19
Unpublished data from the Building Activity Survey covering the 2013–18 period indicate that the
average new Sydney apartment is in a building comprised of 117 apartments (row 1, Table 4) and
which occupies 2,397 square metres of land (row 2). That implies the average apartment uses
20 square metres of land (row 3). For reasons discussed below we do not value this land at its
market price but at its opportunity cost under an alternative policy: its value if reserved for detached
houses. The average Sydney house occupies 625 square metres of land and costs $1.2 million,
including structure (Kendall and Tulip (2018), updated) at an (unweighted) average cost of
$1,965 per square metre (rows 4, 5 and 6). This represents a simple benchmark to which we refer
later. A more realistic assumption, and one consistent with estimating effects of marginal changes,
is to assume that new building occurs in similar locations to recent construction. In particular, more
apartments are built on relatively expensive land closer to the city centre. If we weight by apartment
completions in each SA3 from 2013 to 2018, the average price of land used for detached housing
increases to $4,033 per square metre.
Multiplying this by the land requirement of the average
apartment implies that the land for extra apartments would cost about $82,700 per apartment (final
row), or $9.7 million for the representative apartment building. Similar calculations in columns 2 and
3 imply that the cost of land for replacing nearby houses with apartments of their current
configuration is about $44,000 per apartment in Melbourne and $34,000 per apartment in Brisbane.
In comparison, Urbis assumes land acquisition costs of $105,000, $41,000 and $53,000 per
apartment in Sydney, Melbourne and Brisbane in 2011, based on a 50-apartment building requiring
5,000 to 10,000 square metres of land and the average price of urban development land at chosen
locations. In 2018 prices, this is substantially more expensive than our estimates. This partly reflects
larger land area spread over fewer apartments. CIE (2011, p 36) assumes costs of $85,000, $55,000
and $72,000 in Sydney, Melbourne and Brisbane for the median apartment in 2011, but does not
provide underlying details.
To value land at the average cost of detached housing would be an unrealistic description of how
apartments are built under existing policy. The most likely sites for development include a large
premium above other land, because their development potential is capitalised into the property
value. Nevertheless, valuing land as though it were used for average detached housing is appropriate
for comparing different policies. An alternative to the current policy of reserving most of our urban
land for detached housing is that we build some apartments on that land. The opportunity cost of
permitting more apartment buildings is the value of land when it is used for detached housing.
6.2 Finance and Margins
We assume finance and developer’s margins add 10 per cent and 25 per cent respectively to the
cost of land, as discussed in Section 4.3. These assumptions are larger than those of Urbis and the
CIE. As previously discussed, it seems appropriate to assume risks are substantially bigger at the
beginning of a project than at the end.
For the sake of computational simplicity, this estimate ignores some small costs such as stamp duty, conveyancing
and other transaction costs (about 4.5 per cent of the property value, according to Fox and Tulip (2014, Section A.5));
land tax, rates and other holding costs (about 5 per cent of property costs according to CIE (2011, p 42)) and
demolition costs (about $15,000 for the average-sized house according to industry contacts and Rider Levett
Bucknall (2017, p 40)).
This is perhaps the most important difference between our estimate of the effect of planning restrictions and the CIE’s
(2010) estimate of ‘transformation benefits’ from infill development.