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Victoria will need to dramatically ramp construction of new apartments and townhouses to achieve the state government’s housing ambitions.Credit:Darrian Traynor

The housing industry is now warning that the government’s plan to rein in sprawl by building up and not out is now at serious risk,against a backdrop of higher interest rates and construction costs,general economic gloom and high state taxes.

The analysis by KPMG urban economist Terry Rawnsley shows there was a total housing backlog of 5530 dwellings that had been approved but not started in September. But almost three-quarters of them,or 73 per cent,were multi-unit developments.

At the same time,the backlog of detached houses is now being cleared,in a further sign the government’s efforts tocontrol Melbourne’s spread have been failing.

Rawnsley said most of the country had been working through the backlog of stalled projects,but Melbourne and Sydney were both facing challenges making projects financially viable because of a focus on higher density developments.

“While these not yet commenced dwellings represent a pool of approved homes that can be quickly delivered as market conditions improve,the actual number of dwellings being completed and entering the housing market remains too low,” Rawnsley said.

“More effort is required to increase the number of dwellings entering the market at affordable price points to combat chronic undersupply.”

Rawnsley estimated that about half of the stalled projects were located near the city,or in inner-eastern or bayside suburbs in the south-east. He said projects were either on hold because developers had lacked the confidence to go into debt in a climate of rapidly rising interest rates and economic uncertainty,or because a sharp increase in building costs had made projects less viable.

The Victorian division of the Urban Development Institute of Australia said the figures confirmed what its members were saying:the investment climate for apartments continued to be bad in Melbourne because of a perfect storm of elevated interest rates,escalating construction costs,a lack of consumer confidence and property taxes.

“At the moment housing affordability continues to be better in new detached housing in the new suburbs in greenfield sites,” said Linda Allison,the developer group’s Victorian chief executive.

That is at odds with the government’s plans to develop the bulk of Melbourne’s new housing in established suburbs as outlined in the government’shousing statement in September.

The institute was a signatory to an affordability accord as part of the statement launch.

However,Allison said the government’s promise to build 80,000 new homes per year in Melbourne over the next decade looked to be in jeopardy given the poor investment environment for apartments.

“The government needs the industry at the table to work out how to attract new capital to the apartment market,” said Allison.

As reported by this masthead last month,the rate of home building in Victoria dropped to the lowest level in almost 30 years during the three months to the end of June.

Construction work started on 10,582 houses,townhouses and flats,the lowest since 2009,when the state economy was still shaking off the effects of the global financial crisis. But the drop for apartments and townhouses has been particularly acute.

In the June quarter,just 3301 apartments and townhouses were started in Victoria,the lowest since December 2009,and down by more than half since June 2019,just before the pandemic derailed the state economy.

Victoria has never managed to build 80,000 homes in a single year. Last financial year,construction work started on 54,097 homes. That was above the long-term annual average of 46,140 homes a year since 1990,but well below the all-time high of 75,572,reached in 2017-18.

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correction

An earlier version of this article incorrectly said 3301 apartments and townhouses were approved in Victoria in the June quarter. It has been updated to say 3301 apartments and townhouses were started in the state over that period.

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