The Apartment Shortage

Abstract

This paper measures the excess demand for apartments in Australia’s largest cities. We estimate that homebuyers will pay an average of $873,000 for a new apartment in Sydney though it only costs $519,000 to supply, a gap of $355,000 (68 per cent of costs). There are smaller gaps of $97,000 (20 per cent of costs) in Melbourne and $10,000 (2 per cent of costs) in Brisbane. The large gaps are sustained by planning restrictions. The shortage of apartments is most severe in the inner suburbs of Sydney, where height limits prevent more construction. Elsewhere, restrictions on converting low density housing to apartments are important. High rise apartments are a much less costly means of supplying extra housing than the medium density housing that some planners favour.

Keywords: housing prices, apartments, zoning, land use regulations

JEL Classification: R31, R38, R52