moment. A little extra supply in the system is balanced nicely by the demand from buyers. But what happens in two to three years’ time when demand is still strong but there is insufficient supply because the government failed to approve enough developments now? The short answer – Sydney will have a big affordability problem on its hands.

And trust me, demand will remain strong. There are periods when demand temporarily reduces but over the long term overall absorption continues to rise. Over the last 12 years, 1 million new people decided to call our fine city home.[2] And that number will only go up. One of the reasons immigration will continue is because it’s the most important factor contributing to GDP growth. GDP is the most critical economic indicator for the treasury which is why it will continue informing government to support immigration. Looking forward, the current NSW population of just over 8 million (as at 31 March 2019)^[3] is expected to grow to more than 9 million by 2027^[4]. With around 65 per cent of people in NSW living in Sydney^[5], that’s another 650,000 or so needing somewhere to live in the next seven years.

Some of these people will already have a home to go – think new babies born to existing residents. But others, such as people moving here from interstate or offshore, will be competing in the market for housing. Without enough new developments coming to market, Sydney won’t have the supply it needs to keep up with this demand. The result will be prices ticking back up and housing affordability will yet again make headline news.