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

Keywords discount rate; EOQ model; finance holding costs; greenfield; holding costs; housing; housing affordability; inflation; infrastructure contributions; development assessment; inte

A N A NALYSIS OF H OLDING C OST I MPACT

January 2012

FINAL VERSION

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

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

implications in relation to the framework used in Australian jurisdictions that promote, retain, or otherwise maximise, the opportunities for affordable housing

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

1.1 Background 2

1.2 Context – research problem 4

1.3 Purposes – aims and objectives 7

1.3.1 Primary considerations of this Research 7

1.3.2 Research questions 8

1.3.3 Discussion of the Research Questions 8

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

2.4.7 Holding costs evolution from inventory management EOQ models 86

2.4.8 Opportunity and sunk costs defined 89

2.4.9 Opportunity cost and the present value / discount factor 90

2.4.10 Opportunity cost: irreversibility and uncertainty 93

2.4.11 Discount rate as the opportunity cost of capital 94

2.4.12 Opportunity cost, and the cost of equity 102

2.4.13 Taxation and liquidity effects 102

2.4.14 Impact of highly regulated environments and commercial risk 103

2.4.15 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

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

6.1.5 Addressing the Null Hypothesis H0 304

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

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

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 holding costs 73

Figure ‎ 2-30 Hyperinflationary periods are rare: propensity of interest rates to exceed inflation (as measured by the Consumer price Index) over time 99

Figure ‎ 2-31 Impact of Time & Associated Holding Costs 101

Figure ‎ 2-32 Residential Development Pipeline 116

Figure ‎ 2-33 Simplified Property Development Pipeline 118

Figure ‎ 3-1 Schematic diagram showing detail of research program highlighting methodology and sequence of research output 135

Figure ‎ 3-2 The Explanatory Sequential Design 137

Figure ‎ 3-3 Holding cost relationships and possible correlations 138

Figure ‎ 3-4 Hierarchical structure of qualitative analysis conducted through NVivo (diagrammatic representation only) 157

Figure ‎ 4-1 Accelerating increase of mortgage repayments due to holding costs over time 178

Figure ‎ 4-2 Accelerating increase of mortgage repayments due to holding costs (noting impact of regulatory assessment period) over time 179

Figure ‎ 5- 1 Word frequency query (―Tag Cloud‖) – analysis of Survey Instrument #3 Questionnaire - follow up personal interview 192

Figure ‎ 5-2 Case Study timeframes for property development pipelines 198

Figure ‎ 5-3 Cost component comparison of greenfield property development case studies 203

Figure ‎ 5-4 Case Study comparison of greenfield residential property development cost components 203

Figure ‎ 5-5 Confidence intervals for major cost components as a percentage of gross realisation (case studies) 204

Figure ‎ 5-6 Confidence intervals for major cost components as a percentage of gross realisation (case studies): logarithmic scale for the y axis 204

Figure 5-7 Exponential trend equation (total holding costs and total gross realisation) 209

Figure ‎ 5-8 Linear regression trend equation (holding costs and gross realisation – per lot basis) 209

Figure ‎ 5-9 Survey Respondent Profile 215

Figure ‎ 5-10 eDA awareness 217

Figure ‎ 5-11 Usage of eDA tools 218

Figure ‎ 5-12 Use of eDA tools by developers 219

Figure ‎ 5-13 Encouragement of developers to increase use of eDA tools 222

Figure ‎ 5-14 Encouraging developers who do not use eDA tools 224

Figure ‎ 5-15 Holding costs incurred by respondents 238

Figure ‎ 5-16 Holding costs typically incurred by Town Planner survey cohort 239

Figure ‎ 5-17 Holding costs typically incurred by Developer survey cohort 240

Figure ‎ 5-18 Estimation by developers of holding costs typically incurred 246

Figure ‎ 5-19 Estimate by developers of the proportion of holding costs incurred during the development assessment process 249

Figure ‎ 5-20 Developer response as to whether holding costs are passed on 252

Figure ‎ 5-21 Passing on Holding Costs to end users - response from different cohorts indicating they are mostly passed on 253

Figure ‎ 5-22 Passing on Holding Costs to end users – ―rarely‖ response from different cohorts 253

Figure ‎ 5-23 Histogram of key holding cost periods affecting timelines for major outlay milestones (case study results) 267

Figure ‎ 5-24 Sensitivity of Time – Up to 66 months assessment 270

Figure ‎ 5-25 Sensitivity and Acceleration of the Impact of Time on a Land Development Project 271

Figure ‎ 5-26 Cost of mortgage repayments due to holding costs 271

Figure ‎ 5-27 Increased mortgage repayments and the accelerating effect of time due to holding costs 272

Figure ‎ 5-28 Increase in Cost of Mortgage as a % of Household Income 273

Figure ‎ 5-29 Accelerating increase in cost of mortgage equivalent as a % of household income over time 274

Figure ‎ 5-30 Increase in cost of mortgage repayments and impact on housing affordability: Interest rate effect @ 6% p.a 275

Figure ‎ 5-31 Increase in cost of mortgage repayments and impact on housing affordability: Interest rate effect @ 9% p.a (base case scenario) 275

Figure ‎ 5-32 Increase in cost of mortgage repayments and impact on housing affordability: Interest rate effect @ 12% p.a 276

Figure ‎ 5-33 Increase in cost of mortgage repayments and impact on housing affordability: Interest rate effect @ 15% p.a 276

Figure ‎ 5-34 Increase in cost of mortgage repayments and impact on housing affordability: Interest rate effect @ 18% p.a 277

Figure ‎ 5-35 Increase in cost of mortgage repayments and impact on housing affordability: Interest rate effect @ 21% p.a 277

Figure ‎ 5-36 Lot cost comparison @ 2.5 years development time (base case scenario) 279

Figure ‎ 5-37 Lot cost comparison @ 5 years development time 280

Figure ‎ 5-38 Impact of interest rate changes on a property development project 281

Figure ‎ 5-39 Impact of time frame changes on a property development project 282

Figure ‎ 5-40 Combined impact of interest rate and time frame changes on a property development project 282

Figure ‎ 5-41 Scenario model for interest rate / inflation change incorporating linear trend line equation for measuring impact on housing affordability 287

Figure ‎ 5-42 Scenario model for development time change incorporating linear trend line equation for measuring impact on housing affordability 288

Figure ‎ 5-43 Scenario model for mean household income change incorporating linear trend line equation for measuring impact on housing affordability 288

Figure ‎ 5-44 Scenario model for lot numbers change incorporating linear trend line equation for measuring impact on housing affordability 289

Figure ‎ 5-45 Scenario model for undeveloped land cost change incorporating linear trend line equation for measuring impact on housing affordability 289

Figure ‎ 5-46 Scenario model for acquisition costs (ex land) change incorporating linear trend line equation for measuring impact on housing affordability 290

Figure ‎ 5-47 Scenario model for rates, infrastructure charges, DA, consultants and other fees change incorporating linear trend line equation for measuring impact on housing affordability 290

Figure ‎ 5-48 Scenario model for development costs change incorporating linear trend line equation for measuring impact on housing affordability 291

Figure ‎ 5- 49 Scenario model for developer‘s margin change incorporating linear trend line equation for measuring impact on housing affordability 291

Figure ‎ 5- 50 ―What-If‖ Scenarios: Holding Costs summary of all independent variables 292

Figure ‎ 5- 51 ―What-If‖ Scenarios: Gross Realisation summary of all independent variables 292

Figure ‎ 5-52 Holding Cost – Housing Affordability Trend Lines 293

Figure ‎ 6-1 Research Output – Sequencing with Research Methodology 313

Figure ‎ 6-2 Medium term increase in cost of mortgage payments due to holding costs (base case scenario) 317

Figure ‎ 6-3 Long term increase in cost of mortgage payments due to holding costs (base case scenario) 317

Figure ‎ 6-4 Generic Property Development Pipeline 320

Figure ‎ 6-5 Research Stages and Project Timelines Gantt Chart 322

List of Tables

Table ‎ 2-1 House Prices: Eight Capital Cities, Sep 2010 22

Table ‎ 2-2 Housing Price Potential Explanatory Independent Variable Matrix 27

Table ‎ 2-3 Building Approvals, Australia (as at September 2010) 36

Table ‎ 2-4 Dwelling Commencements (last 12 months) - Australia 39

Table ‎ 2-5 Number of dwelling units commenced, Australia & Queensland: Correlation Coefficients for Polynomial trend regression equations 43

Table ‎ 2-6 Change in the Housing Supply Gap – Australia & Australian States 51

Table ‎ 2-7 No of Households – Australian States (Reflecting Change in Underlying demand for Housing) 52

Table ‎ 2-8 Gap between underlying demand and dwelling supply: 5 Year Projection (Australia, 2009-2014) 54

Table ‎ 2-9 Gap between underlying demand and dwelling supply: 20 Year Projection (Australia, 2009-2029) 56

Table ‎ 2-10 Housing affordability comparison of Australian Capital cities against others 63

Table ‎ 2-11 Costs (benefits) of poor (good) coordination between levels of government in a planning and land development context 65

Table ‎ 2-12 Comparison of EOQ Inventory Model against Property Development Holding Costs 88

Table ‎ 2-13 Derivation of financial gains foregone (the "best alternatives" for holding cash) 97

Table ‎ 2-14 NHSC Development Pipeline (Summary) 117

Table ‎ 3-1 Summary of links between research questions and research stages 131

Table ‎ 3-2 Concept of the cross sectional regression table 143

Table ‎ 3-3 Software utilised (not included in instruments) 149

Table ‎ 3-4 Instruments used in qualitative and quantitative analysis 150

Table ‎ 3-5 Research project time-frame summary 153

Table ‎ 3-6 Ethical clearance for low risk research involving human participants 158

Table ‎ 4-1 Holding Cost Economic Model – data input summary 164

Table ‎ 4-2 Developers Margins (Comparison of Case Studies and Base Case Scenario) 168

Table ‎ 4-3 Selling costs (Comparison of Case Studies and Base Case Scenario) 168

Table ‎ 4-4 Mean and median household income comparison 173

Table ‎ 4-5 Holding costs over time (per lot basis - base case scenario) 175

Table ‎ 4-6 Economic Analysis to Examine the Sensitivity of Time on a Development Project – Gross realisation required to cover holding costs (per lot basis) 176

Table ‎ 4-7 Holding Costs: Mortgage equivalents 177

Table ‎ 5-1 Case Studies overview 197

Table ‎ 5-2 Case Study Comparisons: Summary Data 200

Table ‎ 5-3 Case Study quantitative data summary (gross - prior to adjustments) 201

Table ‎ 5-4 Case Study quantitative data summary (per lot - prior to adjustments) 201

Table ‎ 5-5 Case Studies: variations in lot cost components as a percentage of gross realisation 202

Table ‎ 5-6 Case Study population statistics: variations in cost components as a percentage of gross realisation 202

Table ‎ 5-7 Respondent Industry Association Groups 211

Table ‎ 5-8 Organisational Doubling up in the population sample 212

Table ‎ 5-9 Recalculated response rates based on eDA tool user adjustments & organisational "doubling up" 213

Table ‎ 5-10 Estimate of Town Planner & Developer Organisations in Queensland 213

Table ‎ 5-11 Town Planners & Developers in Queensland and Comparison with Survey Respondents 214

Table ‎ 5-12 Town Planners & Developers in SE Queensland 214

Table ‎ 5-13 Town Planners & Developers in SE Queensland using eDA Tools 214

Table ‎ 5-14 eDA Usage and awareness 218

Table ‎ 5-15 Cost of Staff Time (all respondents) 229

Table ‎ 5-16 Time Saving Calculation: DA Preparation (all respondents) 229

Table ‎ 5-17 Cost of Staff Time (Developers) 231

Table ‎ 5-18 Time Saving calculation: DA Preparation (Developers) 231

Table ‎ 5-19 Time Saving: DA decision 234

Table ‎ 5-20 Calculation of Time saved for a DA Decision as a result of Using eDA tools 234

Table ‎ 5-21 Time Saving: DA decision (Developers) 234

Table ‎ 5-22 Calculation of Time saved for a DA Decision as a result of Using eDA tools (Developers) 235

Table ‎ 5-23 Holding Cost estimate categories 241

Table ‎ 5-24 Holding Costs Estimate (all costs) 243

Table ‎ 5-25 Daily Holding Cost Comparison – Survey data and case studies 244

Table ‎ 5-26 Holding Cost Calculation - low, medium, high estimates 244

Table ‎ 5-27 Holding costs estimates - all costs (developers) 245

Table ‎ 5-28 Holding Cost Calculation - low, medium, high estimates (Developers) 246

Table ‎ 5-29 Proportion of holding costs due to DA assessment 250

Table ‎ 5-30 Calculation of the impact of the DA process on holding costs 250

Table ‎ 5-31 Proportion of holding costs due to DA assessment (Developers) 251

Table ‎ 5-32 Calculation of the impact of the DA process on holding costs (Developers) 251

Table ‎ 5-33 Passing on Holding Costs to end users - response from different cohorts indicating they are mostly passed on 254

Table ‎ 5-34 Passing on Holding Costs to end users – ―rarely‖ response from different cohorts 254

Table ‎ 5-35 Major activities in the property development timeframe: groupings for case study data and input to the Holding Cost Economic Model 265

Table ‎ 5-36 Case Study activity timeframes detail 266

Table ‎ 5-37 Case Study grouped activities timeframes 267

Table ‎ 5-38 Holding cost differences at varying interest rates 278 Table ‎ 5-39 Holding Costs differences at varying timeframes 279 Table ‎ 5-40 Effect of increased timeframes (2.5 years to 5 years) 280 Table ‎ 5- 41 Initial approach for conducting ―what-if‖ scenario analysis (representation only

showing 5 of the 18 scenarios calculated for each variable) 285 Table ‎ 5-42 – Sensitivity of factors impacting holding costs, and subsequent effect on housing

affordability 287 Table ‎ 5-43 Polynomial trend line equations summary for case studies and the Holding Cost

Economic Model base case scenario 294 Table ‎ 6-1 Publications Output 309 Table ‎ 6-2 Major assumptions and gross holding cost calculations: Base Case Scenario (30

months / 2.5 years total development time period) 314 Table ‎ 6-3 Generic Greenfield Property Development Pipeline & Impact of Time 319

List of Equations

Equation ‎ 2-1 Holding Period Return 78

Equation ‎ 2-2 General formula for Present value 91

Equation ‎ 2-3 Opportunity Cost 91

Equation ‎ 2-4 Risk adjusted expected rate of return 93

Equation ‎ 2-5 Capital Asset Pricing Model (CAPM) 93

Equation ‎ 2-6 NPV and IRR 95

Equation ‎ 2-7 PV of Future Cash Flows 95

Equation ‎ 2-8 Expected cost of holding money 97

Equation ‎ 2-9 Present Value (assuming continuous discounting) 100

Equation ‎ 2-10 Relative rate of change of the present value 100

Equation ‎ 2-11 Cost of equity 102

Equation ‎ 2-12 Land Holding Cost 121

Equation ‎ 3-1 Linear (two variable regression) form 139

Equation ‎ 3-2 Polynomial form 140

Equation ‎ 3-3 Exponential form 140

Equation ‎ 3-4 Logarithmic (semilog) form 140

Equation ‎ 3-5 Multiple linear regression analysis form 141

Equation ‎ 4-1 General compound interest rate conversion 169

Equation ‎ 4-2 Effective Annual Interest rate for 90 Day bank Bills 170

Equation ‎ 5-1: Holding costs and gross realisation (total) 209

Equation ‎ 5-2: Holding costs and gross realisation (per lot) 209

List of Abbreviations

AHURI Australian Housing and Urban Research Institute

ALGA Australian Local Government Association

DA Development Application, or Development Approval, as appropriate eDA Electronic development assessment (planning) system

EOQ Economic Order Quantity (inventory management model)

EPAA Environmental Planning and Assessment Act

ERA Excellence in Research for Australia initiative

GFC Global Financial Crisis

GST Goods and Services Tax

HAF Housing Affordability Fund

HIA Housing Industry Association Ltd, Australia

HPLGM Housing, Planning and Local Government Ministers

IRR Internal rate of return

LGA Local Government Area

NHS National Housing Strategy

NHSC National Housing Supply Council (Australia)

NSW New South Wales

PCA Property Council of Australia

PIA Planning Institute of Australia

PIP Priority Infrastructure Plans (Queensland)

PV Present Value

RDC Residential Development Council

QHAS Queensland Housing Affordability Strategy

QLD Queensland

SEQRP South East Queensland Regional Plan

UDA Urban Development Area, as administered by the ULDA

UDIA Urban Development Institute of Australia

ULDA Urban Land Development Authority (Queensland)

UK United Kingdom

US United States

VG Valuer-General

Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made

Signature: _

Date: _

Acknowledgments

Primarily, I wish to acknowledge the invaluable assistance and mentoring provided by my Principal Supervisor, Professor Chris Eves, and Associate Supervisor, Professor Douglas Baker I also acknowledge assistance provided by other colleagues and staff of Queensland University of Technology (QUT), including Confirmation of Candidature Panel members (comprising Principal and Associate Supervisors, and Associate Professor Bambang Trigunarsyah), as well as staff of QUT‘s Built Environment & Engineering Research Portfolio Office and in particular the Higher Degree Research (HDR) Student Support team Such persons have provided an amazing array of helpful support over the years I have also appreciated feedback and counsel from a number of colleagues within the Property Economics discipline of QUT‘s School of Urban Development: they have been an important

―sounding‖ board for many of the ideas and concepts contained in this thesis

A number of external organisations have also proven very helpful Special mention is made in relation to extensive cooperation and assistance provided by staff

of the Housing Affordability Programme in Queensland, in particular Mr Todd Wellard In addition, this research could not have been undertaken without the support of a number of property development organisations who during the course of this investigation participated in surveys, and / or kindly provided an array of internal confidential company records including case study data and other material Their names and organisational details must remain anonymous for reasons of confidentiality; however their contribution has been invaluable

I thank my wife Nicole for her incredible support throughout; also, the support and encouragement of my good friend and confidant Reverend Dr Apichart Branjerdporn

Finally, this thesis is dedicated to the memory of Jamie-Lee Belinda Garner, Adam Timothy Garner, and Danielle Lyn Garner

This thesis investigates the impact of holding costs on housing affordability Holding costs can take many forms, but they invariably revolve around an assessment of ―carrying costs‖ related to capital outlays The cost of carrying is determined over that period existing until a yield can be fully realised (and therefore costs recovered) at a future point in time Capital outlays in this instance relate to amounts expended in the course of undertaking a midsized (15-200) lot, residential greenfield property development in South East Queensland Therefore, the findings

in this study are limited to those parameters even though it is possible that the outcomes have application outside this specification

Identifying and understanding the elements or components of holding costs facilitates the ability to develop a model that enables quantification of the impact of holding costs on housing affordability Aside from obvious linkages with elements such as interest rates and inflation, this process involves quantifiably connecting with other related aspects such as the length of regulatory assessment periods Ultimately, this provides a suitable foundation for exploring whether or not these costs, either in total or in part, are actually passed on, and to whom

Despite the quantum and high economic impact of related statutory intervention by policy makers, the extent and importance of these of effects are either not well understood, or at the very least a better understanding is required (Gurran et al., 2009, p 41; 2010; Gurran et al., 2008b, pp 39,70,79; Matthew et al., 2010, p 16; Randolph, 2007; UDIA, 2010c; ULDA, 2010) One of the major reasons for this is because conducting research in this area is typically difficult due to the lack of base-line information – i.e highly sensitive commercial-in-confidence data that is tightly held by major industry players (a problem well documented by researchers, e.g Gurran et al., 2009, p 22) Furthermore, there has been little evidential material identifying to whom the burden of these effects are passed (Gurran et al., 2009, pp 9,51,59; Matthew et al., 2010, p 9; UDIA, 2010c, p 17) This research fills an information void that exists in relation to these matters, ultimately assisting strategic intervention by policy-makers concerned the issue of housing affordability and various aspects related to development holding costs

This chapter outlines the background (section 1.1) and context (section 1.2) of the research, and its purposes (section 1.3) which also contains detail of the research questions addressed by the remaining chapters of the thesis Finally, Section 1.4 describes the significance and scope of this research and provides definitions of terms used

1.1 BACKGROUND

The author‘s current main research interests and involvement cover a wide range of topics, including: displacement of industries, and industry change in rural areas; population demographic analysis, particularly older age cohorts and propensity for rural exodus; large scale (―state significant‖) projects; rural valuation practice and methodologies; and housing affordability However, it is the latter research topic mentioned that is a matter of significant current social concern, obviated, inter alia,

by the substantial volume of related literature and political / social commentary that abounds Therefore, an investigation into aspects of this is considered a worthy undertaking based on its apparent obtrusiveness into mainstream Australian society This has been the primary motivation behind selecting the research program for this dissertation

Housing affordability issues essentially revolve around increasing disparities between incomes and housing costs The significance of housing affordability in an Australian context is not new – it can be traced back several decades However, its recurrence as a major concern is gaining increasing prominence in the Australian socio-economic landscape (Allmendinger et al., 2005, pp 5,25-26; Berry, 2002a; Burke, 2004; Cox, 2007; Department of Families Housing Community Services and Indigenous Affairs, 2010a; Eagles, 2008; Earl et al., 2008; Gurran et al., 2007; Harris, 2009; HIA, 2003, 2007; HIA & Commonwealth Bank, 2007; Housing Affordability Fund Consultation paper, 2008; Lawson & Milligan, 2008; Macroplan/PCA, 2007; Making housing affordable again, 2008, pp 4, 8-9; Milligan

et al., 2007; PCA, 2006; Queensland Housing Affordability Strategy, 2007, pp 1-2; Randolph, 2007; Rudd, 2008; Small, 2009; UDIA, 2008b; Wood & Ong, 2009b; Yates, 2007c; Yates et al., 2007) This is despite a lengthy period of relatively strong

economic growth and prosperity, and more recently, a manoeuvring through the Global Financial Crisis (GFC) (Stevens, 2010) Its importance has captured the attention of the wider population, with the issue ranking highly across the broader political agenda The need to provide affordable housing to meet the expectations of burgeoning populations, particularly young people, first home owners and the socially disadvantaged is fundamental to maintaining stability of families and households and supporting an acceptable standard of living Aside from maintaining essential structures that support social networks (Berry, 2002a), there are many other reasons that lie behind addressing the issue It is, for example, widely acknowledged

as an important consideration for any new development, playing a vital role in fostering industry and employment (Burke et al., 2007, pp 1, 13, 21, 42, 51, 63, 103; Forster, 2006, pp 174, 177; Macklin, 2008; PCA, 2010; Small, 2009; Solutions,

2007, pp 3, 31, 35, 38-39; UDIA, 2008a, pp 1, 7-8; "What is 'affordable housing'?," 2007) This aligns with the converse situation, whereby, as well stated by Burke (2007, p 112), even modest rises in unemployment…―will have significant ramifications‖ and ―has the potential to affect the housing market and economy‖ Other commentators (e.g PCA, 2010) go even further by suggesting that a major reduction in economic output (Gross State Product) would be considerably exacerbated by the social consequences of higher unemployment, because of the impact on the property and construction industry sectors ―so vital to our social and economic wellbeing‖

Although there is a considerable body of literature evolving in relation to welfare aspects and various theories and concepts related to housing affordability (examples include Burke, 2004; Burke et al., 2007; Commonwealth Bank & HIA, 2003; Cox & Pavletich, 2010; Department of Families Housing Community Services and Indigenous Affairs, 2010a; Department of Infrastucture & Planning, 2008; Earl

et al., 2008; Forster, 2006; Harris, 2009; Jones et al., 2007; Karantonis, 2009; Katz et al., 2003; Lawson & Milligan, 2008; Making housing affordable again, 2008; Milligan, 2007; Milligan et al., 2007; PCA, 2006, 2007, 2008; Powell & Stringham, 2004; Schwarten, 2007; Small, 2009; Stewart, 2008; Tanton et al., 2008; UDIA, 2007; Wood & Ong, 2009b, 2010; Yates, 2007a, 2007b, 2007c; Yates et al., 2007; Yates et al., 2006a; Yates et al., 2006b), there has been limited work completed on the delivery side of the equation This includes holding costs, a facet hitherto given

less attention in the literature It is of particular interest given the volatility of property markets, where the expectations of property developers and property owners

do not always align very easily The determination of aspects related to this may prove enlightening – i.e which, if any, are real, and which, if any, are just perceptions?

1.2 CONTEXT – RESEARCH PROBLEM

It is widely held that strong relationships exist between housing, economic status, and well being (Australian Industry Group, 2010; Bourassa, 1988; Burke et al., 2007; Claessens et al., 2010; Cunningham, 2005; Eccles et al., 1999; Ellis, 2010; Forster, 2006; Glaeser et al., 2008; Gurran et al., 2007; Haslam-McKenzie et al., 2009; Himmelberg et al., 2005; Johnston et al., 2003; Karantonis, 2009; PCA, 2010; Renne, 2005; Richards, 2009; Riddell et al., 2011; Small, 2009; UDIA, 2010b; Walker et al., 2008; Wood & Ong, 2009b) This is exemplified by widespread housing stock surpluses in many countries which threaten to destabilise numerous aspects related to individuals and community However, housing demand and supply varies from region to region, and in the case of Australia the reverse scenario exists:

an overall shortage of housing in many capital and regional cities underpins relatively buoyant residential housing prices (Haslam-McKenzie et al., 2009; Macklin, 2008; Rollins, 2010) Nonetheless, the ultimate effect of this can be the same as surplus housing stocks – that is, the destabilisation of individuals and community (Bell, 2007; COMSEQ, 2008; Johnston et al., 2003; Making housing affordable again, 2008; "What is 'affordable housing'?," 2007) Furthermore, if incomes cannot keep pace with buoyant or rising residential property prices and / or rental values, a strong housing demand level can have the effect of exacerbating problems related to housing affordability since there is an increasing gap between private earning levels and the price of residential accommodation

The issue of housing affordability is multi-dimensional The growing body of literature on the subject (refer to various examples in the previous section - 1.1 Background) has identified many factors associated with housing affordability These include macro structural / micro-behavioural variables such as interest rates, construction cost, income levels, buyer‘s decision, intentions, land supply, housing

prices, and a range of other factors The matter has many facets, is complex, and interwoven

It is emerging that an important factor impacting housing affordability, having particular application in the case of new housing ―greenfield‖ development, is that relating to holding costs Although perhaps in some ways less transparent than other factors, holding costs have been widely held to impact housing affordability (Barnes, 2007; Bourassa, 1992; Brown et al., 1986; Çorbacıoğlua & van der Laan, 2007; Department of Families Housing Community Services and Indigenous Affairs, 2010a, 2010b; Eagles, 2008; Gurran et al., 2008a, pp 42, 58, 128; Gurran et al.,

2009, pp 30-31, 63-64; Gurran et al., 2008b, pp 2, 5-6, 29, 40, 52-53, 56-57, 71-72; Housing Affordability Fund Consultation paper, 2008; Marshall, 2010; Set, 2007; Tse, 1998, pp 1, 6-7; ULDA, 2009, 2010; Yardney, 2007): it may be readily seen that this assertion, over time, is well established in the literature Crucially, whilst acknowledged to be only one contributor to the problem of housing affordability, the scope and nature of its impact requires clarification Although related to land banking behaviour often exercised by both the public and private sector, it is much more multifarious than simple calculation of the interest cost, or opportunity cost, of long term land holding

There are potentially a multitude of significant costs associated with ―holding‖ that inevitably act to drive up prices, and therefore impact housing affordability These costs cannot always be easily identified, however ultimately the real impact is felt by those whom can least afford it - new home buyers who obtain finance: their mortgage repayments can be relatively easily pushed into the realms of un-affordability

One of the problems in examining holding costs is that they cannot always be easily identified Perhaps this may in part be explained by their nature: some forms

of holding costs are not as visible as the more tangible cost items associated with greenfield development such as regulatory fees, government taxes, acquisition costs, selling fees, commissions and others Holding costs are typically incorporated as a part of overall cost categories, or even excluded especially where capital outlays are derived from invested, rather than borrowed, funds In this sense they can be a

―hidden‖ component In its simplest form, it commences with a calculation of the interest or opportunity cost of land holding However, there is significantly more

complexity for major new developments This particularly applies in the case of greenfield property developments which typically involve intricate multi-stage, multi-phase staging over relatively long periods of time (years) Difficulties in the evaluation of holding costs also occur since they must be ultimately assessed over time in an ever-changing environment A strong relationship with opportunity cost provides further complexity because of its interdependent relationship with prevailing inflation and / or interest rates In addition, large scale developments are often run in tandem with geographically diverse or otherwise unrelated projects in order to accommodate corporate operations and manoeuvring - particularly that related to financial arrangements All these factors do not assist the computation of holding costs

The analysis conducted herein tests whether even small shifts in primary factors impacting holding costs can appreciably affect housing affordability The importance of examining this question can be gauged from the unprecedented level

of attention policy makers have given them over recent years This may be evidenced

by the establishment of significant new entities specifically designed to address holding cost related problems Examples include the Australian Government‘s Housing Affordability Fund, and at a more local level, the embedding of specific strategies to address burgeoning holding costs (and particularly those cost savings associated with streamlining regulatory assessment) within bodies like the Urban Land Development Authority, statutory instruments such as the Queensland Housing Affordability Strategy and elements within the South East Queensland Regional Plan

Whilst the current period may be anomalous, the performance based planning regime as it now exists in Queensland strongly suggests an atypical legislation and planning context Within the confines of this, several key issues require investigation These include computation methodology and ambiguities related to the definition of holding cost elements, and evaluating their comparative influence over holding costs as a whole An examination of elements related to holding costs and a determination of the size of their impact on the end user ultimately leads to establishing whether or not these costs are actually passed on Arriving at these conclusions involves the development of robust economic and econometric models which seek to clarify the componentry impacts of holding costs of mid-sized

greenfield property developments (i.e sized between 15-200 lots, located in south east Queensland) Research methodology for this project adopts an explanatory sequential design - a mixed method approach incorporating both quantitative, and qualitative analysis 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 It helps to understand and explain the quantitative results from theoretical data modelling

This thesis extends research in the general area of housing affordability, providing a comprehensive investigation of those elements related to holding costs specifically in the context of south east Queensland

1.3 PURPOSES – AIMS AND OBJECTIVES

1.3.1 PRIMARY CONSIDERATIONS OF THIS RESEARCH

This research establishes the significance of holding costs to end users, by examining the effect on housing affordability Ultimately, the research is designed to establish whether or not holding costs are passed on, and to whom Particular consideration is given to investigating the consequences of extended time-frames, especially excessive time taken for regulatory assessment and land banking behaviours of various stakeholders The reason why these matters are of particular significance is because of the implications for public policy and the associated potential for (in association with other factors outside the scope of this study) the development of a strategic jurisdictional framework likely to promote or assist housing affordability

This investigation is undertaken with overall guidance provided by the aims and objectives of this research which are first, to establish the nature and composition of holding costs over time, as related to residential property in South East Queensland, Australia; next, to examine the linkages that may exist between various planning instruments, the length of regulatory assessment periods, and housing affordability; and finally, to develop a model that quantifies the impact of holding costs on housing affordability for mid-sized residential lot developments, with a particular focus on the consequences of extended assessment periods as a

component of holding costs Thus, clarification is provided as to the impact of holding costs on overall housing affordability

4 What correlations with housing affordability can be derived from a model quantifying the impacts of holding costs?

1.3.3 DISCUSSION OF THE RESEARCH QUESTIONS

In relation to the question concerning the nature and composition of holding costs applying in South East Queensland residential property markets, it is necessary

to examine the literature across a broad range of geographical regions in order to establish those areas of common agreement, and those that are more contentious Having established the overall matrix componentry, and proceeding to further refine any characteristics that relate specifically to south East Queensland, it is then possible to investigate related several aspects Of particular importance is the need to determine whether the matrix is relatively static, or whether it changes over time The criticality of this relates to the very nature of holding costs, i.e by definition holding costs embraces time as a key component in their calculation

In a similar manner to the first research question, the next research question also deals with ―impact over time‖ Establishing the extent and variability of regulatory assessment periods - across geographical locations - will enable an analysis that investigates the question as to how the length of the regulatory

assessment period impacts holding costs This study will determine impact specifically in South East Queensland; however a geographically wider analysis is required in the first instance in order to gain a more realistic perspective The time taken for regulatory / statutory assessment is often cited by industry participants and commentators as a major problem constraining the property development industry (Gurran et al., 2010; Gurran et al., 2008b; Marshall, 2010; Milligan et al., 2007, pp

40, 46, 67, 79, 93; Slack, 2008; UDIA, 2010b; Walker et al., 2008; Yardney, 2007; Yates, 2007a) Any streamlining of these periods logically hold promise for either improving developer cash flows, reducing property development timeframes, reducing costs that are passed onto home buyers, increasing the profitability of developers, or indeed any combination of the foregoing However, this streamlining also poses itself as a potential danger to prudential town planning requirements that otherwise ensures retention, inter-alia, of development integrity This research is designed to elicit which, or if any of these propositions are material, and which, if any, merely represent views held by the market and others that are unable to be substantiated

In examining the extent that the assessment period (and other primary holding cost factors) is a contributor that impacts housing affordability in South East Queensland, it will be prudent to concurrently examine any linkages existing with other housing affordability issues Whilst this presupposes a level of connectedness with other housing affordability dynamics, it is nevertheless considered prudent to establish the milieu under which holding costs exist in order to fully comprehend the level of interrelatedness and complexity Importantly, these considerations will ultimately assist in the deliberation of policy implications related to the framework used in South East Queensland that might result in promoting or retaining affordable housing

The final research question assumes the ability to develop a model, in the light

of the foregoing, which is able to quantify the impacts of holding costs Such a model

is well positioned to establish what correlations with housing affordability can be derived Focused on the timing of assessment periods and other key holding cost factors, the results of this model amalgamated with information consequential to answering the other three research questions enables the identification and / or maximisation of opportunities for affordable housing

1.4 SIGNIFICANCE, SCOPE AND DEFINITIONS

The Queensland Housing Affordability Strategy (QHAS) calculates that development holding costs typically add at least $15,000 to $20,000 per dwelling, for greenfield developments (Queensland Housing Affordability Strategy, 2007, p 3) Even though investigations into the methodology behind this computation reveal lack

of rigour, until now it has never been seriously challenged Furthermore, these costs are often acknowledged to be simply passed on by the developer, and are reflected in purchase price paid This research authenticates not only the quantum amount, but further investigates as to whether such holding costs are in fact passed on - for example, to the end-user The extent of their significance is also determined - especially where time taken for regulatory assessment is excessive For example, the significance of even small shifts in the assessment period (or other holding cost factors) in relation to its affect on housing affordability is modelled The (null) hypothesis H0 tested is that holding costs are not passed on in South East Queensland, with the concurrent determination as to whether the impacts of holding costs are greater than that generally acknowledged by governments, statutory organisations, or other groups As a consequence, the perception that land use planning requirements and government taxes are increasingly responsible for rising costs of residential development and consequent housing unaffordability (Gurran et al., 2008b, p 1) is scrutinised More broadly, the process facilitates gaining an appreciation of the dimensions of holding costs and their influence over housing affordability more generally

Data to support or reject the hypothesis presented suggests a requirement to gather information derived from actual mid-sized greenfield property developments (i.e those sized between 15-200 lots) carried out by property developers operating in South East Queensland Such case studies provide not only statistical and economic data, but also an opportunity to collect qualitative information from participants as to what they perceive the impact and effect of holding costs are, particularly in relation

to housing affordability The ability to provide quantitative data from actual developments delivers statistical evidence for the observed and claimed implications

of planning regulations for residential development costs, rates of housing supply, and house prices (Gurran et al., 2009, p 21) However, attempts to obtain and collate

this kind of information have proved typically quite difficult for researchers For example, in one of the few and most recent studies of this nature, Gurran (2009, p 22) found that they had limited capacity to recruit development industry participants, who were in any event reluctant to provide access to financial information regarding their projects, even on the basis of confidentiality Further limitations were encountered due to restrictions in the ways in which development costs were monitored, with many informants advising that they were unable to quantify these costs themselves1 Nonetheless researchers in that instance challenged ―assumptions that costs are able to be directly ‗passed on‘ to first buyers‖

This research also considers all the market and non-market variables likely to affect housing affordability, in the context of holding cost detail As housing affordability matters have both space and time variance, this study suggests that research undertaken might incorporate a breaking down of the analysis, ideally by regions in Australia, over time This could be later compared to an international comparison study that confirms the extent and variability of regulatory assessment periods in Australia and elsewhere However these broader areas are outside the scope of this research which limits itself to an analysis of recent midsized residential property developments conducted in South East Queensland only

The case studies also provide the basis for econometric modelling that assists other forms of quantitative analysis, which together seeks to clarify the extent to which the length of regulatory assessment period impacts holding costs

The importance of this research potentially emphasises a number of aspects such as the impact of land banking behaviour by developers (the kind of which has been outlined by various researchers such as Rowley & Costello, 2010; Tse, 1998,

pp 1377-1391; Walker et al., 2008, pp i 14-19, 21), and the significance of timely processing of development applications and other relevant statutory documents by regulatory authorities This latter aspect has been a major consideration in establishing legislation and statutory authorities in many Australian states - in the case of Queensland, notably the Affordable Housing Strategy, and establishment of

1 Ultimately, respondents were not able or willing to expose their records in this way Gurran reports that further difficulties were also encountered due to actual planning costs not being able to be readily quantified because the complexity and difficulty of their determination, incurred at multiple stages and scales of the planning process

the Urban Land Development Authority It was actually through the Queensland Housing Affordability Strategy that the Queensland Government established the Urban Land Development Authority, and according to the QHAS (Queensland Housing Affordability Strategy, 2007) undertook certain other changes to speed up the planning and development assessment process as a primary means to significantly reduce timelines and associated holding costs of bringing new housing

to the market Yet, whilst the problem has received much attention, the significance

of this research is highlighted since quantification of its impact has not hitherto been rigorously undertaken Accordingly, the determination of holding cost variables (including assessment period impacts) on housing affordability has significant policy implications for changing the framework that promotes, retains, or maximises the opportunities for affordable housing

This chapter begins with an introduction (section 2.1) which sets the scene in terms of the broad housing affordability research agenda, leading to an overview of holding costs role in the determination of property value It then proceeds to provide reviews of literature as follows

An historical background to the research topic is provided in Section 2.2 which contains an outline of the residential property market Historical and trend projections are made at macro (Australian) and regional (the state of Queensland, and South East Queensland) levels A brief world context is also covered Together with the historical background exposed in the previous section, an informed discussion is enabled on a range of issues explored in subsequent sections, specifically related to holding costs and their relationship with housing affordability

The issue of housing affordability is explored in Section 2.3 The meaning and significance of housing affordability is described, with relationships examined pertaining to demand and time, along with measurement methods employed as found the literature The next section 2.4 proceeds to examine holding & opportunity cost theory in a property development context With an evolution stemming from inventory management EOQ models, the nature and composition of holding costs are explored together with an investigation related to the complexities in the treatment and calculation This section pays special attention to the ambiguities present in the literature, particularly with regards the latter investigation

The final section 2.5 summarises the literature review, and highlights the implications in development of a conceptual framework for the study

2.1 INTRODUCTION

2.1.1 HOLDING COSTS – A MAJOR DETERMINATE OF VALUE

Economic evaluation of land development projects, like many other kinds of projects, is typically undertaken using different measures of value based on discounted cash flows Therefore, the element of time is a critical determinant of

viability since the discount applied to any project is always based on discount over time As pointed out in a recent Urbis report (Walker et al., 2008), like all industries, time is of the essence to the land development business Since time is critical, it is apparent that if a project takes longer to come to realisation, for any reason, then the costs of that project will increase In the case of a property development project, costs relating to that portion of time when a project is held up are generally regarded

as ―holding costs‖

Holding costs can take many forms, but they inevitably involve the computation of ―carrying costs‖ of an initial outlay that has yet to fully realise its ultimate yield (Reed, 2007) Although sometimes considered a ―hidden‖ cost, holding costs prospectively represent a major determinate of value If this is the case, then considered in the context of housing affordability, it is therefore potentially pervasive

This research focuses on the varying approaches and methodologies adopted when the calculation of holding costs is undertaken, based on greenfield residential development Whilst acknowledging there may be some consistency in embracing first principles relating to holding cost theory, a review of the literature reveals considerable lack of uniformity in this regard There is even less clarity in quantitative determination, especially in Australia where there has been only limited empirical analysis undertaken Despite a growing quantum of research undertaken in relation to various elements connected with housing affordability, the matter of holding costs has not been well addressed regardless of its part in the highly prioritised Australian Government‘s housing research agenda The end result has been a modicum of qualitative commentary relating to holding costs There have been few attempts at finer-tuned analysis that exposes a quantified level of holding cost calculated with underlying rigour

2.1.2 COMPATIBILITY WITH OTHER KEY HOUSING AFFORDABILITY RESEARCH

AGENDAS

The research agenda held broadly across the research community is in many instances responding to housing affordability concerns that currently have a particularly high priority on the political schema One reason for this is that the development of appropriate policy responses across housing, planning, taxation and

other portfolios requires a need for a deep appreciation of the range of factors shaping the supply of affordable housing For example, the Australian Housing and Urban Research Institute (AHURI) Research Agenda 2008 describes one of their targeted areas of research for 2008 (section 4) being the supply of affordable housing (AHURI, 2007, p 62) It has a policy research aim to “understand how governments

use housing assistance and other policy levers to increase the supply of affordable

housing” This national research organisation (comprised of seven participating

Research Centres involving 12 universities) throughout Australia specialises in housing and urban research and policy and is primarily involved in the creation and dissemination of knowledge in housing markets, housing policy and programs, and the urban environment in cities, towns and regions They are therefore well placed to determine where the knowledge gaps are Such research questions fundamentally include examination of government low-income home ownership support programs and the forms government action and subsidy that could most effectively support low-income households‘ access to and maintenance of home ownership They also include investigating how changing supply side conditions, particularly land supply, may have affected house prices

This research study complements such agendas by looking at aspects of housing affordability not currently addressed Its focus is on the impact of holding costs It is designed to assist in clarifying, inert alia, the impact of government regulations and other factors related to holding costs on house prices in South East Queensland

In examining various theoretical models utilised for both defining and measuring holding costs as found in the literature, it may be observed that most ultimately rely upon derivations of the Present Value / discounting approach Whilst his aspect is more full covered in Section 2.4.9, at this point it is suffice to say that the application of these ―first principles‖ in PV varies widely As a result, the methodology used in calculating holding costs also has wide variation On many occasions, the methodology utilised is not obvious, or even disclosed This makes it difficult to ascertain the detail of major assumptive variables (even interest rate(s) and timing) The extent of rigor in data modelling is therefore not apparent Whilst acknowledging that the effects of liquidity, interest / discount rate selection, and imprecise timelines add considerable complexity to the equation, many

commentators provide vague, limited, or even no detail when applying holding cost theory to generic or specific land development projects This consequently severely compromises the integrity of outcomes

Despite this lack of detail, it has been determined that significant resources have been poured into policies designed to inhibit the holding cost effect in Australia, although much of this has been confined to the containment of holding costs related to timelines involved in regulatory assessment and planning This aspect

is covered in more detail in Section 2.4.6 Also, an assessment of the linkages of holding costs with regulatory assessment periods evidences often opposing effects This primarily relates to ambiguities connected with distinguishing differences between the strength, as against quantum, of regulation

Nonetheless, the consequences of extended assessment periods as a component

of holding costs is apparent as a fundamental driver impacting on the quantum of holding costs – and therefore housing affordability A few key studies outside this research have observed that little attempt has been made to quantify the direct costs

to housing development arising from government taxes and planning regulations – certainly with any degree of rigour Yet it is emerging, as a result of research undertaken in this study, that it is these costs which have some of the greatest impacts on housing affordability

It was this very problem, amongst others, that Gurran sought to overcome in a major study looking into ―Planning, government charges, and the costs of land and housing‖ (Gurran et al., 2008b) At the time of commencing this dissertation, that AHURI Project was identified as being closely aligned However, ultimately the nature and extent of holding costs was inconclusive as detailed in the final report

―Counting the costs: planning requirements, infrastructure contributions, and residential development in Australia‖ (Gurran et al., 2009) This is despite further analysis arising out of the research in the subsequent paper ―How do planning requirements impact housing costs and the development process?‖ (Gurran et al., 2010) The original study proposed to develop a fee schedule outlining the common planning procedural and design requirements, as well as direct fees, charges and development contributions in each State and local government area The fee schedule was to include a capacity to record non planning related fees or charges as nominated

by developers during the case study interviews, as well as estimated or total

development costs with provision to detail both time and holding cost (Gurran et al., 2008b, pp 66-77) Regrettably, the researchers, in their final report, declared that the analysis was limited by a lack of financial data provided by the sample of case study developers Nevertheless, qualitative data ascertained that the most significant costs perceived by respondents related not to quantifiable fees and charges, or development standards, but to more amorphous issues associated with procedural costs and land prices Uncertainty about timeframes and likely planning requirements were rated as significant, unquantifiable and unpredictable problems, leading to a range of other negative outcomes – such as missed market opportunities (Gurran et al., 2009, p 14) This therefore confirms that despite a lack of quantifiable data, the impact of time-frames, and therefore holding costs, was a major factor considered by developers themselves The research undertaken in this study scrutinizes this claim

2.2 HISTORICAL BACKGROUND (INCORPORATING AN OVERVIEW

OF AUSTRALIAN AND QUEENSLAND RESIDENTIAL PROPERTY MARKET & TRENDS)

2.2.1 RESIDENTIAL HOUSING PRICES AND RESIDENTIAL HOUSING SALES

VOLUMES (TRANSFERS)

Overview & context

Over recent years, residential housing prices in Australia have generally proven

to be relatively buoyant or at least resilient (Small, 2009, pp 83-84; Stammer, 2008), despite impacts being felt subsequent to the Global Financial Crisis (GFC) and associated economic / socio-economic related fallout

The Australian situation counters the experience being felt in many other parts

of the world particularly in the aftermath of the GFC As mentioned by the Reserve Bank Governor, “Australia's economy is stronger after GFC” (Stevens, 2010)

countries like Europe, the US and Japan face immense fiscal challenges in the wake

of the global financial crisis Many countries, including the USA, United Kingdom and other European centres have experienced significant declines in many residential, and for that matter, other property market sectors (Brunnermeier, 2008; Claessens et al., 2010; Killelea, 2010; Reinhart & Rogoff, 2008; Stammer, 2008) This has been denoted by some the result of a ―Housing Bubble‖ (Greenspan, 2009;

Himmelberg et al., 2005)2, essentially meaning the formation of an unsustainable

―bubble‖ caused by rapid growth in house prices underpinned by fundamental factors

of supply and demand Even geographically closer countries like New Zealand have recorded major market corrections in strong contrast to its trans-Tasman neighbour – for example, Eves (2009) has provided evidence of recent significant housing declines in specific socio-economic locations within Christchurch substantially due

to increases in the Official Cash Rate by the Reserve Bank and a decline in net migration numbers (Eves determined that buyers purchasing with mortgages in 2007 and 2008 even have strong potential to be facing negative equity positions)

Therefore, in many ways, and certainly in the context of residential property values, it may be argued that Australia sets itself apart – perhaps even as something

of an enigma – from many countries, since it has managed to have largely cushioned itself against events proving elsewhere for the most part catastrophic This stark contrast is most evident when examined against many property market sectors and geographic regions within the United States of America and Europe, where residential property values have dropped by double digit percentages (Stammer, 2008)

According to a local banking consortium ("Residential Property Market Performance," 2010), Australia‘s real estate market has defied the effect of the GFC that so devastated other countries They point out that “during the worst of the GFC

our chronic shortage of new homes actually helped push up house prices here by as

much as 20 percent in the major cities” Their explanation for this is that as interest

rates continued to climb from their historic lows of the mid GFC era, despite the expiry of the Government First Home Buyer Grant Boost, the investment loan money that would normally have gone into the share market went into domestic housing Another perspective may be seen more recently in the Henry Review outcomes Conducted over 2009-2010, this Inquiry received a large number of submissions from developers and the construction industry who argue that taxes are

an important contributor to high housing prices in Australia (therefore impacting housing affordability) GST, developer charges and stamp duties are claimed to have

2 Greenspan suggests that real-estate capitalization rates that declined and converged across the globe resulted in the global housing price bubble and the ensuing ―financial mess‖ He rejects the notion that

the U.S housing bubble was produced primarily by the "easy money" policies of the Federal Reserve

contributed to price growth over the past 10 years One submission argues that 35 per cent of the cost of broad-acre development in north-west Sydney is attributable to these taxes and charges (Henry et al., 2008, p 210) Developers express concern about a lack of transparency in the way they have been derived Local government bodies argue that developer charges are consistent with the beneficiary principle of equity and encourage the efficient consumption of goods and the efficient use of resources (Henry, 2010) In contrast, other submissions suggested that tax plays relatively little role, arguing that recent low affordability is attributable to economic fundamentals which have raised demand, and institutional arrangements which have constrained supply

At a more local level, the Brisbane and South East Queensland property markets demonstrate particular resilience and stability compared to many other Australian regions The following analysis explores this from a largely historical (trend / time series) perspective Together with related economic indicators and demographic variables (particularly population growth), it becomes apparent that the fundamental strength of the residential housing market goes some way in explaining how it is that despite rising income levels and a period of largely sustained period of economic prosperity, the issue of housing affordability in Australia remains pervasive, and is likely to remain so, in the foreseeable future

Data sets utilised in this analysis

Analysis of house price movements will be discussed using both indexed (stratified3) data, and raw median price (un-stratified) data; and later cross referenced with other data sets, to ensure robustness in interpretation, as follows:

a) Figure 2-1 presents city-wide median prices of house sales data available from the State/Territory Land Titles Office or Valuer-General (VGs) Office in each capital city Unlike (b) below, the data is unstratified The ABS advise (Australian Bureau of Statistics, 2009a)

3 The approach taken by the ABS is that price observations are grouped into clusters ('stratified') based

on similarities in the housing stock Period to period changes in the median price for each cluster are weighted together according to the importance of the cluster at the capital city level The Housing Price Index (HPI) for a particular period will reflect the weighting of the component clusters of the index and the measured price behaviour of each cluster This is because the prices of individual houses, or groups of houses, do not all change at the same rate Also, the set of houses being sold will change between periods (Australian Bureau of Statistics, 2009a)

that these median prices are ‗raw‘ medians from the available data set Numbers of established house transfers recorded each quarter by the VGs are presented in Figure 2-2 A comparison of both these data sets over time is made at Figure 2-3

b) The next data sets contain quarterly changes that do not concord with the unstratified sales data in (a) above since these ones are compiled in strata and weighted by the value of housing stock Figure 2-5, Figure 2-6, Figure 2-7, and Figure 2-8 all indicate changes in house prices for each of the eight capital cities of Australia Known as the Housing price Index, or HPI, the information has been derived from the ABS (Australian Bureau of Statistics, 2010h), and is presented in the form of price indexes constructed separately for Established Houses and for Project Homes Both these categories are important since project homes relate more to greenfield residential development (which is the focus of this thesis), whilst established houses provide a broader market overview which is useful in establishing context The ABS advise (Australian Bureau of Statistics, 2009a) that this information is calculated on the reference base 2003-04 = 100.0 for each of the eight capital cities as well as a weighted average of them Capital city indexes measure price movements over time in each city individually Importantly, they do not measure differences in price levels between cities

c) Data sets in (a) and (b) above are then compared with other independently prepared interpretations and data sets such as Figure 2-4 (Smith & Hallam, 2010), providing a more localised (South East Queensland) focus

Median price trends

Figure 2-1 provides an overview of the raw median house price trends over the past decade for all Australian capital cities This information relates to established houses, which is defined as “detached residential dwellings on their own block of

land regardless of age (i.e including new houses sold as a house/land package as well as second-hand houses)” (Australian Bureau of Statistics, 2009a) This provides

an overview of prices exhibited by residential land markets operating in each of the