An Uber for apartments could solve some common housing problems

Bringing together buyers and sellers of apartments could result in better apartment pricing and design. CucombreLibre/Flickr, CC BY

Andrea Sharam, Swinburne University of Technology and Lyndall Bryant, Queensland University of Technology

Speculative property developers, criticised for building dog boxes and the slums of tomorrow, are generally hated by urban planners and the public alike. But the doors of state governments are seemingly always open to developers and their lobbyists.

Politicians find it hard to say no to the demands of the development industry for concessions because of the contribution housing construction makes to the economic bottom line and because there is a need for well located housing. New supply is also seen as a solution to declining housing affordability.

Classical economic theory however is too simplistic for housing supply. Instead, an offshoot of Game Theory – Market Design – not only offers greater insight into apartment supply but also can simultaneously address price, design and quality issues.

New research reveals the most significant risk in residential development is settlement risk – when buyers fail to proceed with their purchase despite there being a pre-sale contract. At the point of settlement, the developer has expended all the project funds only to see forecast revenue evaporate. While new buyers may be found, this process is likely to strip the profitability out of the project. As the global financial crisis exposed, buyers are inclined to walk if property values slide.

This settlement problem reflects a poor legal mechanism (the pre-sale contract), and a lack of incentive for truthfulness. A second problem is the search costs of finding buyers. At around 10% of project costs, pre-sales are more expensive to developers than finance. This is where Market Design comes in.

Matching buyers and sellers

Market Design argues individuals will cooperate where there is an advantage in doing so. This is the premise of the “sharing economy”. Much of the innovation in the sharing economy also reflects another insight of Market Design; that markets can be constructed in different ways to serve different purposes.

Our interest here is in two-sided matching markets, which is a common design for e-commerce. Buyers are aggregated on one side of the market and sellers on the other with a market manager. Think Airbnb or Uber. Aggregating potential buyers of apartments would resolve the issue of searching for presales: taking the process from looking for needles in the haystack to shooting fish in a barrel.

Both buyers and developers would need to be registered participants, and the market manager would be responsible for recruiting participants and matching development opportunities to buyers. Pre-identification of buyers would avoid much of the cost of pre-sales and search time.

In addition there could be real-time communication and customer segmentation that permitted developers to take account of the actual expressed preferences of the buyers. An expanded apartment product range and cost reduction should make apartments more attractive to owner-occupiers, reducing settlement risk. The same can be said of having more owner-occupiers and fewer investors.

Pre-sales are one of the most expensive and riskiest elements of property development.
Dean Lewins/AAP

Keeping developers honest

However, as one financier (who agreed to be interviewed but not identified) rightly noted, developers can be expected to pocket the savings. Residential development is oligopolistic so there needs to be a source of competition to put pressure on prices, and who better than consumers themselves?

DIY apartment developers, what we call “deliberative” developers, now comprise 10% of all new housing in Berlin, and it has taken off in Europe. Deliberative developers make cost savings in the order or 25-30% and get the type and high quality product they want. Financing constraints have meant deliberative development in Australia has been the preserve of the well heeled, but support from impact investors for example, would enable ordinary households access to such self-help schemes.

One further change however is required. Planning schemes need to impose density restrictions (in the form of height limits, floor space ratios or bedroom quotas) in urban localities where housing demand and land values are high in order to dampen speculation and de-risk development by creating certainty.

Building a model that encourages owner-occupiers

The existing development model relies on capturing uplift in site value, and suits investors (incentivised by tax concessions) seeking rental yields in the short term and capital gains in the longer term. The price of land in the vicinity of redevelopment sites is then pushed up as landholders’ expectation of future yield is raised. It is a vicious circle in which developers seek to compensate for these higher prices through increased dwelling yields, smaller apartments and reduced amenity, further alienating would be owner-occupiers from the market.

However restrictions on over-development of larger infill sites needs to be offset by permitting intensification of “greyfield” suburbs. Aggregating existing housing lots to enable precinct regeneration, and moderate height and density increases would permit better use of airspace, delivering housing designs that can optimise land use while retaining amenity.

Redesigning the market and supporting deliberative development are the keys to achieving good, affordable apartments.

The Conversation

Andrea Sharam, Research Fellow housing & homelessness, Swinburne University of Technology and Lyndall Bryant, Lecturer in Property Economics, Queensland University of Technology

This article was originally published on The Conversation. Read the original article.

Not just daggy dongas: time to embrace prefabricated buildings

Prefabricated buildings don’t have to be dull. The challenge will be to get Australians to embrace them. Wendy Miller, Author provided.

Wendy Miller, Queensland University of Technology; Dale Steinhardt, Queensland University of Technology, and Karen Manley, Queensland University of Technology

Amid Australia’s housing affordability problem, could prefabricated homes offer a helping hand?

Prefabricated homes – in which either the entire house or significant parts of it are manufactured in advance and then installed or assembled on site – are generally cheaper to build and have less environmental impact than conventional buildings.

The industry might even help to safeguard manufacturing jobs, as the workforce from Australia’s ailing car industry could potentially shift to manufacturing buildings instead.

This rosy outlook aligns well with Australia’s Construction Vision 2020, a government-commissioned plan for the property and construction industry which strongly supports the role of prefabrication. Yet this vision is not yet becoming reality – less than 5% of new Australian houses are prefabricated.

What are the key issues that are holding prefabrication back? It is being let down by a combination of the industry’s small size, Australia’s culture and weather, financing, weak policy support, and traditionalism.

Wendy Miller, Author provided

How we build and where we live

The size and culture of the Australian housing market limits the reform of traditional building processes, as does the warm climate of its urban areas. Australia is a relatively small, low-density market that does not favour high-output factories.

With an abundance of sun and no routine snowfall in our coastal capitals, there has not yet been a compelling reason to move the workforce inside (although there has been no study on the impacts of inclement or extreme weather events on construction time and cost).

Australians are also engaged in a growing love affair with renovating existing housing, rather than building from scratch.

The financing of prefabricated houses is complicated by the fact that the industry necessarily straddles the manufacturing and housing sectors. Financing for traditional house builds relies on the gradual release of funds as milestones are reached such as the pouring of a concrete slab, erection of the frame, and full completion.

In contrast, prefabrication reduces the on-site work to a simple installation process, with no gradual progression, so the builder/manufacturer needs funding up-front. Such cashflow issues have struck Melbourne-based modular housing designers Unitised Building and Modscape, both of whom have been forced to seek overseas financial backing or draw on private equity.

Not your average donga.
Wendy Miller, Author provided

Shifting sands of policy

Australian prefabrication designers also face significant policy and regulatory uncertainty. The National Construction Code was specifically “developed to incorporate all on-site construction requirements”, and features little acknowledgement of offsite, prefabricated methods.

Another example is the Queensland Building and Construction Commission’s Home Warranty Insurance scheme, which does not cover prefabricated work and advises clients to withhold payments until the house is completed. However, there are encouraging signs that the scheme may be expanded next year to cover prefabricated builds.

There are also positive signs from within the industry. Australia’s two largest housing industry groups each have a sustainable building program that aligns with the benefits of prefabrication: the Housing Industry Association’s GreenSmart scheme, and Master Builders Australia’s GreenLiving Builders project. With the housing market more focused on ecological sustainability than ever before, environmentalism could be one way of encouraging even more uptake of prefabricated buildings.

A smart way to build.
Wendy Miller, Author provided

Stuck in our ways?

There is still a long way to go, however. The Construction and Property Services Industry Skills Council has pointed to specific skill deficiencies, general reluctance within the industry, and a lack of consumer demand as holding back prefabrication. Convincing existing trades to abandon traditional methods in favour of a more structured factory setting may not be easy. The recently announced ARC Training Centre for Advanced Manufacturing of Prefabricated Housing is a prime example of early work linking research and industry to develop new technologies and people skills.

Little hard evidence is available regarding consumers’ views. A history of poor-quality school demountables and mining “dongas” has probably been damaging. Building stylish prefabricated hotels or apartment towers can help, and will also play to prefabrication’s strengths in developing economies of scale.

But these unique builds will not necessarily thrill the average suburban mum and dad, who might be more focused on carving their own slice of the Australian dream. Proving to Australians that prefabrication does not have to be bland or standardised remains a challenge, and one that is actively acknowledged and targeted by a new breed of architect-designed Australian prefabricated housing. Making the jump from one-off, designer homes to mainstream acceptance is the next challenge.

There are signs that prefabricated housing is gaining a foothold in Australia, but there are still key sticking points in convincing industry, financial lenders, policy developers, and consumers of its potential. Lobby groups such as prefabAUS are aiming to improve attitudes – but perhaps what we also need is a primetime television show about prefabrications, to counter the endless fascination with renovations.

Wendy Miller is Senior Research Fellow at Queensland University of Technology.
Dale Steinhardt is Research Fellow at Queensland University of Technology.
Karen Manley is A/Professor of Construction Management at Queensland University of Technology.

This article was originally published on The Conversation.
Read the original article.