An analysis of holding cost impact on housing affordability in relation to midsized greenfield residential property developments in south east queensland

AN ANALYSIS OF HOLDING COST IMPACT ON HOUSING AFFORDABILITY IN RELATION TO MIDSIZED GREENFIELD RESIDENTIAL PROPERTY DEVELOPMENTS IN SOUTH EAST QUEENSLAND Gary Owen Garner CertAg(Tocal), AssocDipVal(WAIT), BBus(Curtin), GradDipB&M(ACT) Submitted in fulfilment of the requirements for the degree of Doctor of Philosophy School of Urban Development Faculty of Built Environment & Engineering Queensland University of Technology January 2012 FINAL VERSION i Keywords discount rate; EOQ model; finance holding costs; greenfield; holding costs; housing; housing affordability; inflation; infrastructure contributions; development assessment; interest rates; inventory; investment; land banking; net present value; opportunity cost; planning; planning requirements; property development; regulatory assessment; residential development An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland i ii Abstract The position of housing demand and supply is not consistent The Australian situation counters the experience demonstrated in many other parts of the world in the aftermath of the Global Financial Crisis, with residential housing prices proving particularly resilient A seemingly inexorable housing demand remains a critical issue affecting the socio-economic landscape Underpinned by high levels of population growth fuelled by immigration, and further buoyed by sustained historically low interest rates, increasing income levels, and increased government assistance for first home buyers, this strong housing demand level ensures problems related to housing affordability continue almost unabated A significant, but less visible factor impacting housing affordability relates to holding costs Although only one contributor in the housing affordability matrix, the nature and extent of holding cost impact requires elucidation: for example, the computation and methodology behind the calculation of holding costs varies widely - and in some instances completely ignored In addition, ambiguity exists in terms of the inclusion of various elements that comprise holding costs, thereby affecting the assessment of their relative contribution Such anomalies may be explained by considering that assessment is conducted over time in an ever-changing environment A strong relationship with opportunity cost - in turn dependant inter alia upon prevailing inflation and / or interest rates - adds further complexity By extending research in the general area of housing affordability, this thesis seeks to provide a detailed investigation of those elements related to holding costs specifically in the context of midsized (i.e between 15-200 lots) greenfield residential property developments in South East Queensland With the dimensions of holding costs and their influence over housing affordability determined, the null hypothesis H0 that holding costs are not passed on can be addressed Arriving at these conclusions involves the development of robust economic and econometric models which seek to clarify the componentry impacts of holding cost elements An explanatory sequential design research methodology has been adopted, whereby the compilation and analysis of quantitative data and the development of an economic model is informed by the subsequent collection and analysis of primarily qualitative data derived from surveying development related organisations Ultimately, there are significant policy ii An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland iii implications in relation to the framework used in Australian jurisdictions that promote, retain, or otherwise maximise, the opportunities for affordable housing An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland iii iv Table of Contents Keywords i Abstract ii Table of Contents iv List of Figures viii List of Tables xii List of Equations xv List of Abbreviations xvi Statement of Original Authorship .xvii Acknowledgments xviii CHAPTER 1: INTRODUCTION 1.1 Background 1.2 Context – research problem 1.3 Purposes – aims and objectives 1.3.1 Primary considerations of this Research 1.3.2 Research questions 1.3.3 Discussion of the Research Questions 1.4 Significance, scope and definitions 10 CHAPTER 2: LITERATURE REVIEW 13 2.1 Introduction 13 2.1.1 Holding costs – a major determinate of value 13 2.1.2 Compatibility with other key housing affordability research agendas 14 2.2 Historical Background (Incorporating an Overview of Australian and Queensland residential property market & trends) 17 2.2.1 Residential housing prices and residential housing sales volumes (transfers) 17 2.2.2 Building & construction activity 33 2.2.3 Conclusions and contextualisation within housing affordability 43 2.3 The issue of housing affordability 44 2.3.1 Definition & significance of housing affordability 44 2.3.2 Relationship between housing affordability, and property supply & demand 47 2.3.3 Relationship between housing affordability & time 59 2.3.4 Measurement of housing affordability in australia 60 2.3.5 Correlation of housing affordability & housing costs 69 2.3.6 Holding costs: a critical component of housing development costs and consequently a significant impactor on housing affordability 70 2.4 Holding & opportunity cost theory in a property development context 74 2.4.1 Holding cost components 74 2.4.2 Statutory interpretation of holding costs 76 2.4.3 Holding period / holding period return 77 2.4.4 Treatment of holding costs by commercial software models 79 2.4.5 Complexity of the holding cost calculation 80 2.4.6 Holding cost estimates and linkages with statutory bodies 82 iv An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland v 2.4.7 2.4.8 2.4.9 2.4.10 2.4.11 2.4.12 2.4.13 2.4.14 2.4.15 Holding costs evolution from inventory management EOQ models 86 Opportunity and sunk costs defined 89 Opportunity cost and the present value / discount factor 90 Opportunity cost: irreversibility and uncertainty 93 Discount rate as the opportunity cost of capital 94 Opportunity cost, and the cost of equity 102 Taxation and liquidity effects 102 Impact of highly regulated environments and commercial risk 103 Dimensions of regulatory assessment in the greenfield residential development pipeline 106 2.4.16 Impact of land supply 119 2.5 Summary and Implications 124 2.5.1 Overview 124 2.5.2 Implications of the literature review 125 CHAPTER 3: RESEARCH DESIGN 129 3.1 Methodology and research design 129 3.1.1 Methodology 129 3.1.2 Research design 136 3.1.3 Limitations of the research 145 3.2 Participants 147 3.2.1 Industry survey 147 3.2.2 Case studies (field investigations) 147 3.3 Instruments 149 3.4 Procedure and timeline 151 3.5 Analysis 154 3.5.1 Quantitative analysis 154 3.5.2 Qualitative analysis 155 3.6 Ethics and limitations 158 CHAPTER 4: RESULTS 161 4.1 Economic modelling 162 4.1.1 Development of a Holding Cost Economic Model examining the effects of time for a property development project 162 4.1.2 Modelling results 173 4.2 Econometric modelling 179 4.3 Industry survey: Development Assessment & holding costs 181 4.4 Case studies – property development survey 182 4.4.1 Scope of the case studies and property development survey 182 4.4.2 Data collected: survey instrument #2 - questionnaire (structured survey for case studies) 184 4.4.3 Data collected: survey instrument #3 questionnaire - (follow up personal interview to confirm financial details and clarify uncertainties) 185 CHAPTER 5: ANALYSIS 191 5.1 Introductory analytical discussion 191 5.2 Nature and composition of holding costs over time 192 5.2.1 Case study / field investigations 192 5.2.2 Conclusions 205 An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland v vi 5.3 Linkages that exist between various planning instruments, the length of regulatory assessment periods, and housing affordability 210 5.3.1 Industry survey: Development Assessment and holding costs 210 5.3.2 Conclusions 254 5.4 Quantification of the impact of holding costs on housing affordability 268 5.4.1 Increased costs and housing affordability – measurement of the impact upon mortgages 268 5.4.2 housing affordability measurements: mortgage equivalency as a percentage of household income 269 5.4.3 Interest rate impact 274 5.4.4 Time frame impact 279 5.4.5 Combined impacts: interest rate and time changes 281 5.4.6 Calculating holding costs for individual projects – comparison with estimates derived by Queensland government and others 283 5.5 Theoretical development & econometric modelling 283 5.5.1 ―What-If‖ scenario modelling for holding cost variables: measuring sensitivity and impact via housing affordability trend line equations 283 5.5.2 Holding cost – housing affordability trend lines 292 5.6 Conclusions 295 CHAPTER 6: CONCLUSIONS 299 6.1 Conclusions and Implications 299 6.1.1 What is the nature and composition of holding costs applying in South East Queensland residential property markets? 300 6.1.2 How does the length of the regulatory assessment period impact holding costs in South East Queensland? 300 6.1.3 To what extent is the assessment period (and other primary holding cost factors) a contributor that impacts housing affordability in South East Queensland? 301 6.1.4 What correlations with housing affordability can be derived from a model quantifying the impacts of holding costs? 302 Addressing the Null Hypothesis H0 304 6.1.5 6.2 Limitations of the research 305 6.3 Recommendations 306 APPENDICES 309 Appendix A: Publications (Research) Output 309 Appendix B: Research Output & Sequencing 313 Appendix C: 30 month / 2.5 year Base Case Holding Cost Economic Model Assumptions and Summary Output 314 Appendix D: Base case scenario – primary model outputs 316 Appendix E: Base case scenario – additional model outputs 317 Appendix F: Case Studies Summary 318 Appendix G: Timelines for the Property Development Pipeline 319 Appendix H: Generic Greenfield Property Development Pipeline 320 Appendix I: Case Studies: Property Development Pipelines 321 Appendix J: Research Project Timelines 322 Appendix K: Impact of interest rate changes, time frame changes, and interest and time frame changes 323 Appendix L: Linear Trendline Analysis - Sensitivity of Factors Impacting Holding Costs and Subsequent Effect on Housing Affordability 324 Appendix M: Case Study Comparisons against the Base case Scenario (summary data) 325 Appendix N: Case Study A: Summary Input and Output 327 Appendix O: Case Study B: Summary Input and Output 328 vi An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland vii Appendix P: Case Study C: Summary Input and Output 329 Appendix Q: Case Study D: Summary Input and Output 330 Appendix R: Holding Cost Economic Model Output: Long term Analysis to Examine the Sensitivity of Time on a Development Project 331 Appendix S: Scenario Modelling – Gross Realisations and Holding Costs 332 Appendix T: Case Studies: Cost Component summaries and comparisons 333 Appendix U: Residential Lot Cost Comparisons based on Interest rates 334 Appendix V: Residential Lot Cost Comparisons based on Time Frame 336 Appendix W: Scenario Modelling: Holding Costs – Housing Affordability Summary and comparison of all independent variables 337 Appendix X: Holding Cost - Housing Affordability Trend lines: Polynomial trend line equations 338 Appendix Y: Industry Survey – Development Assessment & Holding Costs (Survey Instrument #1) 339 Appendix Z: Data Obtained for Survey Instrument #2 – Questionnaire (Structured Survey for Case Studies) 365 Appendix Z1: Development Assessment & Holding Cost Survey Instrument 387 Appendix Z2: Property Development Survey (Case Studies) Survey Instrument 400 Appendix Z3: Follow Up Interview Questions – Property Development Survey (Case Studies) Survey Instrument 418 BIBLIOGRAPHY 421 An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland vii viii List of Figures Figure ‎2-1 Median price of houses in Australia (capital cities), 2002-2010 22 Figure ‎2-2 Sale volumes (house transfers) in Australia (capital cities), 2002-2010 23 Figure ‎2-3 Comparison of median house prices and sales volumes in Brisbane, 2002-2010 23 Figure ‎2-4 Real median prices of houses, units and land, South East Queensland 25 Figure ‎2-5 Price Index of Established Houses, Australian capital cities, 2002-2010 28 Figure ‎2-6 Long Term Price Index of Project Homes: Australian capital Cities 1986-2010 31 Figure ‎2-7 Medium Term Price Index of Project Homes: Australian capital Cities 2000-2010 32 Figure ‎2-8 Comparison of Price Index of Established Houses and Project Homes: Brisbane 2002-2010 32 Figure ‎2-9 Trend (linear regression) comparison of price index of established houses and project homes: Brisbane 2002-2010 33 Figure ‎2-10 Number of Private Sector Dwelling Approvals – Australia, 1983-2010 37 Figure ‎2-11 Number of Private Sector Dwelling Approvals – Queensland, 1983-2010 37 Figure ‎2-12 Dwelling unit commencements – Queensland 2002-2010 39 Figure ‎2-13 Dwellings Approved / Private Sector House Approved 2009-2010 (Australia) 40 Figure ‎2-14 Dwelling Unit Commencements, Australia: 2002 -2010 40 Figure ‎2-15 Dwellings Commenced 2002-2010 (Australia) 40 Figure ‎2-16 Private Dwellings commenced – Long term 1957-2010 (with Trends), Australia 41 Figure ‎2-17 Private Dwellings commenced – Long term 1957-2010 (with Trends), Queensland 41 Figure ‎2-18 Private Dwellings commenced – Medium term 2000-2010 (with Trends), Queensland 42 Figure ‎2-19 Private Dwellings commenced – Short term 2006-2010 (with Trends), Queensland 42 Figure ‎2-20 Median House Price Comparisons: Australian Capital Cities, as at October 2010 49 Figure ‎2-21 Residential Sales Volumes: Australian Capital Cities, as at October 2010 50 Figure ‎2-22 Change in the Housing Supply Gap - Queensland & Australia 51 Figure ‎2-23 Change in Underlying Demand for Housing (Number of Households - Australia) 53 Figure ‎2-24 Short Term Projected Change in the Housing Supply Gap (Australia) 55 Figure ‎2-25 Longer Term Projected Change in the Housing Supply Gap (Australia) 57 Figure ‎2-26 Housing Affordability Nation Comparison 62 Figure ‎2-27 Housing Affordability - Australia Extracted from Cox & Pavletich (2007) 62 Figure ‎2-28 Changes in housing affordability (1988 to 2008) 67 Figure ‎2-29 Impact of planning delays on capital investigation: three scenarios demonstrating the acquisition of 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An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments in South East Queensland Chapter 1: Introduction This thesis investigates... Equation ‎5-2: Holding costs and gross realisation (per lot) 209 An Analysis of Holding Cost Impact on Housing Affordability in Relation to Midsized Greenfield Residential Property Developments