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SELECT COMMITTEE ON HOUSING AFFORDABILITY IN AUSTRALIA
14/04/2008
Barriers to homeownership in Australia

CHAIR —I welcome our first witnesses for today, from the Queensland division of the Urban Development Institute of Australia, particularly the Chief Executive, Mr Brian Stewart. Thank you very much for coming this morning. Thank you for bringing such a stellar line-up with you, Mr Stewart. We are very grateful for that. Please make an opening statement, and then we will go to questions from members of the committee.

Mr Stewart —Brent Hailey will provide the opening statement as president.

Mr Hailey —The Urban Development Institute of Australia (Queensland) welcomes the opportunity to appear before the committee and commends the Senate and the committee for ensuring that evidence is to be heard in Brisbane and on the Gold Coast. Housing affordability in all of its facets is essential to the maintenance of a cohesive and just society. It is an issue that transcends political ideologies and goes to the heart of people’s dreams and ambitions. It is also one of the key bulwarks of sustainability. Without affordability strategies to address this pressing issue, the goals of addressing ecological sustainability, economic growth and climate change become less critical compared to the pressing social issues associated with the absence of a home, and yet they are, in their own right, critical for our future. In broad terms, affordability has a number of significant contributing factors, many of which are being addressed by government at various levels throughout Australia today.

UDIA has provided comprehensive submissions to the committee at national and state levels. As senators would be aware, the specific problems and causation vary from state to state and from locality to locality within states, but a number of fundamental propositions are common. In our view, the supply of developable sites, the cost of construction, the provision of infrastructure and its cost, and the processing costs associated with the development process are the common and critical factors.

Unaffordable homeownership and an investment climate that generates reduced returns for investors lead inevitably to increased rents as more and more pressure is placed on all levels of the market, but particularly the lower end. The UDIA’s Queensland inquiry report and the national inquiry report provide sufficient evidence to demonstrate that affordability is at a critical level today. With the national level of undersupply of housing approaching 200,000, according to most independent sources, it is now a compelling issue. As representatives of Queensland’s development industry, we are pleased to give evidence and to provide any additional information that is sought by the committee.

CHAIR —Thank you, Mr Hailey. As no-one else has indicated that they would like to add anything at this point, we will move on to questions. As you have commented, both your national body and your state bodies have made separate submissions to the committee, and we have yours as well, which is very helpful to us. There is one issue that has been coming up in other hearings. It came up in Karratha, which I would characterise as having very extreme difficulty in relation to housing affordability. We were very pleased to have the chance to physically go there and see it—to the extent you can do that within a day—and talk to local community members there. But I wonder whether we are coming to a point where, for developers—for people in your business—it is in fact extremely difficult to develop what is called ‘affordable housing’ as opposed to other expectations that you pursue in terms of meeting the market’s demands.

Mr Hailey —I think what has essentially happened is that, looking across Australia, there are different markets at play. We quite often in Queensland point to the Victorian template and say that they have done it particularly well. What they have managed to do is put plenty of land supply out there but also combine that with infrastructure provision. So if you look in the western areas of Melbourne, the provision of the Western Ring Road, the provision of significant infrastructure and the rezoning of large quantities of land 10 years ago meant that that affordability level was maintained. And that government has been proactive in making sure that it is moving out ahead of the growth areas, making sure the infrastructure is in place, so that it keeps the cost of land down.

In Queensland we see the opposite happening. We have seen planning schemes that have almost constrained land supply, if you like, because of the inability to fund the infrastructure at a local government level. Because of that constraint, the cost of raw land has gone up, but also putting the burden of providing infrastructure onto the development community, which essentially is the new homebuyer, means that there has been a double whammy. So it has gone up at an accelerating pace.

CHAIR —I assume that you as an organisation lobby governments about the development of infrastructure. It has been a recurring theme in our discussions. I am from New South Wales and it does not even bear contemplating. We cannot even get car parks to match railway stations in New South Wales so that people can commute and do what they need to do and live where there is land or wherever they want to live. What sort of lobbying role do you as an organisation have in relation to infrastructure development here in Queensland?

Mr Hailey —Certainly we have been pushing the state government for more funding to the local authorities. There has probably been a cascading argument, if you like. We talked to the federal government about this several years ago—about more of the GST dollars reaching down to the local government level. The GST is raised by the federal government and placed to the states, and then the states look after infrastructure funding from there. That money was being spent by the states on state based infrastructure—highways, railways and those sorts of things—but it was not reaching down to the local authority level. As a consequence of that, in Queensland in around 2003 there were changes to the planning act to allow local governments to bring forward some infrastructure charging policies, which has happened. We have seen an acceleration of infrastructure costs being levied at the local authority level. We see that there needs to be a direct link between the federal government and the local authorities to provide that infrastructure.

CHAIR —So you mean developer contributions.

Mr Hailey —Yes, developer contributions.

Senator HUTCHINS —A few things in our inquiry are starting to emerge and I would be interested in your comments. You talk about housing affordability. One of the things that is starting to emerge is the issue of, for want of a better term, housing suitability. We were getting evidence in Perth that they cannot sell four-bedroom, two-bathroom places. With the housing prices as they are in Perth—where we from the east coast keep getting told the streets are paved with gold—they cannot sell them. In Campbelltown, in south-western Sydney, high-density housing which is close to the railway station—which can get you into the city of Sydney in one place in 35 minutes and in other place in 55 minutes—is not acceptable or suitable. People want a quarter-acre block. I would be interested in your comment about that. To me, that is emerging as an issue. It might be all well and fine to say that the infrastructure is not there, but people do not want to live in that house; they want to live in another one and we cannot make them live in that one. I would be interested in your views. It may be something you have dealt with before.

Mr Sharpless —I think there is a phenomenon that is with us today that probably was not around maybe 10 years ago. I give the example of our project called Springfield, in Ipswich. When we first started developing land out there, in 1992, we noticed that people would buy a block of land and spend probably the next 12 months building their house. They would spend every weekend out in the front yard landscaping, doing all those things that they could not afford to do when they first built the house. It probably took them almost two years to come up with a house in the form that they actually wanted. Now we do not see any of that. Now we see people shifting into a house with everything done up-front—swimming pool, landscaping, everything. My point is: I think people want everything straightaway these days.

Senator HUTCHINS —And often they are just for two people. They are not for a tribe or anything like that. They are just for a husband and wife. That was one observation.

Mr Sharpless —Because they want it straightaway, then you have got this decision about what sort of house you build. We still see the same thing—more people want to shift into a house that has got the flexibility for potentially the next purchaser. If they are an older couple, it is for their children, who might want to spend some time with them. Households are changing. We still see that a lot of people do want the bigger block with a house on it. At the end of the day, you have to design product that suits all sections of the market, and the market is changing. We have also seen that one- and two-person households, younger families with no children, are the opposite: they do not want a large block of land; they do want to live much closer to public transport.

Senator HUTCHINS —If you were drawing up recommendations for our inquiry in relation to the sustainability of what people want, what would you be advising us to put before the Senate? As you said—and it comes back to other bits of evidence we have received—it seems that the affordability of credit in the last six to seven years has pushed people to have expectations which were not there a decade ago. How do we come up with a recommendation that might, in a way—

Mr Sharpless —My personal view would be that you have to start with that land size. It does not work in the current marketplace to have affordable housing on large lots of land, because land is a finite resource and the infrastructure charges that developers pay is obviously proportionate to the amount of land and therefore the number of lots that they can develop within that land. That is the starting point.

Senator HUTCHINS —Would you have a national land size recommendation or template? For a three-bedroom, one-bathroom place or—

Mr Sharpless —I will pass that over to Brent.

Mr Hailey —I think it is more about the mix of housing choices. If you can get the mix right and you can get the supply side of the equation right, then the rate of price increase can be kept at a moderate level. It is when there is a constrained supply or when the constraints come onto the supply that there is an issue. In the South East Queensland Regional Plan, you can look at the urban footprint and say, ‘Yes, there’s a lot of land in the urban footprint.’ But when you superimpose the planning scheme overlay—vegetation, bushfire hazards and all of those sorts of things that can impact—you chew up about 50 per cent of the land that is coloured pink on that map and deemed to be suitable for residential housing. We can get the mix right when we have the land that is available to us, but if you are buying a 30-hectare block and you are only able to use 15 hectares of that for development, then that will drive the price up. As you can imagine, the local authorities have to service a much broader range of land in terms of building roads and all that sort of thing in there. As such, that keeps getting divided between less and less land, so the infrastructure charges go up. It is probably going back to the fundamentals of land supply. When you put land out there, how much of it should be able to be developed? Should it be 80 per cent rather than 50 per cent?

Senator HUTCHINS —Or should it all be developed before people are able to move in? What is your view on that?

Mr Hailey —In terms of the infrastructure, that needs to be there. You need to put shopping centres in areas. That is where the Springfield development has been particularly successful. They have a lot of that infrastructure going in, albeit that they have been going since 1992 and the shopping centre turned up 12 months ago. And you would have liked to have had the railway station there 10 years ago. But it is on its way. It really needs to be infrastructure led development. Get the infrastructure in. Perth does it particularly well, but even there it was market forces that drove prices up.

Mr Stewart —I will add to that, if I may. This is a very complex problem that we face today. The solutions that we are going to need to find are not going to be as simple as they would have been 10 to 15 years ago, because we have a situation where there is a major affordability problem. There was a major movement of capital made available. There was a capacity for young families to access much more money and an expectation that they would be able to do that. The market, in a way, has soaked up that available capital from the two-person working family. That has been one of the causes of that additional demand that started in the very early 2000s and in the late 1990s as well. We are now in a situation where we have very high prices. The danger of flooding land supply, if it could be done, is that you might start to see negative equities, which is something that people do not want to see. So we need to have a very measured and thoughtful response.

That response is going to be very different in every different market place. Sydney is vastly different. In that case, one must ask how new entry dwellings at $600,000 in the new major estates that are going to be built to the west of Sydney are going to help affordability. The answer to that is: not well. There are examples that have worked particularly well in Australia and there are some examples where we have not worked quite as well. The other thing is that the way the market operates, both internally within the development industry and externally as part of the structure of the economics of Australia, has also changed. That was one of the reasons why we recommended in our national inquiry report that a ministerial council on housing affordability be set up.

We also saw the need to follow a similar model to the United Kingdom, which has put in place a National Housing Policy Advisory Unit, under Professor Stephen Nichols, at Oxford University, where they are providing economic modelling of the industry; looking at how the housing markets in every local authority are working; providing economic advice to the local authorities to make that work better in those areas; and putting out requirements on the availability of land supply in all local authorities by comprehensive planning instruments of five years for fully-serviced and available land, 10 years for land available in the planning scheme and 15 years for the longer term, so there can be a professional rollout of that land supply. They are also looking at the issues of demand in local areas, job creation and sustainability—the comprehensiveness of that.

We realise the federal government has a policy of putting in place a national housing affordability advisory unit. We saw that as a very positive initiative. We do think, however, that there is a need to have the two components very clearly delineated and directed. The first component is obviously the planning component at government level, and we see a ministerial council there being primarily a responsible body to ensure that the policies are delivered. There also needs, in our view, to be an independent advisory body that can provide very independent advice to government at all levels on how this new market is emerging and changing, and particularly on what is and is not working in local areas to restore that level of affordability.

Senator IAN MACDONALD —Thanks very much, Mr Hailey, and your team, for coming along. Obviously as people operating in the fastest growing region in Australia you are well qualified to talk on this. Thanks very much for bringing such a representative team along. I am from Queensland, as the chair said, but from the north—although as senators you are all God’s children as far as I am concerned! You mentioned a second ago, Mr Stewart, there are some cases where it has worked well. Can you remind me which they are?

Mr Stewart —Melbourne over the last three years is the best example that we see, certainly from here. One of the big issues is that this is so complex. If one looks at Brisbane, for example, at the moment the cost of providing affordable accommodation in infill is very severely challenged by construction costs—driven by raw land primarily, but construction costs are another challenge. So what land is available is not able to be brought into a developable end product in a lot of instances. The market is operating very differently even from one part of the city to another. Even though there have been some price increases, there are still first homes available around Queensland in the area of $300,000.

Senator IAN MACDONALD —I notice in your submission you instance Capricornia, where you cannot get builders because they are all out working in the mines earning five times what you guys would pay them—they are being paid by people who are earning five times your profits, of course. In answer to Senator Hutchins’s questions you mentioned the UK model and the national housing policy unit, which you also mentioned in your submission. Do you have any concern that there might be a danger that, if you overregulate the development market, you may well get to a situation where the regulation also indicates what your profits are going to be or what wages you might have to pay? Is there a concern with the policy advisory units at national level that you are really digging yourself deeper into a totally government regulated industry which pays little regard to the market, profitability and investment?

Mr Stewart —I think there is a very substantial difference between monitoring and controlling. I think it is important, where we have markets such as the housing market, in its broader sense, that are providing products out to the community, that they are monitored. But in a very real sense the profits of developers are effectively monitored anyway, given that there are now a very substantial number of development companies that are publicly listed, and their returns are very clearly able to be assessed and evaluated, one shareholder against the next. That is one of the points I was trying to make before: that it is not the simple market that it was in the past. I think we have seen, from the difficulties that Sydney reached, that there is a level of expansion that you can get to and then you start having major problems and the market internally becomes dysfunctional—in between, say, the Blacktowns and in towards the centre of the city.

We are approaching an age in Queensland where, as I see it, it is quite unique. We are going to be looking at developing the new cities of the future—the Springfields, the Yarrabilbas, at Caloundra South and Caboolture West—because we cannot go on incrementally expanding. We are at a stage where in political terms local authorities are concerned about how they deliver growth, and rightly so—their job is to provide sustainable futures for all of us. But they cannot be timorous about that, because we do still have to provide housing and accommodation. That is the critical part of where we have fallen down, as I see it, in the last 10 to 15 years. People have been timid—and with restricted funding, I guess, too—about the population changes and the societal changes that have meant we have an ageing problem, hospitals have needed major funding and education has needed major funding. We have backed away from providing the infrastructure that really drives the community and growth because we have had other very, very pressing priorities. I think we can see that particularly in Queensland.

Getting that balance right is very difficult, but if we do not, and we have ignored the housing and infrastructure at the present, we are going to create our own generation of problems, where generation Y will say: ‘Why should we stay in Australia? We are completely mobile. We can travel overseas and work. If I cannot provide a home or the type of future that I want to provide, I will simply move.’ Thus we lose the skill base, we lose a growing population and so on.

Senator IAN MACDONALD —Just moving on to your submission: you mention the Hervey Bay situation, where 12,000 existing developable lots contained under the superseded planning scheme have been excluded. I must say I had not caught up with that. What was that about?

Mr Zaltron —I guess it is an example of the way that the Queensland system has changed over the years from a system where perhaps councils competed to encourage development and housing to a system where we have much tighter control. In the Hervey Bay case, their planning scheme allowed for a lot of development, various people had taken up those options on purchasing that land and then the planning scheme was changed to reduce the footprint of the town. That was coming from one of the planning maxims—of trying to reduce footprint, trying to keep towns smaller than they were, without uncontrolled growth.

Senator IAN MACDONALD —Is it just in the planning scheme or have they given it over to parkland or something?

Mr Zaltron —They have locked it out of the planning scheme for the time being. It may come on down the track. If those kinds of planning changes are done without sufficient knowledge of the way the market works and sufficient knowledge of how they will impact on affordability, they can have real impacts and cause that kind of scarcity as land supply dries up. I think there really is an issue out there in terms of lack of knowledge about the amount of supply we need to meet the market—providing the diversity, providing the range of options for housing.

Senator IAN MACDONALD —Just as a yes or no answer—it is not really germane to this inquiry—if developers buy land under an existing planning scheme for development and then the zoning changes, is that compensatable these days?

Mr Kinsella —Sort of. The situation is that if they bought land that was, say, future urban and had not been zoned categorically then there is still a level of discretion there and that discretion can get tested in the court system. The entitlement to compensation may not exist in all cases. If it was zoned as residential land and they back zoned it, that would certainly be open to a claim for compensation.

Mr Stewart —There are also cases where the superseded planning scheme provisions can stay alive. If the local authority determines that it will reject an application on the basis that they put in a new planning scheme, then they are liable to pay compensation if they take away existing rights. Where there is a specific development entitlement, that situation prevails.

Senator IAN MACDONALD —I used to be on a council and used to be a solicitor and it used not to be compensatable in the old act. You mentioned in your opening statement, Mr Hailey, the GST. Am I interpreting your evidence, and the evidence of others, correctly? As you say, it is a very complex issue. Do I get an underlying theme that one of the things that could be addressed is if local governments were to take on a greater role in infrastructure costs which they now pass on to you, which of course pass on to the new homebuyer and which, as you say, affects affordability? Is that a fixable thing? If I assume that your answer is yes, you mentioned the GST and you would be aware that in Queensland—not in all states, but in Queensland at least, and it might have cascaded on to the other states—the local governments were to get a percentage of the GST at its inception. When the Democrats changed the articles on which the GST could be imposed, Mr Mackenroth was able to overrule the Premier at the time and take back the GST, because he did not want it going to local government. That is a bit of history. Is it worth while your association—and you would have a very willing partner in the Local Government Association—trying to urge COAG to look at making a provision for a percentage of the GST going to states to go to local government specifically for infrastructure?

Mr Hailey —If I can deal with the second part first, with regard to the GST a quite comprehensive submission paper from our New South Wales branch has looked at recycling GST from new housing—because it is something that gets levied on new housing and not existing housing when it is sold—back into infrastructure. They have demonstrated in that paper that that could almost be self-funding, given the amount of infrastructure that is required in those new areas.

Senator IAN MACDONALD —I have not seen this. So they would hypothecate the GST on new houses to—

Mr Hailey —Local authority infrastructure.

Senator IAN MACDONALD —Is that doable? I assume that their paper has gone into it.

Mr Hailey —They have gone right through that as a detailed economic model and shown it to be a sustainable model. That deals with that GST issue.

Senator IAN MACDONALD —I forget what the percentage was going to be in Queensland—I am not sure that it was resolved. But the idea was one per cent of the 10 per cent GST going to local government, which is a slightly different suggestion to what your New South Wales branch is suggesting.

Mr Hailey —That circumstance that you pointed to, of Mackenroth having his win, was when the legislation was changed under our Integrated Planning Act to allow infrastructure charges to come in. That happened in 2003. Up until then, there was a system—

Senator IAN MACDONALD —So that was because of losing the GST—

Mr Hailey —Essentially, yes. What happened was we all accepted that there was a certain level of responsibility for some infrastructure charging in relation to water supply and sewerage—those essential services. What has happened since 2003 is that there are a couple of shires, now cities, to the north of Brisbane where they started adding everything in: they started going down the social infrastructure route as well. They would look at, say, the district parks and make improvements on the land, or look at the local library. But it went beyond just building the local library; it went to putting the books in the local library and it went to the photocopiers—saying, ‘They’ll need to be replaced every five years, so we’d better work out a 20-year life cost’—as well as the replacement of light bulbs and the running costs of the library. So everything got added into the equation. I think we saw the cost go from about $5,000 to $7,000 a lot to $45,000 to $50,000 a lot in terms of infrastructure charges, basically overnight. In some of our submissions we had a number of examples of where developers just walked away from options on land. That was one of the areas where that happened. Developers just could not make it stack up and walked away.

Senator IAN MACDONALD —Were they doing hospitals and schools as well?

Mr Hailey —No, that was left at the state government level. It was basically that locally funded infrastructure, the local authorities’ responsibility.

Senator HUTCHINS —So, say we have got a shire that is half-developed and we want to develop this new estate. The new estate is being asked to fund libraries within the shire, not just for the new estate, and fund other areas you just outlined. Is that what you are saying has happened?

Mr Hailey —Essentially, there is open access for anyone who wants to use that facility, yes.

Senator HUTCHINS —But the charges are not on the developer for the library to be in that new developed area; it could be throughout the shire and the other areas you outlined there?

Mr Stewart —They are based on a methodology which is based on need. The Queensland government has recently referred all of the costing methodologies to the Queensland Competition Authority to ensure that there is a level of equity as well. But, from our point of view, the significant issue with infrastructure is really intergenerational equity. Previous generations have had the benefit of being able to pay off infrastructure over a period of time through rates and through state taxes and charges. We have totally changed that model over the last 10 to 15 years, and one of the consequences has been increased costs for developed land out there in the community. Those of us who have had a free ride have benefited greatly, but our children are the ones who are going to be paying substantial costs.

If, because of whatever circumstances—government costs, natural disasters, wars and the like—we have to find a different way of funding into the future, we really do need to be careful about imposing the costs on the so-called developer, because that is largely the way the issue has been solved. People have forgotten that the costs are not borne by the developer; they are passed down to the consumer. So what we need to look at is how we will fund infrastructure into the future. Are PPPs going to be the way? And what is really equitable distribution? Because clearly, at the moment, it is inequitable to expect all of these charges to be rolled out.

In places like the Sunshine Coast, for example, there is plenty of land for development, but the planning structure around that—I am going to just very briefly defer to James Kinsella to let him tell you about the local growth management strategy there, because it is germane to what we are talking about.

Senator IAN MACDONALD —Particularly under the new mayor, I suggest. He is a great mate of mine, and I am glad he won, but you guys would not have been drinking too much champagne that night, I guess!

Mr Kinsella —Not a lot. The issue of the LGMS feeds from the South East Queensland Regional Plan where, whilst—

CHAIR —The LGMS being the local growth management strategy, for the record.

Mr Kinsella —Yes, sorry. So the South East Queensland Regional Plan mandates that each local authority produces an LGMS to guide its growth to deliver the targets stipulated in the regional plan. The difficulty with the Sunshine Coast and with the legislation as it stands is that, whilst, as Brent said, there is a lot of pink painted on the plant to say ‘this is where the urban footprint shall be’, the responsibility to deliver it has been given to the local authorities. And the LGMSs as they stand in draft form at the moment say, ‘Sure, we’re happy for you to develop, but you’ll provide absolutely everything,’ not as a consequence of development but as a precursor to development, which effectively does not stack up, will not stack up and is a fundamental impediment to moving forward on any of these greenfield sites which could develop in any ranges of densities to meet market expectations.

Senator IAN MACDONALD —Except if the estate is an estate for millionaires, who can afford to buy the land.

Mr Kinsella —The land is not waterfront necessarily. The land is greenfield land at the back of the Sunshine Coast—close to the Sunshine Coast but certainly between the highway and the beach, not on the other side of the highway. There is infinite potential there and there is infinite will, I think, in relation to the companies which own that not only to provide a pipeline for their own shareholders but also to deliver product in a responsible manner. But you cannot do that and build a train line for the Sunshine Coast. You cannot do that and build a regional hospital for the Sunshine Coast. This stuff comes through time. It comes as a result of funding which is generated by actually developing stuff on the ground.

Senator IAN MACDONALD —I come back to the first part of my very long question—and you cannot trivialise or precis a thing but, having said that, I am going to ask you to do it. Is one of the major problems you face the fact that local government does not have the funds to provide the infrastructure that local government traditionally and even now is expected to provide? If there were some scheme—I do not know what it is, GST or grants or whatever—that would channel more money into local government to do the things that we traditionally expected local government to do, could that have an impact on housing affordability?

Mr Stewart —The very short answer is yes, absolutely. The only qualification, as you said, is that it is more complex than that, because the land supply issue is obviously the critical issue associated with that, and then the time to get it out. There is no point in creating communities that are only going to be able to house millionaires, because they do not provide work in the community at the level where you need people working to provide a sustainable community. So the answer is yes, that is a very big part of the problem, as well as the processing costs, the delays, the times. The industry, in the last eight to 10 years that I have observed it very closely, has undergone a major transformation. That is partly as a result of the level of developers that are now in the community. You can see that through Queensland. Sustainable development is not just a byword; it is a critical part of the way they are delivering their services and a critical part of their accountability to their shareholders. There are a number of major developers that I could mention very quickly, but will not here, that have major components of their business designed to deliver sustainable development. We are doing all we can to assist in that regard. So it goes right into the heart of job creation, creating a sustainable community that is able to rely more on public transport and that is going to be sustainable in 20, 30 and 40 years time and longer.

Mr Hailey —You have heard Brian refer to the changes that have happened over the last 10 to 15 years. If you go back to somebody like Clem Jones in Brisbane, who sewered the city, he did not have an expectation that it was only new developments that were going to pay for that. He sewered an existing city and then the whole of the rate base bore the burden of that. He borrowed money to do it and then paid it off over time out of rates. I think tomorrow you will hear from our Gold Coast president, Col Dutton. If you have a council that goes in on the basis of saying, ‘If you re-elect us we will put rates down,’ all of the councillors get re-elected. This time around you have a council that is faced with incredible growth problems on the Gold Coast and the mayor has gone in on a platform of saying, ‘I don’t want to see the rates go up, and I will be asking for the other councillors to support that.’ It is just not sustainable. If they were going up incrementally and being used to constantly fund infrastructure in the cities, we would not be in the mess we are in now.

Senator IAN MACDONALD —Wait until 1 July when you get your $32 billion rate cut. We never buy votes!

Senator COLBECK —I think it is a good point at which to ask a question that Senator Hutchins and I were just talking about. There is obviously not rate pegging in Queensland?

Mr Stewart —Local authority rates have largely been restricted to CPI increases. In a number of localities we have been quite critical—this is going back eight to 10—

Senator COLBECK —Was that imposed by the state government or was that something that the councils themselves imposed?

Mr Stewart —It is imposed by the councils themselves.

Senator COLBECK —Yes, it is a slightly different situation.

Senator IAN MACDONALD —Imposed by the voters!

Senator COLBECK —Or by the voices of those seeking higher office. We have heard differing views in respect of the way that the infrastructure costs are built into the system around the country, and I have had some private conversations, particularly with some developers and contractors in Tassie, over the last week or so. I am interested in the impact of changing the system. Everyone is complaining about the fact that there are these significant costs built into the system; there are high charges and sometimes specific charges for a library or something of that nature, for example. We have had some evidence that if that system were to be changed and we were to revert to something like we have been discussing this morning, where there is a longer term or intergenerational approach to providing the infrastructure, that would not necessarily have an impact on the cost of housing. I find that a little bit hard to believe but I would be interested in your perspective.

Mr Stewart —If we are looking today at resolving the housing affordability problem, the principal difficulty is that land holdings have been bought over the last four to five years, and even last week, on the basis of what projected returns will be delivered in three, four or five years time when it reaches the market. So you cannot start attacking affordability by attacking raw land prices. There will be a two- to three-year time before you can impact from there. So the only way to really deal with it in a practical sense is to provide a greater level of funding to purchasers—which then increases demand and has its own difficulties—with the First Home Owner Grant, for example. But now that is quite minimal, compared to where it was in the year 2000, in comparison to prices.

So there are long- and medium-term solutions and there are also immediate-term solutions. In the immediate, what we have called for in Queensland, and did in 2006, was a moratorium on increases so that we could take stock and then move ahead. That is going to be the quickest fix that could be put in place, because even now we turn around and there is a doubling of infrastructure charges as all of the new system rolls in, and that will exacerbate the situation.

The other impact that this has in our view is that, obviously, it will be inflationary. With the price of housing being there and in undersupply, we will see rents go up and of course there will be huge pressure on wages into the future to meet those costs. Then there is the matter of those who aspire to pay off their homes being able to do so with a reasonable standard of living.

Senator COLBECK —You talked of what is happening in Victoria at the moment. I think someone mentioned that that has been going on for the last three years or so. That is obviously a policy approach that has been determined by the different state governments. Do you have any sense of what the drivers might be? Just looking at Queensland, particularly in the south-east corner, with the extraordinary growth that it has been going through over the last 10 years—and I know you mentioned the other infrastructure priorities that were involved—I am interested in getting a sense of what the drivers might be for the different approaches.

Mr Hailey —In Victoria, they have had very much a stated policy of keeping 10 years of zoned land out there in the marketplace. In fact, down in one corridor towards the south-east that takes in the Cardinia and Casey councils, those two areas were becoming constrained. They saw that there was about four years zoned land out there. So the Growth Areas Authority actually stepped into the local authority and state government process to accelerate the process of rezoning. That is all coming through the system now. From a wider perspective, there was an announcement just recently by the Brumby government saying that, for everything that is inside the UGB—urban growth boundary—that is not currently zoned, they are going to move to have it rezoned. They will accelerate that process using their Growth Areas Authority.

They have a fundamental sense of keeping enough zoned land out there—even though it is in developers’ hands—and appropriately funding the infrastructure. Melbourne is divided into four water authorities, for argument’s sake, and those water authorities will actually set up the schemes and, if you provide some of that trunk infrastructure as a developer, they will then reimburse you because they are getting the income from the wider market. We do not have that operating in Queensland.

Going back to your previous comment about having a lesser up-front charge and paying it off over time and that not necessarily getting you an advantage in terms of pricing coming back, it would if you had land supply coupled with it. If you have a constrained land market and you take a cost away, the land prices will not come down, because it is the demand that is driving it. But if you free up the supply and then cure some of those cost aspects, the price probably will not come down but the rate of increase will certainly flatten.

Senator COLBECK —I understand, obviously, that it is multifaceted and there are a whole range of inputs that need to be developed, but one of the councils put it to us quite categorically that there would not be any impact on prices. Having a chat with a couple of the developers and hearing about the competition in the development market, we found that they were quite certain that they would be taking it out of their costings because they could not afford not to—because there is always someone in the market who will. Therefore, there has to be an impact. But I understand what you are talking about with respect to supply. How do you see that being built into the overall market? It obviously has had an impact on established property prices. How do you see that being built into the overall housing market, not just the development of new properties? It obviously has an impact on the established market. How does it fit within that?

Mr Hailey —I suppose that is one of those political conundrums. If you come out with a policy that says you are going to flatten price growth in the outlying suburbs, that probably means you are going to flatten price growth right across the market. Those people who have established homes that are a large part of their equity and retirement fund would say, ‘There’s a decision that has been taken to actually slow down the rate of growth of my retirement fund.’ That is a bold move, but it is probably the sort of move that is required. That is what we say. Everybody in the housing market who has product now is having a free ride in terms of their equity increase as a consequence of what is happening out on the fringe and what is happening in the new home market.

Senator COLBECK —As a part of that, there were some reports last week that indicated that we had one of the most overcooked property markets internationally. My perception would be that the base prices, particularly in those new areas, are very much set around the costs of development of the overall package. So there is a flaw that is put in place by that. The established property market is to an extent, as we have just discussed, related to that. Again, it is a very difficult question about the fact that it is an overcooked market. Given that there is this very high input price that is established by the new development market, my view would be that if there is going to be a significant correction in the market—and you said in your documents that it has been going that way for the last 14 years—that potentially has an impact of saying, ‘If the overall market is going to drop like that, that is another element that stifles development growth because that has an impact on the benchmarks of new development.’

Mr Hailey —I am not sure about the overall market correcting. Certainly, there will be elements of markets that will correct. Sydney, particularly the western suburbs, is a prime example of that. There are repossessions going on there and prices are coming back. Saul Eslake did a presentation the week before last to the UDIA Queensland members. He is probably taking an even more conservative view than groups like BIS Shrapnel. As I mentioned in my opening statement, by the end of the decade they anticipate that the undersupply of housing in Australia will be 175,000 units—houses, townhouses or whatever that might be—which is one year’s supply. What we are finding is that, yes, there is a strain on the outer edges, particularly for single-income households and families, but what you also have is a skills shortage, so we are increasing migration.

Some of the people who are coming in are looking at Australia and probably thinking it is relatively affordable compared to the prices that they have been used to paying in the areas that they come from. Overseas migration is certainly still fuelling demand, but we need the skilled labour because we have so many people exiting the workforce. Those people are staying in their existing residences. It is not as if they are retiring, giving up their homes and creating supply. They are not; they are retiring and staying in their homes. But we have approaching 200,000 migrants a year looking for housing, in addition to our natural growth.

CHAIR —I have two questions. Unfortunately the Queensland government—on Friday afternoon, I understand—declined to appear before this inquiry, which puts them in the august company of the New South Wales state government. The Western Australian government, in contrast, was quite helpful last week. I understand the Queensland government have a Housing Affordability Strategy of their own. In the absence of being able to question them about it, do you have any observations as, I guess, stakeholders in the policy environment on that Housing Affordability Strategy and whether you think it is effective and useful?

Mr Stewart —We made a number of recommendations in July 2006, when we anticipated and saw this problem was starting. The Queensland government undertook its own internal inquiries and came out with the Housing Affordability Strategy in July 2007—I think 26 July. That strategy was very broad in that it was intended to address land within the urban footprint that existed under the South East Queensland Regional Plan. That process is continuing. There is underway a major review of the Integrated Planning Act, and that is being undertaken with very extensive industry consultation. In addition to that, the state government put in place an Urban Land Development Authority. We do not have, and have not had, a land commission of that nature in Queensland. The ULDA’s job is to assemble and deliver housing through a number of major precincts, most of which are urban renewal and one of which is in Mackay. That is, in broad terms, the strategy as a whole. It is a very good and very solid start.

With respect to infrastructure charges, what the government have also done is to refer the equity of those charges for consideration by the Competition Authority. I think that through that we will see a standardisation of the application of their methodology. What that does not do, however, is to put in place a moratorium, which was one of the key platforms that we felt were needed to draw a line in the sand and then start exploring better and more equitable ways of providing infrastructure. I think the government got ticks across a number of large areas. We are yet to see the final outcomes of that. We would like to see that policy go further, from the point of view of putting in place an independent monitoring unit of land supply. Of course, we still hold that that independent national housing planning unit is really a key ingredient.

CHAIR —That policy the federal government has flagged?

Mr Stewart —Yes, similar to the UK model. We see that as being absolutely critical. This market has changed incredibly from one where growth could be delivered largely by individual privately owned companies. The economic structure of the world is rapidly changing, and so we are seeing a vast amount of development being undertaken by publicly listed companies, for example. They have different prerogatives to those which the individual landholders and landowners of the past had. For example, some of those could stop development for any period of time if markets went bad. That is not going to be the case today because you have very large set-ups to do it. So the economic basis—the impact of this on the economy and the impact of a loss of growth and development on job creation, the state economy and the national economy—is, to our mind, a really critical feature today.

CHAIR —I have a final question on the undersupply, linked to the skills shortage. A number of the peak groups, such as the MBA and the HIA, have commented to us on skills shortage issues, particularly the difficulty of using entrants in the migration stream under 457 visas. It is not particularly practical for the construction industry as far as I can tell. Certainly that was the view of Dr Silberberg, from the HIA. You say that Saul Eslake—whom I have also known for many years; I suspect Senator Macdonald may have as well—estimates the undersupply by the end of the decade—in two years—to be 175,000. We are looking at a skills shortage which is obviously very significant; it gets raised in different contexts across almost all of the submissions. The Brisbane City Council raises it in a submission which I think is, impliedly, reasonably critical of developers; you raise it; it has been raised elsewhere. The National Rental Affordability Scheme I think contemplates the construction of 50,000 rental properties over the first five years and 50,000 more, if it works. I cannot actually see how this is doable based on the skills environment and the land supply environment in which we are working and all the other factors which we have been discussing with you today. How is this doable?

Mr Stewart —I think it will be a great challenge. For that reason I will pass over to Mr Brett Gillan.

CHAIR —I agree with you, Mr Stewart. Perhaps you have even understated it. Mr Gillan, I believe the hospital pass is yours.

Mr Stewart —Yes. There will be competition from infrastructure, clearly, but Brett is primarily involved with infill infrastructure and the delivery of infill housing.

Mr Gillan —It is certainly extremely difficult. We are continually looking at improving and making more efficient techniques to reduce labour forces so we are not having as many people on sites. We are seeing some improvement there. I think the industry are extremely efficient in the way we go about doing things, but we are coming into a market—certainly this year, and it is certainly going to increase next year—where there is a lot of competition from the building activity for civil and social infrastructure. I know that in a project I am working on at the moment our quantity surveyors are forecasting large increases in construction costs next year—double digits—because of that competition with social and civil infrastructure, which is going to lead to further increases in our construction costs. For infill projects, for example, the construction component is about 60 to 70 per cent of the overall cost of a development. That will put enormous strain on us to be able to deliver, particularly, infill projects that are affordable.

Senator COLBECK —Are those projected construction cost increases local or are they broader?

Mr Gillan —They are for Brisbane. That is mainly because of the competition. They are particularly concerned about the amount of social infrastructure work that will be rolled out next year: hospitals, jails and all kinds of infrastructure. There is an enormous amount of civil infrastructure which impacts on the structural costs like concrete, reinforcing and all those sorts of issues.

CHAIR —I heard a story last week about a by-product of the US subprime events. Apparently there are a lot of well-skilled US construction workers ready to make the move west to help us all out. I wonder if you have heard anything about that.

Mr Gillan —I have heard about it, obviously, from in the paper and things like that, but we have not seen it on the ground at all at this stage.

CHAIR —Thank you very much. That brings us to the end of the time we have available to talk with you this morning. Thank you very much for attending the committee this morning and for bringing people with such a range of experience. It is very helpful to us to get that range of perspectives, and we are very grateful for that. We also appreciate, as I said in my earlier remarks, your submission and that of your fellow institutes around Australia. You have been very helpful to our inquiry. Thank you very much.

Proceedings suspended from 10.33 am to 10.51 am