Melbourne’s Granny Flat Revolution is Here - July 2024

By Rich Harvey, CEO & Founder, propertybuyer.com.au

It’s clear Australia’s housing affordability woes are so deeply entrenched that there will be no quick fix, which has authorities urgently thinking outside the box.

In recent times, we’ve seen governments throw billions of dollars at initiatives to boost supply, in the form of greenfield, infill and high-density developments. We’ve seen moves to overhaul planning systems to make it easier and cheaper for project proponents to get to market. And we’ve seen big commitments to invest in more social and public housing.

These are all worthy measures, but it will take years for the benefits to be felt, meaning those struggling right now to put a roof over their heads aren’t helped. That’s why some governments are also looking at additional measures to generate supply quickly.

In Victoria, there’s been a dramatic overhaul of strict planning and building regulations to allow people to construct a granny flat in their backyards with much less fuss and far fewer costs. It’s tipped to spark a small home bonanza.

What are the changes?

Until now, building a secondary dwelling on a block has been tricky in many council areas in Victoria. There were restrictions and costly planning hoops to jump through that meant it wasn’t a feasible idea for most people.

That’s changed, thanks to new reforms by the State Government.

Put simply, a granny flat that’s less than 60 square metres in size no longer require a planning permit. That’s provided there are no flood or environmental overlays.

It’s a big deal, because getting planning approval is usually a costly, confusing and time-consuming process. It also used to be that in some council areas, authorities would only consider a planning application if the block size was at least 450 square metres.

These blanket changes mean that a granny flat can be built on blocks that are 300 square metres or larger, so that’s quite a generous allowance.

Whoever builds a granny flat can use it however they like. It could be for a family member to live in, it might be used for temporary housing, such as rented out via Airbnb, or it could become a long-term rental property.

How big is the potential?

Granny flats aren’t a new phenomenon. They became a brief craze in the 1980s and early 90s in some parts of Australia, where the idea of having a ‘home away from home’ for an elderly parent or a moody teenager was appealing.

There are an estimated 80,000 backyard dwellings across Australia, so they’re not exactly uncommon. But getting one approved has tended to be a punishing process, especially in certain councils with a protectionist mindset.

Changes in New South Wales a few years back have seen demand rise sharply, and a similar boom is now likely in Victoria.

Across Australia’s three largest cities, analysis by CoreLogic shows there are a huge number of potential granny flat project sites. More than 655,000 suitable sites were identified in Sydney, Melbourne and Brisbane, showing the big potential on offer.

The CoreLogic research found Melbourne has about 230,000 blocks that could suit a granny flat dwelling, which is 13.2 per cent of metropolitan housing stock.

The Mornington Peninsula offers the biggest potential for secondary home development, with 23,870 potential sites found. Other council areas with big promise include Casey (16,861 potential sites), Monash (13,960 potential sites), Knox (13,741 potential sites), and Manningham (13,063 potential sites).

Some suburbs of interest to the east of the CBD include Glen Waverley (4009 potential sites), Rowville (3674 potential sites), and Berwick (3604 potential sites). The coastal enclave of Rye also has a good number of potential sites (3705), as does Doncaster East in the north (3397).

Multiple benefits

There are a number of reasons someone might build a granny flat, from family to financial.

Intergenerational living, where more than one generation of family lives together, is increasingly popular. As we live longer, younger Aussies these days get to have their mums and dads for much longer than they did half a century back. And they want to keep them close as they get older.

It means older parents have somewhere safe and secure to live, and help at hand if they ever need it, while grandkids get to spend time their nanny and poppy. For other people, a granny flat is a great place to house guests who come to visit. You get all the fun and enjoyment of a visitor without having them under feet too much.

Then there’s the rental income potential. Critical shortages of available leased dwellings across the country has pushed vacancy rates to record lows and prices to record highs. A secondary dwelling that’s self-contained would find a tenant pretty quickly in this market. Adding a granny flat can help boost the overall yield on your investment property such that it provides a positive cashflow if you get the numbers right. For example, a $950,000 house without a granny flat might rent for $750pw, but adding a $180k granny flat renting for $500pw, could boost the overall yield to circa 6 per cent.

In the right suburb, a granny flat could also prove popular on short-stay platforms like Airbnb and Stayz.

And when it comes to capital growth, CoreLogic’s research also indicates that a house with a granny flat in the backyard could see its value improve by up to $160,000.

Things to keep in mind

The changes in Victoria are great news and make the process of a granny flat project much easier.

However, you’ll still need a building permit. And a secondary dwelling must meet residential design codes in the local planning scheme when it comes to things like setback and sitting.

You also can’t include a car space, even if there’s rear lane or corner access. So it’s important to consider the availability of street parking for tenants.

And here’s the catch. Unlike in some other jurisdictions, granny flats in Victoria can’t be subdivided or sold off separately from the main home.

With that in mind, it’s worth thinking about the long-term resale value of the home. Will having a granny flat in the backyard deter future buyers? Or perhaps they’ll see it as largely a good thing? It might depend on the suburb and its demographics, both now and into the future.

If you’re interested in a granny flat for the cashflow potential, it’s important to consider the current rental demand in your area, to ensure someone will want to rent your granny flat. Given the cheaper affordability of granny flat rentals (and the experience of other states), they are usually rented very quickly and in high demand – particularly in suburbs where there is lack of apartments and predominantly houses which rent for 3 to 4 times the rent of a granny flat.

CoreLogic’s analysis found a third of potential granny flat sites are close to desired amenities and infrastructure, like schools, hospitals and public transport. That means two-thirds aren’t, and that’s worth keeping in mind.

And in Victoria, anyone renting out a dwelling as short-stay accommodation, such as an Airbnb, is subject to a 7.5 per cent levy.

There’s big potential when it comes to granny flats but finding a site that is suitable can be tricky, especially in this current market. It’s worth working with an experience and knowledgeable buyers’ agent who can help source properties that tick all the boxes - and not just in terms of block size, but also in relation to current and future rental demand as well as long-term capital growth potential.

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