Last week's column looked at the history of social housing, defined as housing for the poorest quintile, previously called public housing as it was publicly funded, but now called, somewhat erroneously, social housing. In the last 75 years in Australia it has declined from near 20 percent to 4 percent of all housing.

This week we were going to address what designers crave: viable alternative typologies. But the column also elicited some comments that suggested that we need to look at how housing is procured before typologies. Unless you understand the costs, you cannot understand the success, or failure, of those promising typologies.

For instance, in the same A+D newsletter as last week's column there was an article by the Grattan Institute (from The Conversation) that illustrates the point. It correctly pointed out the fallacy of first home grants and ‘HomeBuilder’, lauded the desirability of social housing, and how it would usefully increase construction sector employment. It also had silly self-serving syllogisms such as homelessness being fixed by giving people a home. Duh.

Crucially, it commended the government as the sole way forward for social housing – but 75 years of decline says that’s not happening any time soon – and gave a swipe to property developers along the way. But I contend that understanding property development is the best way to understand the role of build-to-rent and social housing.

Australia is ambivalent about property developers. The green left sees them as city killers (Sydney in particular, according to EM Farrelly’s next book), whilst the crimson right sees them as captains of capitalism (seven of our top 20 richest derived their wealth from property investment, especially housing).

So, unless daddy left you a mine or two to keep you rich, a significant part of a society sees housing development as the premier get-rich-quick scheme. If we can understand what makes housing developments so attractive, then we can adapt that process to produce lower cost, i.e. social, housing.

I’d go further: I’d say that unless we deconstruct developers’ methods, we have no hope of competing against the mania for home ownership and developing public or social housing in any meaningful quantity.

Let’s say you want to develop a block of flats for individual sale (first off call them apartments!). There are essentially three components: the land, the construction and the profit. For a long time, developers divided them equally, but rising land prices and costs of construction mean that the proportion is now about 40 percent land, 35 percent construction leaving a 25 percent profit margin.

This means the sale of a million-dollar apartment in that complex comprises $400,000 for its part of the land, $350,000 for construction, and the developer who purchased the land, negotiated the design, paid consultants, obtained approval, borrowed the money, and orchestrated the building walks away with a profit of a quarter of a million dollars per apartment.

You can see why successful property development is so attractive; but also why it is so precarious if anything in that process goes wrong.

If that apartment is put on the rental market, the owner might seek a return of around 5%, or $1,000/week (1000th of its purchase price). Given that housing should cost no more than one third of income it suggests the renting household is on $150,000, the average income of the second quintile. The lessee pays $50,000 for each of 20 years to pay the value of purchase to the owner. Yes, there are more complex issues of interest, CPI increases and other factors, but let's keep it simple at this point.

Now, reverse engineer that situation for a family/household wanting to rent on an income of say $50,000 (the fourth quintile average). They want to pay about $320 to $350/week. So, a ‘developer’ wanting a 5 percent return will need to build an apartment for $350,000, not a million.

How is that at all possible?

Firstly, we remove the land cost. Who has land in Australia that could be made available free for social housing? Federal and state governments, Defence, churches, philanthropists and some ‘not-for-profits’. They all need to be encouraged to enter the social housing market by providing their land for free.

Secondly, how do we reduce construction costs, which are often thought of as materials 40 percent, labour 40 percent and preliminaries, overheads and builder’s margin about 20 percent? Many alternative materials or techniques have been suggested, but this is tinkering at the margins. Even a super-cheap wonder material, such as the ‘Plonk-on Plank’ as Roy and HG once touted, cannot massively reduce the costs; it is just one component.

Trying to radically slice and dice costs by inventing new materials is ultimately futile; as is pinning hopes on alternative techniques like the Victorian Housing Commission’s mass concrete prefabrication, or the current fad of CLT. The only way to significantly reduce the cost of construction is to reduce the area.

To reduce the $350,000 construction cost by 10 or 20 percent it will need to be 15 to 25 percent smaller given that the overheads of infrastructure, kitchens and bathrooms don’t reduce. Flexible design helps. Lower floor to floor heights can help, but not as much as eliminating car parking. So, our construction cost could be reduced to $300,000.

Thirdly, the whole process has to be conducted to eliminate the profit motive, but that’s a hard sell in a land where two thirds of the population are property developers. You own a house? You want to increase its value? Bingo! You’re a property developer. But increasingly many understand the social over the economic in the triple bottom line.

One last, but critical, issue is the elimination of state and council charges for social housing. There are a myriad of payments required, from approval fees to statutory charges for providing additional social services for every dwelling created; which can be north of $20,000 each in NSW. No government should ‘profit’ from social housing.

Taking the three parts together we can drive the commercial costs down to almost one third. Even allowing for holding costs and bank borrowing, and 5 percent for design and approvals, this approach could yield an apartment for a total cost of $350,000, which is the build-to-rent housing model for the fourth quintile. In a building of say 20 apartments you could aim for $300/week per apartment on average, with some at $250 and some at $350 according to income.

The 5 percent return that could be achieved provides a small profit that allows a CHP to reinvest, to go again on free land, to build economically at a smaller size, at a better design with no profit margin. This is the only way that social housing can be delivered by a market-based rental.

But what about a household on a social income of less than $30,000 – the fifth quintile? One third of your income is $190 a week, how do we make an apartment for less than $200,000. We can see from above that this is not commercially possible, the market cannot deliver it. It is only possible if it is subsidised. We need re-invigorated state housing commissions, or philanthropically endowed CHP’s to provide this level of real social housing. We must end privatisation of housing.

And ultimately Brendan Coates, author of the Grattan Institute article, is right. That is exactly where the Federal Government’s stimulus package MUST go.

Having mastered some building economics, we are now ready to look at some of those innovative typologies next week.

Tone Wheeler is principal architect at Environa Studio, which has designed apartment buildings for large and small developers and for 5 different CHP’s and not-for-profits. The numbers are drawn from the practice’s experience.

Tone is also Adjunct Professor at UNSW and President of the Australian Architecture Association. The views expressed here are solely those of the author and are not held or endorsed by A+D, the AAA or UNSW. Comments can be addressed to toneontuesday@gmail.com.

Tone Wheeler

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