Melbourne’s vertical expansion and the political economies of high-rise residential development

Abstract

Chinese

This article advances understandings of Melbourne’s dramatic vertical expansion over the last decade by attending to the political economies of its high-rise housing development. Melbourne’s major high-rise development in the wake of the financial crisis represents a radical yet poorly understood departure from the city’s traditional patterns of suburban development. This article applies an existing conceptual framework for residential vertical urbanisation informed by heterodox political economy and critical geography. Drawing on secondary sources supplemented by supply-side stakeholder perspectives, the analysis shows how Melbourne’s high-rise development assisted in syphoning significant investor capital into the city. This not only expanded the local housing stock but, in the immediate aftermath of the financial crisis and later, amid ongoing economic uncertainty, Melbourne’s high-rise construction served both economic and geopolitical/symbolic functions in the city’s ongoing inter-urban competition for hyper mobile flows of capital and highly-skilled workers. Large apartment projects fuelled the Victorian economy and filled state coffers through property-related revenue. Meanwhile, the city’s dramatic vertical expansion helped project a powerful image of Melbourne around the world. Its crane-filled skyline heralded a thriving economy, and its new thicket of towers rendered a striking impression of urbane high-density living. Together these representations helped promote Melbourne as a vibrant, desirable place to live, work, and invest. Looking beyond the planning failures and planning politics identified in planners’ critiques of Melbourne’s vertical expansion, this article showcases the state’s considerable stakes in this development, and its role in smoothing the way for this expansion to occur.

Keywords

apartments condominiums high-rise housing political economy vertical urbanisation

Introduction

Melbourne’s skyline has been radically transformed by an unprecedented surge in high-rise apartments. In the wake of the global financial crisis, and the near decade-long era of economic uncertainty that has followed, Melbourne’s apartment stock expanded by 30% (RBA, 2016, 2017). Residential towers, which were uncommon even at the turn of the century, now cram inner-city blocks at record densities and heights (Birrell and Healy, 2013). This prolific vertical expansion has positioned Australia as a global frontrunner in skyscraper development, with more 150m+ towers than all but six countries despite its small population (CTBUH, 2018). Melbourne’s vertical growth also deviates radically from the city’s traditional patterns of suburban development. Media and academic condemnation suggest Melbourne has succumbed to a resource- and energy-hungry vertical sprawl of poorly-designed, investor-focused apartments that offers limited prospects for fostering environmentally-sustainable, vibrant communities (Buxton et al., 2016; Dodson, 2012: 109–111; Gleeson, 2017).

Melbourne’s vertical expansion remains surprisingly under-researched. Key contributions from planning scholars seek answers to the question publicly posed by Melbourne planning academic Michael Buxton (2016): ‘Why would any government collude in such destruction contrary to the public interest when other housing alternatives are so widely available?’. Planning scholars offer two interlinked explanations for this apparent collusion. The first is the failure of the planning system, itself symptomatic of Melbourne’s broader metropolitan governance deficit. ‘Facilitative’ and ineffective policy has encouraged substandard development to occur at unprecedented rates, especially in the congested inner city, and notwithstanding repeated metropolitan planning policies endorsing medium-density consolidation beyond these locations (Buxton et al., 2012, 2016). Ambiguous planning controls are also blamed for a frenzy of property speculation that has diminished affordability (Sharam et al., 2015) and passed on windfall profits to landholders through land value uplift (Birrell and Healy, 2013; Buxton et al., 2016: 71). Planning scholars’ second explanation is the power of vested property interests, especially developers and lobby groups, to exercise influence in Melbourne’s vertical expansion (Burke, 2012: 46; Buxton et al., 2012). Buxton and colleagues (2016: 82) argue that:

The high-rise model is promoted by a powerful network of high-rise and big-city advocates […] Financial and property interests, the construction industry, and high rates of foreign investment are, in effect, deciding the urban form of large areas of Melbourne.

These planning accounts typically portray the state as beholden to ‘neoliberal business as usual’, avidly supportive of the ‘free market’ (Shaw, 2013: 2175) and ‘laissez-faire’ (Buxton et al., 2016: 153). Developers are subsequently interpreted as having ample latitude to plough the skyline for profits without regard for public interests. The subtext of these planning accounts is the problematic triumph of the market over a ‘backseat’ state, with political practice explained by the hegemony of persuasive neoliberal ideologies, namely: more markets and less state interference (Buxton et al., 2012: 114; Buxton et al., 2016: 153)

This article contributes to these planning critiques of Melbourne’s vertical expansion by attending to the political economies of this development. It applies a conceptual framework for residential vertical urbanisation informed by heterodox political economy and critical geography, and constructed via intertextual theorisation (Nethercote, 2018). The first section summarises this framework, and this provides the conceptual and theoretical grounding for the examination of high-rise Melbourne that follows. The empirical content derives from a range of secondary sources, with the analysis of these triangulated through interviews conducted with local supply-side stakeholders. My analysis extends the explanation for Melbourne’s vertical expansion beyond issues of planning failures, powerful property interests and a ‘laissez-faire’ state. In particular, it foregrounds major economic and geopolitical/symbolic functions Melbourne’s vertical expansion served in the immediate aftermath of the financial crisis and subsequent decade of economic uncertainty as state and federal government competed for hyper-mobile flows of capital and highly-skilled workers to support its knowledge-based economy.

Conceptualising vertical urbanisation

A spatial fix

Over-accumulation is an endemic feature of financialised capitalism and describes the trend for surpluses to accumulate at faster rates than productive outputs.¹ Since the 1980s, surplus accumulation has diverged radically from global GDP (Lapavitsas, 2013). Copious surplus capitals looking for returns have sought out investment opportunities beyond the productive economy, including in the ‘spatial fix’ offered by built environment investments (French et al., 2011).

Under financialised capitalism, the flow of capital into this ‘secondary circuit’ of the built environment (Harvey, 2006 [1982]; Lefebvre, 2003) corresponds with four trends. First, an emphasis on land ownership for value-creation and rent-extraction, and an alignment of multiple private interests with real estate assets. Second, exponential growth in transnational flows of capital and people into and through real estate. Third, substantial growth in private wealth. Fourth, worsening socio-spatial and wealth inequalities.

The combination of unlimited liquidity and limited asset classes has meanwhile prompted a new political economy of ‘compounding bubbles’ in western consumer economies (Blyth, 2008). Flows of capital into the built environment have not informed a ‘one-size-fits-all’ process of urban development (Brenner and Theodore, 2002). Nonetheless, the intensifying commodification and financialisation of the built environment corresponds with an ‘increased standardisation of built forms, preferred uses and users’ in its socio-spatial reorganisation of cities and neighbourhoods, in part due to the ‘selective effects’ of investors (Halbert and Attuyer, 2016: 1356).

In describing subsequent building activity, political economists favour Keynesian metaphors (NB. not empirical descriptors) of booms, bubbles and busts. These diverge from the naturalised periodicity implied by economists’ cyclical phases and presumed market capacity to eventually adjust supply to match demand. Instead, these metaphors capture the irregular speedups and slowdowns in construction activity, including ‘sudden ruptures and jagged transitions’ associated with various social and political imperatives and economic incentives (Weber, 2015: 19, 25).

A high-rise housing ‘fix’

Vertical expansion represents an increasingly common contemporary ‘spatial fix’ for surplus capitals. Rare political economy accounts of vertical expansion explain rising skylines as driven by capital surging into the built environment, and identify prolific vertical expansion as an expression of the asset bubbles dynamics described above. Weber’s (2015: 7–8) account of Chicago’s post-dotcom skyscraper boom underscores how surplus global capital encouraged the underwriting of commercial property, inflating property values and sustaining a boom in commercial skyscrapers. Craggs (2018: 512) identifies how a flood of foreign capital into London as the financial crisis struck ‘manifested physically’ in a skyscraper boom. Craggs (2018: 514) interprets this vertical expansion as ‘part of a larger scale process of “spatial capitalisation’” constituting both a bailing out of the value of asset prices through a significant injection of liquidity into the market and the reproduction of the means by which the next round of accumulation may proceed—through the physical expansion of the asset base’.

New skyscrapers increasingly house residential functions (CTBUH, 2018). Higher profits explain this trend (Craggs, 2018), yet housing’s distinct functions in the capitalist political economy provide additional insights as to why this is. Aalbers and Christophers (2014) identified three contemporary functions for housing: as a process of circulation, as social relations and as ideology. Using inter-textual theorisation to extend this framing, I (Nethercote, 2018) have previously specified three non-housing functions for high-rise housing. Relating to housing’s function in the circulation of capital, high-rise housing functions: 1) as labour and capital intensive commodities; and 2) as investments on internationalised real estate markets. Relating to housing’s function as social relations and as ideology, high-rise housing functions as: 3) cultural artefacts of distinction at multiple scales including in inter-urban competition and geopolitics, and in class relations. These functions are now briefly described (see also: Nethercote, 2018).

Labour and capital intensive commodities

High-rise development is labour-intensive: it stimulates the local construction sector as well as a range of related and auxiliary industries and businesses (Ball, 2003). Additionally, since skyscraper development also requires significant capital mobilisation, it assists in drawing significant investor capital into cities.

Investments in internationalised property markets

High-rise apartments operate as investments in real estate markets. The relative abundance, liquidity and fungibility of high-rise apartment assets meanwhile underpin market liquidity. Architectural characteristics such as scale, height and distinctive forms make towers particularly amenable to digital promotion and distant transactions by providing sales agents with vast inventories, while still offering buyers enticing product differentiation and distinction. For buy-to-let investors, towers provide landlord-friendly features including lower maintenance and high security in in-demand locations. For buy-to-live investors, starchitect towers provide luxury apartments often with unrivalled views in coveted locations that satisfy their appetite for distinction and exclusivity. For buy-to-leave investors whose apartments are left uninhabited or used sporadically as international pieds-a-terre, these property assets operate as secure ‘safety deposit boxes’ or, more insidiously, a way to launder money via shell companies. Associated land and property transaction taxes provide revenue for states.

Cultural artefacts of distinction

Skyscrapers wield significant symbolic power that helps crystallise and shape the skewed social relations of financialised capitalism. In the inter-urban competition for super mobile flows of capital and people, skyscrapers project and index global city rivalries (Graham, 2016) and also generate ‘promissory values’ about geopolitical power (Ong, 2011: 209). Vancouver’s formulaic tower-and-podium towers broadcast an image of high-density liveability that aggrandises the city in global urban development and planning imaginaries (Peck et al., 2014: 404). Even a critical mass of unremarkable towers animates a ‘climate of possibilities’ that drives local decision-making towards economic and political gains by inflating stakeholders’ expectations about urban futures and national growth (Ong, 2011: 209), such as by fostering confidence in local economies (Grubbauer, 2014) or in capitalism broadly (Craggs, 2018: 514). At the scale of social relations, glitzy starchitect towers also advertise the prestige, exclusivity and vertical secession of those who own the apartments within, and thus help project the uneven social relations of capitalism across the urban landscape.

The local contours of vertical expansion

This three-pronged framework structures the three-part analysis of the political economies of Melbourne’s high-rise that follows. However, before delving into the analysis, it is worth considering conceptually why vertical expansion unfolds differently in different places and times. Based on land rent theories from political economy, Smith’s (2010) ‘rent gap’ thesis of uneven development explains why urban development becomes profitable in some places and not others. When the gap between actual capitalised ground rent under current land usage and the much higher ground rent that could be secured at its ‘highest and best use’ becomes sufficiently wide, developers are incentivised to develop. Density plays a vital role in driving up land values since land values are set by local dwelling sale prices (set by the market) in combination with permissible development types. This residual land value method enables developers to establish how much they should pay for land after accounting for their desired profit margin.

However, not all rent gaps experience redevelopment (Smith, 2010: 101). Instead, states, intermediaries and local opportunity structures also shape how and when (vertical) urban development occurs. First, vertical development requires state support because the state influences the financial conditions under which investments transpire, including their profitability (Halbert and Attuyer, 2016: 1351). States also manoeuvre to secure political and economic benefits from this urban development, as well as to maintain legitimacy, and this in turn shapes development opportunities. Second, intermediaries – financial intermediaries, developers, consultancies and valuers and so forth – all assist in translating financial goals into the built environment. Apartment buyers are also important, since they ‘co-construct’ demand for new housing assets, thus enabling the real estate-financial system to thrive and reproduce itself (Weber, 2015: 64). These socio-technical intermediation processes and their outcomes necessarily differ between places and over time (Halbert and Attuyer, 2016: 1350). Third, ‘locally specific structures of opportunities’ circumscribe those locations ‘where finance capital investments eventually touch base’ (Halbert and Attuyer, 2016: 1353–1354). Economic logics intersect with municipal codes and zoning, urban morphology and functional requirements for space to produce standard market formulas – what Willis (1995: 182, 149–150) termed ‘vernaculars of capitalism’– that subsequently inform tower forms, heights and floor plans. Subsequently, even within a single asset type such as residential real estate, development strategies evolve as local settings change, as do intermediaries.

The empirical content for the analysis of the political economies of Melbourne’s vertical expansion below derives from secondary sources including policy documents, industry and government reports and parliamentary transcripts, academic literature, media articles and quantitative datasets. This analysis is triangulated using interview data from supply-side stakeholders. Stakeholders were identified through government and industry contacts, with government recruitment focused on DPC, DEWLP and OVGA, and central LGAs. Industry recruitment targeted private developers and architects active in high-rise projects. Interview topics covered the drivers, regulation and consumption of Melbourne’s central vertical expansion. In total, 15 semi-structured interviews of 60–90 minutes were conducted with state (three), local (four) and industry (eight) stakeholders in senior managerial positions (or equivalent) in 2017/2018. Interviews were recorded, transcribed and analysed via topic coding relating to high-rise’s functions. Given my focus on the political economies of vertical expansion, the discussion does not provide a comprehensive account of stakeholder perspectives. Government/industry identifiers are used to preserve stakeholders’ anonymity.

Building Victoria’s economy

Counting on cranes

Following the global financial crisis, Australia avoided the deep recessions that plagued most major advanced economies. Nonetheless, the nation’s economic growth slowed significantly, unemployment rose sharply and the country faced heightened economic uncertainty. In the decade since, federal and state government has repeatedly relied on city building to provide an economic stimulus. As 2007/2008 shocks reverberated, federal government insulated Australia’s economy with funding and support for construction projects. This included the National Housing Affordability Scheme (2008–2013), which provided tax incentives to housing providers to deliver below-market rentals. Business and consumer anxieties were eased by prolific subsequent building activity, together with macroeconomic strategies and sharp actual (+1 million since 2006) and forecast (+8 million by 2051) population growth in Melbourne (VIF, 2016). Later, as the resource sector contracted and commodity prices fell, the 2013 coalition government re-stated the role of cities in a transitional post-resource boom economy, and as drivers of state economies. Recourse to city building as an economic stimulus has local precedents. Scholars typically explain Melbourne’s 1990s foray into high-rise living as produced by a growing consolidation planning consensus, or with reference to the agency of urban dwellers with shifting housing preferences. Yet this inner city development also had roots in 1990s economic stimulus programmes in response to a strained suburbanisation model (Badcock, 1993).

Apartment development has become a ‘bright light’ of the Victorian economy (Birrell and Healy, 2013: 5). Since 2009, the number of residential building approvals nationally has climbed exponentially due to higher-density dwellings (semi-detached houses and apartments), with detached housing approvals holding steady (RBA, 2017). In the decade to 2016, higher-density dwelling investment doubled from less than 1% of GDP to almost 2% (RBA, 2017: Table 2), largely due to high-rise apartments (four storeys or more). Nationally, apartment approvals tripled from pre-2010 rates of fewer than 20,000 approvals per annum to over 70,000 (RBA, 2017: Table 3). Melbourne’s development follows these national trends but has been particularly prolific. Since 2013, higher-density approvals have outpaced detached housing approvals (ABS, 2017a, 2017b; RBA, 2017: 3, Graph 4), with high-rise apartments again the primary driver (RBA, 2016: 20, Graph 2). In the City of Melbourne, higher-density approvals soared from 6061 in 2011, to a peak of 9237 in 2015, and remain high at 7456 in the year to June 2016 (ABS, 2017a). Melbourne’s core is subsequently one of the fastest growing municipalities nationally, with its high-rise construction translating to record annualised rates: AU$1.6 billion in 2011, and AU$2.5 billion in the year to June 2016 (ABS, 2017a).

The Victorian construction industry now contributes AU$21.6 million to the state economy (a 12% share), employs 240,000 people across 89,000 businesses and stimulates business for a range of building and auxiliary sectors (DEDJTR, 2018). Victorian Planning Minister Wynne (2017) corroborated this, commenting that: ‘the building and property industries are some of the largest sectors in the Victorian economy. The stimulus they provide makes our state an attractive place in which to invest’. State Premier Andrews’ endorsement of Melbourne’s latest ‘tallest’ tower also reinforces the economic value of vertical development (ABC, 2017a): ‘What we’re really approving is 4,000 jobs … for construction workers and those in the hospitality sector, in the construction phase, and for the future’.

Meanwhile, property-related taxes represent the largest and fastest growing revenue stream for state governments, with exponential growth from AU$20,398 million to AU$35,151 million between 2011/2012 and 2016/2017 amounting to a revenue share rise from 34% to 43% (ABS, 2017c). The Victoria government witnessed the largest dollar increase of any state, with its property-related revenue rising 12.2% between 2014/2015 and 2016/2017 (ABS, 2017d). High-rise development and steep land tax increases from climbing CBD land values are major contributors.

Attracting investment into Melbourne

Melbourne competes for mobile flows of capital with other Australian cities, and internationally. Alongside Australia’s relative economic and political stability, Melbourne offers investors multiple assurances, including strong housing demand underpinned by steep immigration-backed population projections, and property expert and bank reassurances that real rises in income throughout the 2000s and rising prosperity fuel its hot property market (Birrell and Healy, 2013).

The size and complexity of high-rise development restrict the field to private commercial developers, with minority inputs from government development corporations and housing associations. Between 2006 and 2012, 97% of projects in the City of Melbourne were developed privately (City of Melbourne, 2013). While the specifics of local production remain patchy (Burke, 2012: 43–46), Rowley and Phibbs’ (2012) review of infill housing production confirms that multi-unit developers tend to be larger, including because projects are capital-intensive and high-risk, often plagued by project, planning and sales uncertainty drawn out over the years that lapse between project inception and site purchase, and completion and handover. Developers need track-records, and Australian banks place onerous conditions on project finance, including stipulating up to 100% ‘off-the-plan’ pre-sales, and a minimum 20% ROI (Sharam et al., 2015). These conditions narrow the field to developers with access to corporate (rather than project) finance, including real estate investment trusts (Rowley et al., 2014).

Major listed Australian developers and smaller local developers increasingly compete with international developers, principally from Asia, including Singapore, Malaysia and China (UDIA, 2017: 4). These offshore developers accounted for some 20% of apartment completions in 2016, with higher concentrations in the core, and they hold a 33% share of Melbourne’s apartment pipeline for 2017–2019. The Australian government’s Foreign Investment Review Board’s data shows that foreign-developed new residential projects average 170 dwellings per building, confirming foreign developers’ preference for higher-density development (Gaulder et al., 2014: 14). Foreign developers can gain a competitive advantage, with access to cheaper offshore credit relieving them of onerous local bank requirements, and their size cushioning risk exposure (Birrell and Healy, 2013).

In the past decade, Victoria has repeatedly attracted a major share of this foreign investment, including outperforming all other jurisdictions in 2016/2017 by attracting almost half of all proposed foreign investments (Australian Government, 2018: Table 4.11). Nationally, federal policy has incentivised foreign investments into Australian real estate. 2008 reforms streamlined screening and administration for foreign buyer approvals, and provided developers with pre-approvals for foreign investors to buy new homes up to a cumulative value of AU$3million in a single development. Since 2009, foreign investment in residential real estate has surged by roughly 400%, such that, until 2016/2017, real estate absorbed more inflowing foreign investment into Australia than any other sector.² Between 2009/2010 and 2010/2011, approved investment volumes in residential real estate more than doubled from AU$8.77 billion to AU$20.92 billion (Australian Government, 2014: 29, Table 2.8). After holding steady through 2012/2013 (Australian Government, 2014: 29, Table 2.8), investment volumes surged to AU$34.7 billion in 2013/2014, before more than doubling to their peak of AU$72.4 billion in 2015/2016 (Australian Government, 2018: 27, Table 4.4).

China is the biggest single source of these foreign investments into Australian real estate, and Chinese investments have grown exponentially, with investors being enticed by the conditions described above together with ‘push’ factors from Asia. Between 2006/2007 and 2011/2012, investments from China grew six-fold from AU$712 million to AU$4.2 billion (Rogers et al., 2015). These volumes rose to AU$5.932 billion in 2012/2013 (Australian Government, 2014: 32, Table 2.11), before doubling in 2013/2014 to AU$12.406 billion (Australian Government, 2015: 31, Table 2.12), and then doubling again in 2014/2015 to AU$24.349 billion (Australian Government, 2016: 35, Table 2.12), before peaking in 2015/2016 at AU$31.912 billion (Australian Government, 2017: 37, Table 3.13).

The Victorian government has played a major role in this surge by positioning Melbourne as an enticing place to invest through a combination of the city’s permissive performance-based planning system, site availability (including through office conversion) and favourable land price dynamics. Planning Minister Guy’s (2010–2014) ‘Grand CBD’ plan to ‘Manhattanise’ Melbourne aimed to expand Melbourne’s high-rise footprint fivefold. In the absence of coherent metropolitan governance, and under the Central City Zone designation, state government gained unbridled executive power over large developments (exceeding 25,000 m² in floor space) and lucrative inner-city areas.

Stakeholders corroborated how Melbourne gained an interstate advantage by sweetening the deal for developers with its lax planning regulation (Buxton et al., 2016):

restrictions, a whole lot of other barriers to development [in Sydney], would have played into some of that attraction of Melbourne as being a place to do business and particularly for foreign developers to come and put money and to feel like there was an easier path. (Industry, MS08)

During Guy’s ministerial term, almost 100 towers were approved without local government consultation and Melbourne’s skyline subsequently transformed at breakneck speeds (Buxton et al., 2016: 141–142; Shaw, 2013) as unprecedented volumes of investment were syphoned into Melbourne. An industry stakeholder (MS15) commented:

The minister was so focused on making sure things kept going that there wasn’t much of a critical eye turned to what was happening in terms of the built environment outcomes […] it was a melting pot of post-GFC fear about the construction industry and what was going to happen, and a minister very focused on being able to say ‘I approved another building’ […] and a lack of accountability that stemmed from that.

Melbourne’s rapid vertical expansion, although not without controversy, has remained politically viable. The state has maintained legitimacy because centralised development appeases key middle-class voters by relieving pressure on less palatable development in the middle-ring suburbs where these voters reside. Government framings of declining housing affordability as a supply-side problem have also played a part in building public tolerance for vertical expansion.

From small investor apartments to luxury residences

Melbourne’s high-rise development in the decade since the GFC comprises two overarching phases. Post-GFC and until roughly late 2015, a ‘volume’ development strategy proliferated, with developers maximising floor plates and heights, shrinking dwelling sizes and targeting local investors who typically invest in properties valued under the metropolitan median, rather than in premium properties (CoreLogic, 2016). Luxury apartments were meanwhile a minor submarket, comprising penthouses elevated above these cheaper apartments or, more exceptionally, entire towers of premium residences. An industry stakeholder (MS11) commented:

All the apartments stock we build is driven by property developers for profit, never designed for people to live in. […] private property markets sell 85% of their stock speculatively to investors who care about return, not about how people are housed.

Developers sought central, high-amenity sites to benefit from planning permissivity in the central CCZ, while uncapped height controls also invited heady land speculation. Since house prices fall with distance from the centre, central sites also limited developers’ risk-exposure in offsetting high development overheads. Namely, per dwelling, a two-bed infill apartment in a 50-unit tower costs AU$72,000 more to develop than a greenfield, three-bed detached house (Urbis, 2011), with the land component of this cost substantial. The 2016 Amendment C270 dampened land speculation somewhat, tightening built form controls such as setbacks, separation and overshadowing, but floor area ratios (over 18:1) remained negotiable in exchange for ‘public benefits’ provisions.

However, from around 2016, Melbourne’s apartment pipeline began filling with applications for luxury developments which, once constructed, will expand the current luxury submarket substantially. Developers adopting this ‘quality’ strategy are no longer targeting ‘mum and dad’ investors, but instead marketing to wealthy would-be owner-occupiers with luxury larger/three+ bedroom apartments (some sprawling over 1000 m²), with 6-star amenities and customisation opportunities. This strategy has encouraged developers to leverage ‘starchitect’ designs to obtain planning consent with maximum yields. An industry stakeholder (MS07) commented: ‘there’s been discretionary height controls, where if you do a nice design, they give you more height, they’ll give you more yield. So the clients [developers] go to better architects, to get more yield and make more money’. This trend towards luxury apartments aligns with national growth in premium higher-density housing, with higher-density homes now accounting for 13.5% of the ‘AU$2 million plus’ sales nationally (CoreLogic, 2016).

Stakeholders corroborated this periodisation of Melbourne’s vertical expansion, as did the Planning Minister Wynne (2017): ‘The answer is that the market is shifting. It is shifting away from one-bedroom apartments. Lots of people want two, three or four-bedroom apartments’. An industry stakeholder also reflected on this shift:

It’s undergoing substantial change at the moment. Up until 18 months or so ago, it was very much focused on the investor market. With a very small product where the quality was not significant […], there’s been a very quick move towards owner-occupiers, which has changed both the size and quality of what is being provided […] an increase in the three bedroom and upper-end product. It’s quite dramatic. (Government, MS05)

We were doing average 58 square metres [apartments]. We’re probably doing average 80 square metres now. Much, much bigger. Price points have moved from $600,000 to $900,000, as an average. Back five years ago, if a developer came and said, ‘I’m gonna do two million dollar apartments,’ we’d be like, ‘Hopefully one out of 100, and hopefully you’ve got it pre-sold, because you’d never sell it’. […] Now a development of all two-bed, all $1.5–2 million apartments is just normal. (Industry, MS07)

Stakeholders also cited the recent emergence of other high-rise development strategies, including purpose-built student accommodation and apartment-hotels, as developers seek partial institutional financing to overcome difficulties in securing finance.

Stakeholders explained the evolution of high-rise developer strategies as driven by (concerns about) perceptions of a local apartment ‘glut’, tighter planning regulations and new apartment design guidelines. Other drivers include stalling off-the-plan sales due to tighter consumer lending requirements, and developer financing constraints. The shift to premium apartments and the search for alternative financing models also corresponds with a sharp drop in approvals for foreign investments into Australian real estate in 2016/20117 – a fall by two-thirds from 2015/2016 peaks (Australian Government, 2018: 27, Table 4.4; 35: Chart 4.4) – and a halving of Chinese investments (Australian Government, 2018: Table 4.13).³ This drop has multiple potential origins, including the introduction of stricter Chinese ODI capital controls introduced late 2016, the introduction of local applications fees in late 2015 deterring potential investors from making multiple applications for properties they are considering purchasing (Australian Government, 2018: 35) and other potential demand-side drivers discussed below.

Banking on high-rise: Investments in real estate markets and property-related state revenue

Melbourne’s apartment consumption is underpinned by the intensifying commodification of housing and related internationalisation of housing markets. Investors own 27% of Australian property and have made 40% of property purchases since 2012 (RBA, 2015). In Victoria, investors own a higher share (30.5%) of housing stock than in any other state (CoreLogic, 2016). These investors also represent a major proportion of Australia’s foreign buyers (Australian Government, 2018: 34). Investors are highly active in Melbourne’s higher density housing: they own two-thirds of all units (68%) (CoreLogic, 2016), and between 2009 and 2013 they purchased upwards of 85% of new inner city apartments and 75–80% of new apartments beyond the core (Birrell and Healy, 2013: 13).

Local ‘mum and dad’ investors and foreign buyers

The domestic investors who buy Melbourne’s apartments are typical of Australia’s small inventory ‘mum and dad’ landlords who tend to own at most two properties, each typically valued under the metropolitan median (CoreLogic, 2016). Small apartments are developed to fit these investors’ portfolios, with the majority of Melbourne suburbs recording apartment median prices below AU$600,000, and with the median metropolitan apartment price currently standing at AU$607,000 [in 2018], up from $532,000 in 2015 (REIV, 2018; 2015). These local investors seek capital gains, and exploit generous fiscal welfare, including major tax concessions on capital gains and deductions on investment expenses (negative-gearing). These subsidies combine with other favourable conditions including landlord-favouring tenancy regulation, enticing capital gains track-records and record low interest rates. Apartments hold particular appeal with their lower market entry thresholds and marginally better rental yields (RBA, 2017: Graph 7 with gross rental yields in 2016 for Melbourne apartments [4.0%], and Melbourne houses [2.9%] CoreLogic 2016: 25), while offering lower maintenance, higher security assets in locations with strong rental demand.

Foreign buyers are also highly active in Melbourne’s apartment market, although robust data on actual foreign buyers of Australian real estate remains patchy, including because the domiciliary status of these buyers can change. According to FOI data obtained by Credit Suisse, foreign buyers consumed 17% of Melbourne’s new housing stock in 2016/2017, gaining pace on first-time homeowners, to the value of AU$3.4 billion (ABC, 2017b). Data on high-rise apartments specifically is lacking, however federal foreign investment reports confirm foreign buyers’ and temporary residents’ appetite for new, higher-priced, medium- to high-density dwellings in Melbourne’s inner city, reflecting their preference for proximity to the CBD, major universities and infrastructure (Gaulder et al., 2014: 14).

The allure of Australian property for non-resident foreign buyers and temporary residents is a product of complex and intersecting Australian and offshore institutional settings and other local factors (for discussion on Chinese buyers, see Wong, 2017). Australian property offers proven capital appreciation prospects within a politically and economically stable and highly-regulated market context (Gaulder et al., 2014). ‘Push’ factors from countries of origin also combine with investor interest in asset diversification and geographic dispersion of wealth holdings. The failure to subject Australian property investors to Anti-Money Laundering and Counter-Terrorism Financing obligations smooths the way for more insidious motivations, with the OECD lambasting Australian property as a potential haven for money laundering, with capital-intensive apartment developments potential targets (Boyd, 2017).

Chinese investors constitute the biggest source of foreign investment into Australian residential real estate, with major acceleration in investment volumes over the past decade, as documented earlier (Australian Government, 2018: 39). This rise corresponds with an increase in Chinese offshore property investment, itself partly due to the growing Chinese middle class (Rogers et al., 2015). In addition to investment diversification, Chinese buyers are motivated by education and immigration prospects. Under the federal government’s Significant Investment Visa (SIV) programme, significant individual foreign investment offers immigration opportunities by allowing these investors to buy real estate through a REIT and in turn to qualify for an Australia visa when they invest over AU$5 million (Rogers et al., 2015). Additionally, following Australia’s mid-1990s immigration reforms, local higher education and vocational training has offered other attractive migration pathways for international students. Since 2000, the number of international students subsequently increased fourfold, with Chinese students now accounting for 30% of Australia’s international students (DET, n.d.). Melbourne attracts almost a third of these international students to its eight universities and other vocational training institutions (Government of Victoria, 2018), and student visas in turn qualify these students for non-resident property investment rights. This has encouraged parents of Chinese students, in particular, to invest locally via them, including in anticipation of intergenerational migration opportunities.

Despite the introduction of tougher conditions for foreign investment (see below), Melbourne’s remains attractive to foreign capital, especially investors with foreign-sourced credit, given higher surcharges on foreign property purchases found elsewhere (e.g. Hong Kong [30%] and Vancouver (15%])), and if recent Chinese regulation on expatriating capital does not deter Melbourne-bound capital (ABC, 2017b).

As Rogers and colleagues (2015) and Wong (2017) have detailed, a range of professional practices, technologies and off-shore events facilitate these foreign buyer property transactions. Their strategies include investment and immigration policy briefings, including at offshore events; the use of Australian Chinese agents with Australian educations but networks and cultural sensitivities aligned with their Chinese clients; and ‘free’ group tours to Australia to foster investor interest, with travel costs credited against any future sales.

Further consideration is required to identify how cultural profiling of foreign investors by real estate, immigration and financial and developer interests is informing the sales tactics of real estate agents as well as high-rise development practices and designs (Rogers et al., 2015: 16). Such work would update Fincher and Costello’s (2005) earlier research on how the local narratives about high-rise residents’ ethnicities, including immigrant ‘outsiders’, informed Melbourne’s early 2000s apartment production.

‘Growing pains’ and state mediation

Melbourne’s apartment residents are typically younger, higher socio-economic status, transient private renters, and include international students and young professionals (Randolph and Tice, 2013). Although understandings of their distinct housing experiences are limited, existing data highlights multiple challenges. Unprecedented residential densities delivered in poorly-designed and poor-performing towers have produced a local legacy of small, substandard, undifferentiated dwellings. Government reports and stakeholder interviews corroborate that Melbourne’s vertical expansion has delivered huge tower developments, with two-thirds containing over 200 apartments (Birrell and Healy, 2013). The apartments themselves have poor light, poor passive ventilation and compromised visual and acoustic privacy (City of Melbourne, 2013), many with inboard bedrooms and deep floor plans – all characteristics that are ‘inherently antithetical to good design’ (Government, MS02). This high-rise stock lacks housing diversity/mix (and flexibility) to cater to different household types and their differing (and evolving) needs for domestic space. State government reported that within a sampled 10,373 apartments, less than 5% had three or more bedrooms, and 43% had one bedroom, with over two-thirds of these considered small (between 41 and 50sqm) and 7% very small (under 40sqm) (DELWP, 2015). Another assessment of new apartments found that only 16% were ‘good’ quality, while 48% were ‘average’ and 36% ‘poor’, and that almost a quarter had bedrooms reliant on ‘borrowed light’ from adjacent rooms (City of Melbourne, 2013). At the precinct level, high-rise is also blamed for creating windy, uninviting and sometimes desolate urban precincts (Shaw, 2013).

Inner-city communities are meanwhile compromised by Melbourne’s ‘zombie’ apartments left vacant by investors seeking capital gains rather than rental revenue. Reports indicate a 19% rise in property vacancies over five years (Pawson, 2017). Community building is additionally compromised by the transiency of high-rise residents, in addition to the segregation experienced by international students in purpose-built high-rise (Fincher and Shaw, 2009). Only 30% of those living in the inner city in 2006 stayed put until 2011, compared to the statewide average of 80% (Birrell and Healy, 2013), with concerns also about the rising prevalence of short-term/Airbnb style lettings.

At the metropolitan scale, Melbourne’s new high-rise contributes to urban consolidation efforts predominantly in the high-value inner city where price-tags remain prohibitive, albeit with recent middle-ring activity. This vertical expansion defies metropolitan planning ambitions for medium-density, middle-ring development and, without affordable or social housing stipulations, it provides little reprieve to growing socio-spatial divides as lower income households remain relegated to sprawling urban fringes (Dodson, 2012: 109–111). Newer trends towards luxury towers suggest that the socio-spatial repercussions of vertical expansion may become all the more pronounced, as Melbourne falls prey to new local forms of verticalised segregation and elite secession as part of the ‘elite takeover of the urban skies’ that Graham (2016: 197) and others have condemned in other global cities.

The economic benefits of vertical expansion are thus not easily reaped by the Australian state. As the challenges outlined above have increasingly surfaced, Melbourne’s vertical expansion has required ongoing federal and state government interventions to smooth the way for property interests, and to restore and reinforce government legitimacy as economic interests have trumped city residents’ needs. State government responded, for instance, to growing local unease about a glut of ‘dog box’ apartments – or what the state called the ‘natural “growing pains”’ of Melbourne’s vertical expansion – with apartment design guidelines (DELWP, 2015: 5) and stricter planning controls (i.e. C270 Amendments). State government also countered outcry about ‘zombie’ apartments in 2017 by introducing an ‘absentee owner surcharge’ of 1.5% on land tax and again in 2018 by introducing a ‘vacancy tax’ of 1% CIV on inner and middle ring properties left empty for over six months.

The federal government meanwhile attended to public disquiet about the role of foreign buyers in inflating property prices with a 2014 parliamentary inquiry into foreign investment in Australian real estate, and subsequently introduced approval fees for foreign purchase approvals in 2015. In 2016, the national banking regulator (APRA) introduced measures to dampen foreign investor activity, including tighter lender standards for non-resident loans, higher rates for investment loans and Australian banks’ exclusion of foreign mortgage applications without local income streams. The Victorian government followed suit – as one government stakeholder (MS05) rationalised, ‘something had to be done’ – doubling Victoria’s foreign buyer surcharges on stamp duty (7%) and land tax (1.5%), and tripling ‘absentee landholders’ surcharges (1.5%). Again in 2017, the federal budget delivered stricter measures for foreign and temporary residents, including removing their capital gains exemptions when selling their primary residence, and implementing a capital gains tax increase from 10% to 12.5% and a lowering of its tax threshold from AU$2 million to AU$750,000. As noted earlier, post-GFC, the federal government had relaxed restrictions allowing developers to on-sell 100% of dwellings in each 50+ unit development to offshore buyers, and also facilitated transactions by providing foreign investment pre-approvals. The recent budget, however, capped developer sales again to 50% of dwellings in a single development, and mandated developers also market locally and report all foreign purchasers (Australian Government, 2018).

The state’s embrace of vertical expansion not only raises challenges for federal and state government, but also introduces tensions and complexities between and within the tiers of Australian government. For instance, federal government incentivises individual foreign investment into Australian real estate via tax settings and visa regulation, and restricts foreign buyers to purchases of new dwellings. Yet the federal government has no executive powers to regulate how this investment ‘hits the ground’. It cannot, for instance, regulate how the SIV (visa) applies to different asset classes, such as real estate (Rogers et al., 1015). State governments meanwhile have constitutional authority and capacity to regulate housing markets, such as through social and public housing policy, and through metropolitan land-use planning. Yet within state governments, interests in higher density construction as a driver of local business and employment, and as a source for property-related revenue, potentially clash with metropolitan planning ambitions for medium-density, middle-ring intensification, especially in the absence of unified metropolitan governance.

Projecting an image of Melbourne: economic vibrancy and urbane liveability

In the inter-city competition for hyper-mobile capital and highly-skilled labour, Melbourne’s rising skyline performs important geopolitical and geo-economic functions. In the immediate aftermath of the financial crisis, and in the decade-long era of economic uncertainty that has plagued consumer economies thereafter, a skyline full of cranes not only boosted the Victorian economy materially in the ways previously described, but it also projected onto the world stage in highly visible ways a powerful image of Melbourne’s thriving economy. Concurrently, Melbourne’s new glassy towers signal their residential functions thus providing a striking impression of high-density liveability that reinforces an image of Melbourne as a vibrant, desirable place to live and work. This is an image ‘rendered seductively real in the forest of glass-walled condominium towers’, much like the thicket of Vancouver towers Peck and colleagues (2014: 387) describe. These images of Melbourne in turn helped animate ‘a climate of possibilities’ that reinforced stakeholders’ expectations about Melbourne’s urban future, including as global economic uncertainty persisted.

Global audiences were primed to accept these representations of Melbourne through the generic mobility of building types whereby towers signal their functional use and thus project the noted place-making strategies that affect reimagining of urban space (see Nethercote, 2018). Other representational practices also helped cement this association of Melbourne’s vertical expansion with modernity, prosperity and urban liveability, such as architectural and expert commentary, even when local realities (described above) diverge from this portrayal. In these ways, Melbourne’s high-rise has contributed to the city’s ongoing campaigns to cement and circulate its ‘world most liveable’ status, thriving knowledge economy and position as a ‘leading creative centre and magnet city for new ideas and smart people’ (Premier Brumby, cited in Birrell and Healy, 2013; Shaw, 2013). And in this sense, Melbourne’s vertical expansion constitutes a recent example of Melbourne’s ongoing use of city building as part of its evolving branding campaigns, following on from Liberal Premier Jeff Kennett’s mega-projects strategy during the 1990s, and appeals to Florida’s ‘creative city’ rhetoric in the 2000s Docklands redevelopment (Shaw, 2013).

Trophy apartments as status symbols

Consumption of Melbourne’s luxury high-rise meanwhile also assists in reproducing apartment owners’ class position materially through asset appreciation that reinforces wealth disparities, and spatially through vertical urban segregation. Additionally, however, some of Melbourne’s more gaudy towers, positioned as they are within a desirable, global city, also wield symbolic power that enables wealthy apartment owners to advertise their class position across the urban landscape. Apartment marketing and media commentary meanwhile actively construct and prime urban publics to accept contemporary associations of vertical ascent with elite succession and exclusive urbane lifestyles. The marketing of Melbourne’s latest tallest tower illustrates how this symbolic power of luxury apartments is continually fabricated and reinforced. With 1105 luxury apartments and its penthouse selling for $AU25 million, Australia 108 is espoused by a local ‘starchitect’ as ‘an opportunity […] own a trophy sky home […] and be part of a world that few others can imagine’ (Katsilidis, 2017). Height thus becomes another urban metric for social status, operating even at the granular level with super-wealthy residents on higher floors granted exclusive access to ‘upper deck’ amenities and services.

Conclusion

This article sheds light on the political economies of Melbourne’s rising skylines over the past decade by applying a conceptual schema for vertical urbanisation (Nethercote, 2018). This analysis enriches understandings of this radical yet under-researched step-change in Melbourne’s urban development in several important ways (see below). Additionally, since Melbourne is a global frontrunner in the extraordinary recent vertical expansion of cities across the globe, this article constitutes an important case study, including for the limited literature that considers this development within the traditions of political economy.

Melbourne’s vertical expansion served important economic and geopolitical functions in the immediate aftermath of the financial crisis and the decade of economic uncertainty that followed. First, vertical development fuels the Victorian economy. It does so by directly channelling significant investment into Melbourne through large, capital-intensive skyscraper developments and stimulating employment in the construction sector, and indirectly through the flow-on effects of this construction activity and investment to a raft of related industries and businesses. Second, vertical development fills state coffers through increased stamp duty (transfer tax) and land tax revenue collections. Local ‘mum and dad’ investors facilitate this by buying up new apartments, enticed by generous tax concessions on their property investments and future capital gain windfalls. Offshore buyers and temporary residents likewise invest in apartments motivated by local education and immigration prospects, and investment diversification. Third, the city’s dramatic vertical expansion projects a powerful image on the world stage of Melbourne: its skyline filled with cranes signals a thriving economy, and its new thicket of towers render a striking impression of high-density living. Together these images visibly broadcast Melbourne as a vibrant and desirable place to live and work. Immediately post-GFC and amid the economic uncertainty thereafter, Melbourne’s vertical expansion has thus served key economic and geopolitical functions (through the symbolic power of this representation of the city) in Melbourne’s ongoing inter-urban competition for hyper mobile flows of capital and highly-skilled workers.

These functions performed by high-rise development invite an alternative response to Buxton’s query about state complicity in this vertical expansion. Looking beyond planning politics, a response from within the traditions of political economy emphasises instead the state’s considerable financial and political stakes in smoothing the way for Melbourne’s vertical expansion. Attending to the political economies of vertical expansion counters suggestions of a Victorian government subservient to the market, as well as the prevailing view echoed by stakeholders that the state has ‘given up’ or ‘given over’ to the market, providing developers with free-reign to build skywards as they please. On the contrary, both federal and state governments are shown to intentionally and actively stimulate Melbourne’s high-rise production through policy levers and regulatory incentives mobilised across planning, foreign investment, immigration and tax domains. Moreover, the state’s economic and geopolitical stakes in high-rise (summarised above) offer a strong causal explanation for why federal and state governments incentivise and facilitate Melbourne’s rising skyline in this way. Conversely, from within the traditions of political economy, the power of other vested property interests to influence Melbourne’s vertical expansion is understood to stem from specific material relationships that relate to these non-housing functions that high-rise plays, and which are embedded through ‘free market’ ideological narratives (Edwards et al., 2012: 6). These property interests restrategise how to plough Melbourne’s built environment for profits in response to shifting global forces and local factors, such as dwindling off-the-plan sales and changing access and conditions on finance. Consumer/investors’ interests also inform, in co-production with developers, these evolving strategies that underpin Melbourne’s high-rise production, including its recent swing away from small investor-grade products to luxury apartments, apartment hotels and purpose-built student accommodation.

Victorian and federal governments cannot, however, seamlessly secure the economic and geopolitical benefits of high-rise development. First, divergent interests within Australia’s federal system of government, and the differing powers of federal, state and local governments to act upon those interests, create tensions and complexities. For instance, although federal government regulates individual foreign investment, only state and local governments control how this investment ‘hits the ground’. Second, the fallout as financial interests are privileged over public interests risks undermining government legitimacy. Certainly, centralised vertical expansion assuages sprawl anxieties with less visible urban infrastructure deficits, and it mollifies key middle-class voters by steering development away from their suburban backyards. Yet the state walks a fine line as it seeks to retain and reassert its legitimacy amongst constituents while also maintaining enticing conditions for property interests. This balancing act is especially fraught as local realities have diverged further from the striking impression of high-density liveability Melbourne’s rising skyline intends to project globally. As detailed, this is also a balancing act that sees federal and state governments repeatedly intervene to adjust the local conditions under which Melbourne’s skyline rises up.

Footnotes

Acknowledgements

The interview data used in this article was collected together with PhD student, Alexa Gower. The author thanks the reviewers for their helpful feedback.

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research received funding from Australian Research Council Linkage Grant LP 151000089: Infill Developments: Project HOME (Housing Outcomes Metrics and Evaluation).

ORCID iD

Megan Nethercote

Notes

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