(Bloomberg) — When Australia’s central bank resolved to refurbish its 1960s-era Sydney headquarters in 2018, it hardly expected the project would fall victim to the complex construction rules that also hinder the country’s housing sector.
But when renovation work began on the heritage building in 2020, vast amounts of asbestos were uncovered. That meant it needs to be stripped right down to its steel frames, blowing out the projected cost almost fivefold and extending the timeline for Reserve Bank staff to return until at least 2031.
A key factor in both the delays and rising costs is Australia’s Byzantine building regulations, according to economists, who drew parallels between the RBA’s experience and the impediments to developing new homes for Australians.
Meeting the housing needs of Australia’s swelling population has been a fixation of Prime Minister Anthony Albanese’s center-left government as it seeks to ensure affordable accommodation and head off intergenerational inequality. It set an ambitious target for 1.2 million new homes by 2029, but almost immediately fell behind schedule due to planning and associated delays.
At an economic reform roundtable convened by the Labor government last week, one of the key problems raised was bottlenecks that slow housing construction.
“Australia has some of the most restrictive planning and zoning regulations in the developed world,” said Cassandra Winzar, chief economist at the Committee for Economic Development of Australia who attended the reform roundtable. “That absolutely is holding back housing construction.”
Housing in Australia is among the priciest in the developed world, rents hover near record highs, homelessness is rising and home buyers, increasingly desperate to get a foot on the property ladder, are taking out ever-larger mortgages. Everyone agrees that more supply is needed and yet it is extremely difficult to deliver.
The central bank now faces a similar road. One of the first steps for the RBA, working from a leased building nearby, was applying to the City of Sydney to obtain approvals to strip out the asbestos while salvaging heritage features at its headquarters. The 3-1/2-month process involved public consultation and departmental reviews, the types of hurdles that home builders and developers say drive delays and cost blowouts across the country.
The RBA will next need to submit a new application with a reconstruction proposal, approval for which is likely to be drawn out. Already, the estimated cost of the rebuild is A$1.2 billion ($778 million) — compared with the initially planned A$260 million — and that may increase further.
“We often see this with construction projects — cost blowouts, time blowouts,” said CEDA’s Winzar. “The example of the RBA does show you about needing a balance in regulation.”
The Labor government has rolled out a number of measures to try to address the supply shortfall under a A$43 billion “Homes for Australia” program. Albanese made further announcements to boost housing following last week’s economic roundtable.
With construction times blowing out to more than 10 months from a previous six-to-seven months, the government is wagering that moves like pausing changes to the nation’s safety rulebook — the National Construction Code — and streamlining environmental approvals will finally help unlock supply.
Industry players say that while this is a good start, it needs to go further and try to pare back the regulations that run into the thousands of pages. According to the Productivity Commission, there’s not even a clear list of regulations that a developer or builder is supposed to comply with.
While rising property prices have long been seen as a positive by governments, the levels they have now reached appear increasingly problematic. Both Albanese and RBA policymakers have highlighted the risk of social discontent due to growing inequality between young people and asset-rich baby boomers.
The median price for a house in Sydney has soared more than 200% in the past 20 years to a bit over A$1.5 million, according to data from Cotality, a property consultancy. The RBA has also cut interest rates three times this year, taking its benchmark interest rate to 3.6% from 4.35%, further spurring housing demand.
“We have come to see, unfortunately in this country, housing as primarily a way of accumulating wealth,” said Saul Eslake, a veteran economist. “It’s paper wealth rather than something whose primary purpose is to meet a basic human need for shelter and accommodation.”
Despite the cost blowout, RBA Governor Michele Bullock will likely be able to avoid any political fallout, unlike her American counterpart.
The Federal Reserve’s renovation cost overruns have become a cudgel for President Donald Trump’s campaign against Chair Jerome Powell for failing to lower borrowing costs. The RBA, meanwhile, has a separate governance board to oversee just this sort of project.
“It’s very timely that the RBA now has a governance board,” said Jonathan Kearns, chief economist at money manager Challenger Ltd. and a former senior RBA official. “That helps the governor enormously, taking the pressure off her on issues such as this and enabling her to focus more on policy.”
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