New apartments approved in buildings of four storeys or more between 2011 and 2014, Melbourne (source: Better apartments: Minister's forum context report)

One of the arguments that keeps coming up in support of the Victorian Government’s proposals to increase regulation of apartment design is the idea that residents – most of whom are renters – have limited market power.

Tenants are forced to live in “dogbox” apartments, the argument goes, because they have less market power than the other key players i.e. developers and investors/landlords. Dwellings are too small and too dark because they’re built to suit the purposes of profit maximisers, not the interests of residents.

No markets are perfect and there’s bound to be some truth in this assertion, in the same way there are imperfections in the markets for everything else from iron ore to football players.

While relationships between tenants and landlords are relatively harmonious for the most part, there’ve been plenty of cases of exploitation; that’s why we have consumer protection law.

Renting has benefits as a mode of tenure but it also has drawbacks. The key issue for this debate is whether there’s anything about the design of new apartments coming on to the rental market that changes the historical relationship between tenants and landlords in ways that seriously disadvantage the former. Are tenants of new apartments worse off relative to the wider rental market?

Consider this passage from the Victorian Minister for Planning’s new report, Better apartments: Ministers forum context report.

For the first time there are now more apartments being approved in Melbourne, than detached houses in Melbourne’s growth area municipalities. Between 2001 and 2007, average apartment approvals were around 4,000 per annum. By 2010 this had grown to over 10,000 approvals and by 2014 approvals were over 14,000, making up nearly one third of all housing approvals in Melbourne…

The growth of apartment development in inner Melbourne is well known but mid to high-rise apartments are also being built in Melbourne’s middle suburbs – reaching over 5,500 approvals in 2014… In the 2015 to 2018 period, it is predicted that 8,100 apartments will be constructed in Melbourne’s middle suburbs…

Thus renters in Melbourne have a large and growing number of apartments to choose from in an increasing range of locations. The report says apartments were built in 63 suburbs in 2000; by 2014 the number had grown to 116 suburbs.

It cites a forecast that 45,000 apartments will be constructed across the metropolitan area between 2015 and 2017. Indeed, developers and investors/landlords are constantly warned by commentators of an impending over-supply of apartments i.e. a glut.

There are also many players in this market; it isn’t controlled by a handful of big firms. There are hundreds of developers and many thousands of individual landlords, most of whom only own one or two apartments.

They can’t blithely ignore the preferences of renters in relation to apartment design. For sure there are some aspects that are problematic; for example noise transmission between apartments. (1)

Like any consumer, tenants are likely to be at a disadvantage on matters they can’t reasonably understand or foresee; there’s a strong case for strengthening regulation in such instances.

But attributes like floor area or ceiling height are easily assessed by prospective tenants; those who rent so-called “dogboxes” are optimising a bundle of attributes within the compelling constraint of what they’re prepared, or in some cases able, to fork out in rent.

They’re mostly young and see their stay as temporary; so they’re prepared to make trade-offs that others wouldn’t. Those who label small apartments as “slums” rarely live in one themselves and are almost always in a different demographic; they simply don’t “get” the rational calculation the actual residents are making.

The thing that could potentially really put tenants of apartments at a disadvantage relative to existing landlords would be higher rents due to increased construction costs and suppressed supply.

_______________

  1. That’s a longstanding problem that predates the apartment boom and, it should be pointed out, has afflicted new five star hotels for decades.
Past and forecast apartment stock – 2000-17, Greater Melbourne (source: Better apartments: Minister's forum context report)