Quantifying and Addressing the Rental Housing Affordability Gap in Melbourne

How often have we heard government decree that we need to build affordable housing close to jobs, transport and services? Yet in Melbourne these very locations continue to be amongst the least affordable locations to rent or buy a place to live.

Developers argue (not unreasonably) that the combination of high land values and build costs mean that smaller apartments are the only way that the market can deliver affordable housing in these more accessible and sought after suburbs. However, even these smaller apartments are not always affordable to those in the lowest income households to purchase or rent. Even where there is a reasonable supply of smaller apartments in suburbs with good access to jobs and services, the demand for affordable housing is so great that it remains beyond the reach of many low income households.

Why? Well, partly because the gap between income and rent/purchase remains too great for many, but also the housing stock is often taken up by households on middle incomes choosing to take advantage of more affordable rental stock to free up their incomes for other living costs (refer to Figure 1). Why would you pay $500 a week in rent (even if you could afford it at a stretch) when a slightly smaller or older apartment in the same suburb is available for $400 a week, leaving you with an extra $100 a week for other living or entertainment costs, or to save for a house deposit?

Figure 1: The private rental housing affordability gap for Melbourne’s lowest income households

So in the face of these obstacles how can we possibly hope to achieve the goal of affordable housing close to jobs, transport and services? Many planners and housing advocates have long argued that inclusionary zoning is the answer – typically this might take the form of planning policy or development control where a percentage of housing constructed must be delivered for occupation by low income households.

Inclusionary zoning brings into sharp relief the debate about the role of the planning system in influencing markets, and how both the benefits and costs associated with planning choices are allocated between the broader community and specific individuals or groups within the community.

Advocates of inclusionary zoning point out that gentrification across Melbourne not only has an adverse social effect on the community (by displacing low income households from many suburbs) but it also has an overall negative effect on the economic well-being and productivity of cities; for example by forcing key workers to live long distances away from their place of employment, and reducing the capacity of some to engage in full time work. Inclusionary zoning is seen as a way of enabling greater social equity and economic efficiency and therefore delivering overall community benefits.

Meanwhile critics of inclusionary zoning schemes argue that it simply results in the cost of delivering affordable housing being subsidised by other purchasers. They argue that funding of subsidised housing is really only a role for government and should be paid for via broad-based taxation arrangements.

Whilst there is still much debate to be had, there is little argument that Melbourne has a significant housing affordability problem. Not only is this beginning to damage both the social equity and productivity of our city, but the problem is getting worse and there are few solutions in sight.

Figure 2: Lend Lease’s The Merchant development in Docklands is a mixed tenure building that includes private apartments and affordable rental housing units that are managed by Housing Choices Australia.

Current market-led housing solutions appear not to be delivering on government policy to achieve affordable housing in locations close to transport, jobs and services. In a city the size of Melbourne with such large infrastructure needs, the ‘release more greenfields land’ mantra is not going to make enough of a difference. Most of the transport, jobs and services are in our established suburbs, yet despite the lowest interest rates in living memory, the price of housing in our established suburbs is well beyond the reach of a significant percentage of Victorians.

So in this context it hardly surprising that the Victorian government is exploring new solutions. The Minister for Planning has recently announced that the government will trial inclusionary zoning on government land releases, with a view to expanding this to other development sites[i]. This initiative is sure to attract both critics and fans, but given the current housing market realities and the challenges that they present, it’s an option that needs to be explored.

Analysis undertaken by Echelon Planning on recent attempts to mandate affordable housing in Melbourne via the planning system has revealed a myriad of shortcomings that we think must be addressed if government is to pursue inclusionary zoning in Victoria. These range from a lack of evidence about what the unmet local housing needs really are, vagueness over the definition of ‘affordability’, and uncertainly about long term ownership and management of such housing. And as noted by Kathy Mitchell in her April presentation to the Western Region Housing Forum (an extract of which was published in the August version of Planning News), one of the key influences is that there is not yet an explicit level of support from the Victorian Planning and Environment Act and the State Planning Policy Framework for inclusionary zoning that requires the mandatory provision of affordable housing in private developments.

Despite the current legislative barriers, some Councils have had success implementing affordable housing requirements via rezonings and negotiated voluntary agreements. It has taken several years of trial and error through testing planning permit conditions, appeals to VCAT and considerations by Panels to identify the most effective way to achieve this. One of the more popular measures is the transferral of dwellings to registered affordable housing providers such as the Port Phillip Housing Association and Housing Choices Australia, who then rent the dwellings to a range of low-income and key worker households.

We have identified the following ten factors that have influenced the success or failure of proposals for affordable housing proposals in Melbourne.

1) Utilise a clear definition of affordable housing.

Several attempts at inclusionary zoning on specific sites (via planning scheme amendments, planning permits and Section 173 Agreements) have fallen over at VCAT and Panel due to disparate interpretations of this term.

2) Provide a clear nexus between the need for affordable housing and the level of contribution sought.

VCAT and Panels have sometimes found it difficult to ascertain who is being targeted for the affordable housing sought by Council. There have been uncertainties as to what households the affordability data should be based on – is it the suburb, the municipality, the metropolitan area, or Australia as a whole? Often Councils have not been able to justify the percentage of affordable housing being sought, as they have not analysed the existing supply and demand within their municipality. A target or quantified shortfall of affordable housing units is important.

3) Assign clear responsibility for the ownership and operation of the affordable housing.

An affordable housing provider such as a housing association needs to be ready and able to take on the dwellings so there are no delays for the developer. There must also be certainty for developers as to whether they will be required to provide affordable housing, rather than receiving an unanticipated planning permit condition. This requirement should be flagged at the start of the project, and potential housing providers involved as early as possible.

4) Ensure the affordability status of the housing is permanent.

The affordable housing should be provided in perpetuity to provide continued benefits.

5) Provide flexibility of delivery for both developers and affordable housing providers.

Housing associations will be in varying states of cashflow, and may not be in a position to purchase dwellings within the timeframes required in the planning and development processes. Permit conditions or Section 173 Agreements can build in a range of options such as allowing providers to select land, dwellings, cash-in-lieu or a combination of these, or the option to, for example, purchase 10 units at 50% cost or take 5 units at no cost. Also, developers may wish to give cash-in-lieu instead if they do not want to incorporate affordable dwellings within their development.

6) Consider the design and location.

Lower income households have lower levels of car ownership, and thus access to public transport and local services is particularly important. Housing associations often have specific requirements in regards to dwelling design, and again should be involved early in the process if developers are constructing the dwellings on their behalf. Affordable dwellings should preferably be constructed to be similar to the surrounding neighbourhood character.

7) Minimise the ongoing running costs.

Housing associations need to minimise their expenditure in order to most efficiently utilise their resources. Paying expensive body corporate fees for pools, gyms, poker rooms and golf simulators is not a desirable outcome, and thus including affordable housing units within larger developments with significant communal facilities can be problematic.

8) Stage the introduction of new affordable housing requirements.

A staged approach where the level of affordable housing required is increased over several years can assist the development sector to adjust to the new provisions.

9) Lead by example.

As with many urban planning advancements (such as sustainable building design requirements), Councils and State Government should preferably incorporate affordable housing on their own sites to demonstrate how it can be successfully implemented.

10) Educate the community.

Informed developers and local communities are more willing to accept affordable housing if they understand the need for it and have their fears of what types of tenants may be living in the dwellings allayed.

The ability to secure adequate housing in terms of price, location and accessibility to employment has a profound impact on the extent to which lower income households can participate in social and economic opportunities. We look forward to the outcomes of the Plan Melbourne refresh that will examine affordable housing, and hope to see an evolution of policy that becomes more supportive of planning interventions in housing affordability.

Figure 3: As part of the rejuvenation of its Drill Hall community space, City of Melbourne facilitated the development of an affordable housing project on the site.

[i] Wynne, R. 2015, Building Our Communities for 10 Million People, media release, 7 August, Premier of Victoria, Melbourne, viewed 15 September 2015, <http://www.premier.vic.gov.au/building-our-communities-for-10-million-people>.