Sydney: what if apartment buildings could be somewhat taller?

Over five years, would reduce prices and rents by 5.5%

What we gain by building more homes in the right places. NSW Productivity Commission, New South Wales, Australia, February 2024.

A paper that provides a concrete estimate of the benefit of allowing apartment buildings to be modestly taller, focusing on Sydney, Australia. Equivalently, this provides an estimate of the cost whenever we make projects smaller.

Housing is central to our living standards, and the biggest expense for most households. Any improvement to housing costs is equivalent to earning a higher income.

So this question is worth asking: how much would more plentiful and cheaper housing improve NSW residents’ real wages or purchasing power?

In our earlier paper Building more homes where people want to live, we posed a simple thought experiment: what if recently completed apartments had been allowed to be a bit taller? Here we build on this by showing how building more homes can have the same effect as raising people’s incomes.

About 1,500 new apartment buildings were built in Sydney between 2017 and 2022. These buildings averaged seven storeys and contained ten dwellings per storey. If instead we had permitted modestly denser development—for example, if apartments had averaged ten storeys instead of seven—then an extra 45,000 homes could have been provided, all without using any extra land and with minimal effect on neighbourhood character.

The additional 45,000 units would represent a little over two per cent increase in Sydney’s private dwelling stock. Typical rules-of-thumb suggest this extra supply would have lowered apartment prices and rents by 5.5 per cent, all else being equal (Saunders & Tulip, 2019). In dollar terms, this is a saving of about $35 a week in rent on the median apartment – or $1,800 a year. For a median income earner, this is equivalent to a 2.75 per cent increase in their real purchasing power, similar to a typical year’s wage rise.

Housing costs could be reduced further still with higher densities and even more supply. The cost of supplying an additional dwelling provides a floor to how far dwelling prices could fall. In principle, this could be as much as 40 per cent for Sydney apartments.

Third in a series of papers. The previous two:

Building more homes where people want to live (May 2023) showed that households will benefit when government regulation lets more of them live in the places that best suit them.

Building more homes where infrastructure costs less (August 2023) showed that many of those places also have lower infrastructure-related costs.

More

• What if recent apartment buildings in Metro Vancouver were 20% taller? Jens von Bergmann and Nathan Lauster, April 2024. Applying a similar method to Metro Vancouver, they estimate that if apartment buildings completed over the past five years had been allowed to be 20% taller, this would have increased housing stock in Metro Vancouver by 1.5%, reducing prices and rents by 3.7%. For Metro Vancouver renters, total savings would be half a billion dollars a year.

• Supply constraints increased prices of apartment condos in Canadian cities. CMHC, December 2018. Estimates the gap between the hard cost of adding one more floor to an apartment building in Vancouver and Toronto, and the expected selling price. That gap is a strong incentive for buildings to be taller, but we don’t allow them.