UDIA warns SMSF and budget changes threaten supply

“It’s a pretty simple message, you can’t expect to tax something and get more of it, you’re going to get less of it,” Melvin said.

While the government has stated that the measures are intended to change investment incentives, Melvin said early signals were pointing to an unintended contraction in new housing demand and, ultimately, supply.

“We’re already seeing a 10 per cent reduction in new-home sales and, anecdotally from my apartment development members, sales have never been slower,” he said.

“So clearly, these changes have had a consequence.”

Melvin said UDIA had previously warned that sweeping tax-setting changes could weaken the incentive for capital to support new residential projects.

“I don’t think you can change the tax settings on something so dramatically without having a consequence. Clearly, the early signs aren’t good,” he said.

Target gap widens

The comments come as NSW faces an acute gap between its home building target and actual delivery.

Melvin noted that the state’s five-year target is 375,000 homes, which would require approximately 75,000 homes to be completed annually.

However, he said only 42,000 dwellings were completed last year, well below the pace needed to meet the target.

Melvin added that current delivery remained substantially below the state’s recent high point, which itself would not have been sufficient to meet the present target.

“We’re 40 per cent below peak delivery, which was 2018–19, and when we did that peak delivery in New South Wales, that still was a couple of thousand below this annual target,” he said.

“So, not an ideal time to make wholesale changes to the way we tax property.”

Melvin also said the capital flow anticipated from the revised settings had not emerged in the market.

“We haven’t seen a flight of capital into new property, which was one of the things that these tax settings were meant to do, to encourage capital to go in and take those tax concessions, we’re not seeing it,” he said.

Projects fail the feasibility test

Beyond the federal policy debate, Melvin said apartment development in NSW was being held back by a widening gap between the cost of delivering housing and buyers’ capacity to pay for it.

“In the other part of the market, the apartment market is feasibility. It’s that simple equation of cost: cost to build, cost for land, holding costs, financing costs, government taxes and charges, which are enormous here in New South Wales,” Melvin said.

“You haven’t got purchasers who can afford what it costs us to bring an apartment to market.”

He added that buyer affordability had become a fundamental obstacle to new supply rather than simply a demand-side concern.

“I think part of it is actually purchasers’ income. The problem we’ve got here is that people on median incomes can’t afford to service the debt, and that’s a huge problem now,” he said.

He also said that NSW apartment-design requirements were adding unnecessary cost and said modest amendments could improve project economics.

He revealed that a UDIA review involving five major architectural firms had identified opportunities to adjust apartment layouts, including configurations that could add six dwellings to a mid-rise project without increasing its building area.

“That simply means more revenue, it’s about $200,000 you could remove in some sites out of the cost of delivering an apartment, and that’s significant,” he said.

Infrastructure burden

For house-and-land developers, Melvin said the foremost barrier was not approvals, but the timing and availability of critical water, sewer, and road infrastructure.

UDIA research indicated up to 130,000 NSW lots could be delayed because they require enabling infrastructure upgrades, he said.

Melvin added that governments would need to reconsider their reliance on end purchasers to bear infrastructure costs through development charges.

“The capacity for that purchaser to absorb that isn’t there, so if government wants housing, government’s going to have to fund infrastructure,” he said.

[Related: Discretionary trust changes to shrink housing pipeline]