Building cheap, buying expensive: Australia's fundamental property headache

Sydney sits at number 19 on a list of the world’s most expensive construction markets, according to a recent report from consultancy firm Arcadis, with Melbourne following at 21 and Brisbane at 22.

While this news might seem bleak at the outset, experts have quickly pointed out that median house prices in those three cities significantly outstrip prices in several of the cities that outrank them in terms of construction costs, highlighting other factors driving housing affordability concerns in Australia.

Construction costs are far higher in major US cities like Houston, Dallas, Chicago, Boston, Philadelphia and San Francisco – which tops the list – while several European cities also outrank Australian capitals for building costs.

“The build price in Australia compares quite favourably with other parts of the world, but the problem, as we see it, is the cost of the land, and also at the tax end,” Housing Industry Association senior economist Shane Garrett said.

“Research has shown that if you look at the Sydney market, at least 44 per cent of the cost of a new home is accounted for by taxation in one form or another. That includes stamp duties, both of the purchase of the land and the final purchase price of the house, also GST thrown in, and the impact of excessive delays in the planning system.”

One key example is San Francisco, the most expensive city in the world for construction according to the report, where homes cost 70 per cent more to build than they do in Sydney, but have a similar median house price.

An artificial scarcity of land is to blame for the issues raised in the report, according to Urban Development Institute of Australia (UDIA) executive director Kirk Coningham.

“The report is further proof that the artificial scarcity of land fostered by governments of all political persuasions is the chief culprit in Australia’s housing affordability crisis,” Mr Coningham said in response to the Arcadis report.

“As well as being significantly cheaper to build, Australia has 12 times more land per capita than America. On any measure Australians should expect their homes to be cheaper – but that’s not the case.”

UDIA pointed to a recent Reserve Bank study, released in March, that founds costs associated with zoning added a significant amount to the cost of detached housing across Sydney, Melbourne, Brisbane and Perth.

The view is echoed by HIA’s Shane Garrett, who says that for a piece of land to go from planning to being available for construction often takes between 10 and 12 years, which hampers affordability.

But Arcadis national director of costs and commercial management Matthew Mackey sees three Australian cities in the top 25 as making it hard to call Australian construction “cheap”.

“The cost of construction has always been high in Australia due to its geographic isolation and the associated costs of import taxes, travel and transporting materials that this brings,” Mr Mackey said.

But ongoing Chinese investment and growth of 1.2 per cent in the construction market after a three-year decline points to a good outlook for new residential construction in Australia, according to Arcadis.