The Australian housing market in 2023 was marked by low vacancy rates, rising house prices and rents, and a slowing volume of new home starts. There is a strong consensus that resolving the housing crisis requires supply-side solutions. Importantly, one that facilitates the supply of all types of dwellings will be key to easing the market imbalance. 

On current trajectories, the federal government isn’t seeing its housing targets met. The latest data indicates that less than 166,000 dwellings commenced in the 12 months to September 2023. This is well below the average 240,000 needed per year to meet the National Cabinet’s ambition of 1.2 million well-located homes over the next five years. As such, small secondary dwellings, more commonly known as backyard granny flats, have received attention amid the housing conundrum. 

Data on the number of granny flats built or the stock of these dwellings are difficult to find, if not non-existent. Estimates of the size of the granny flat segment have always, and will likely continue to, suggest that they only form a small segment of the overall housing mix.

Number crunching

Results from HIA builder surveys indicate that more than 5900 granny flats were built in NSW in 2017 and close to 4500 in 2022. In Victoria, there were less than 100 built in 2017 and less than 30 in 2022.

Planning NSW publishes data on secondary dwelling approvals, but it only shows the number in October and November 2023. These two months saw, on average, more than 160 development applications (DAs) lodged and more than 200 complying development certificates issued. Extrapolating this implies that there could be 4320 secondary dwellings approved for construction in NSW per year, which is consistent with the figures from HIA’s survey. 

Based on data requested from the Victorian Building Authority, 1350 granny flat permits were issued between 2019 to 2023, at an average of 270 per year. The divergence from the HIA survey result could be due to the sample being unrepresentative of overall figures due to the small size of the granny flat segment, especially in Victoria, where regulations have been more stringent.

Although these figures represent a tiny percentage of overall dwelling construction, the potential to dramatically expand their contribution to markets, particularly in space-constrained capital cities, could provide respite to an already hot housing market.

But despite this potential and the ease and speed with which these types of developments can be brought to market, there are certain challenges and caveats.

Strong incentive

A key underlying driver of secondary dwelling demand is land value. In a rental market where vacancy rates are significantly below the Goldilocks band of three to five per cent and house prices are growing sharply, demand for other forms of dwellings would be driven by prospective tenants being priced out of the rest of the market. This becomes a stronger incentive for homeowners to build granny flats to rent out, as it maximises the use of expensive land, particularly in Sydney. 

However, demand for granny flats in a stable housing market will primarily come from households seeking to provide additional shelter to family members, including elderly parents and children who would like to live closer to their parents’ homes. This is why the original rules governing granny flats are based on the idea that granny flats would be utilised by members of the same family unit, not rented out to the private market.

These rules are the caveat and the main driver of supplying granny flats. Rules relating to obtaining a permit and then subsequent tenancy vary across jurisdictions. Some are governed by individual council rules. 

In 2009, the NSW Government passed legislation through its State Environmental Planning Policy, which standardised rules for approving granny flats and bypassed council processes. 

In Victoria, announcements were made in their Housing Statement last September to exempt small secondary homes less than 60 square metres from getting a planning permit. 

Queensland amended rental rules for granny flats in September 2022 to allow homeowners to rent them out to anyone outside the family unit. Councils still have the authority to issue development approvals subject to their rules.

Last October, the South Australian Government clarified that planning rules do not restrict granny flats from being rented out and occupied by non-family members. Its Residential Tenancies Act was changed to indicate that granny flats could be rented out to non-family members, with the misconception coming from councils adding conditions to whom granny flats could be rented. 

Western Australia announced changes in January 2024, which removed the requirement to get planning approval for compliant granny flats up to 70 square metres. It also scrapped the previous minimum lot size requirement of 350 square metres.

Retail investors 

What makes building granny flats attractive amid current housing market conditions is that prospective landlords are incentivised to contribute to the overall housing stock. They become retail investors without the high upfront cost of building multi-unit developments and benefit from high rental yields. Moreover, granny flats are less susceptible to onerous regulations on multi-unit dwelling construction and to NIMBY (‘not in my backyard’) community opposition to medium- and high-density development. 

If current conditions persist, seeing an uptick in secondary dwelling construction in 2024 would not be surprising. In addition, easing regulations on granny flat tenancy, such as the changes implemented in Victoria, Queensland, South Australia and most recently, Western Australia, should facilitate the supply of more granny flat dwellings.

For more information

Access the HIA resource on Planning for a Secondary Dwelling, to find out more.

First published on 22 March 2024