Making Housing Affordable Series. PETER PHIBBS. The politics of property and the role of urban planning

May 2, 2017

The narrative provided by the property industry and by some politicians is that the planning system creates large bottlenecks to more supply. Yet the reality is that we have been generating record levels of supply in Australia in recent years. While supply is undoubtedly important, it is not the key moderator of price that it is in some other markets.  

To observers of Australian housing markets the current state of the Sydney and Melbourne housing markets should come as no surprise. As discussed in other parts of this series, we have tax settings that make housing an incredibly tax effective investment when the housing market is rising. Combined with record low interest rates, we have a situation where prices have been rising sharply in our largest markets for several years.

Recently in the AFR Philip Coorey revealed that a senior Howard Minister when leaving office in 2007 described his disappointment at leaving what he described as “the perfect storm” for house prices. This was exactly what has happened – the introduction of the capital gains discount in 1999, as well as the record low interest rates have seen investors surge into the markets pushing prices to eye watering levels in Sydney and Melbourne. For example, the real estate website Domain recently reported that 78 Sydney suburbs now boast a median house price of $2 million or more. Five years ago, the list was just six suburbs.

Political realities

Political parties from both sides have done little to alter this situation because for them a homeowner with rising house prices is a happy voter – most likely to vote for the incumbent and with the majority of the population being homeowners (or home purchasers) no one wants to rock the boat. When you add to this situation the personal story of Federal politicians – many of them are property investors – as well as the close links between the conservative sides of politics and the property lobby (e.g. Scott Morrison was a long-time CEO of the Property Council) it is not surprising that the policy is set in favour of the role of housing as a wealth generator and not as a place of shelter. Moreover, given the addiction of State Governments to fast rising stamp duty revenues from dwelling sales do not expect any State Government to take serious steps to rein in their federal counterparts.

However, clearly rising house prices makes it much harder for first home owners to get into the market (for them the problem is raising the deposit). Previously Governments relied on happy homeowners to carry the political argument for them, but as the situation has become more difficult for prospective first home purchasers, governments have lifted their rhetoric.

Housing prices are now causing politicians to “lose sleep at night”, fixing housing has become “a very high political priority” and big policy announcements are promised. But the last thing a politician want to do is to risk offending home owners by doing something effective and generating some price falls. It is pretty clear to me as a researcher that the default position for many Australian politicians is to sound extremely concerned about the housing issue but do nothing effective.

Blame shifting

So how do politicians do this? The preferred strategy is a simple one – blame shifting. If you a federal politician you blame the States. If you are a State politician you blame Local Government – everyone likes blaming nimbies and planning. Take this example from Malcolm Turnbull, when speaking at Western Sydney University in early 2016..

Why is housing more affordable in Brisbane than in Sydney? Well, developers tell me it is because it takes about a third of the time to get a DA.”

The problem with this statement is a simple one – when house prices are rising faster than holding costs for a developer (which was the case in 2016), a delay obtaining planning approval is a benefit to a developer not a cost.

In this blame shifting space, the favourite mantra for a federal politician is more supply (because you don’t control it – the States do). Get more supply out the door and the problem will be over – no need to change tax settings or anything else. However, as I have argued in other places whilst supply is incredibly important it is not the immediate moderator of prices it is in other markets.   For example, an economist who undertakes modelling for the NSW Government estimates that a 50% increase in new supply in Sydney would only reduce prices by 2%.

Record levels of supply

And while the narrative provided by the property industry is that there are large bottlenecks to more supply generated by the planning system, the reality is pretty different. We have been generating record levels of supply in Australia over recent years. The HIA record that dwelling starts increased from153,000 in 2012 to 228,000 in 2016. This has been a sharp supply response. In NSW, the most expensive state, the housing starts have more than doubled since 2012. This is not an inert housing system – the market is responding to price signals.

In some cities, this new supply has been concentrated in the inner city. This is particularly the case in Melbourne. In Sydney, for a variety of reasons the supply response has been dispersed across the city. However, the supply response does lack variety – you have the choice of a large separate dwelling or an apartment – there is a “missing middle”. Smaller, non -strata dwellings that some households could downsize to are hard to find in many parts of Australian cities.

Inclusionary zoning

So, what are the opportunities for improvements in affordability in light of this political gridlock. There is an opportunity through the planning system in the form of inclusionary zoning. Inclusionary zoning is a system where a percentage of dwellings in large developments are required to be provided as affordable dwellings. In overseas jurisdictions this can be a large percentage. For example in New York this target is 25-30 percent. There is a current proposal in Sydney to use an inclusionary zoning provision to generate between 5 and 10 percent of affordable dwellings at the point of a change in zoning ( Whilst there has been strong resistance to this scheme from the development lobby who argue that it will make housing more expensive, if it is applied at the point of rezoning, the costs will be passed back to the landowner. Currently land owners at the point of rezoning in some parts of Sydney are receiving windfall gains of between 300 and 400 percent. The addition of an inclusionary zoning cost to developers will reduce these windfall gains but in most markets will lead to the same costs for developers.

The careful application of an inclusionary zoning strategy has the potential for assisting the development of Australia’s emerging not for profit sector. The dwellings available from an inclusionary zoning strategy could be added to their balance sheet and provide some cash flow to support debt finance. The real problem for supply in Australia is when the property market turns down. This increases risk for private developers and some will withdraw from the market. The not for profit sector in the UK has played an important role in providing counter-cyclical supply and the Australian not for profit sector could perform a similar role. This role would not only increase the supply of affordable housing stock but it would also help maintain employment in the construction sector. For this to happen, Governments would need to start investing in housing again.

Apart from the short lived national stimulus program associated with the GFC, Australian Governments have been withdrawing from the task of providing social housing.

Bond aggregator model

The bond aggregator model which has been talked about in the press and by the Treasurer, Scott Morrison, is an important element – it will provide cheaper and more effective debt finance for not for profits. However, there is still a financing gap. This can be partly filled by an effective inclusionary zoning strategy but government’s must also be prepared to provide some capital or cheap land to help the not for profit sector to expand. If the only tool you are trying to use is supply and supply is limited in its ability to put downward pressure on prices in such a hot market, a direct action strategy of creating affordable dwellings that will be available into the long term is a very important strategy. An inclusionary zoning strategy is also most effective in expensive cities because in these cities a change in zoning from, say, single dwellings to medium rise apartments, or from industrial to apartments will generate a large increase in land value. This large increase in land values allows for the imposition of the cost of inclusionary zoning by planning regulation whilst still incentivising the land owner to sell. This means that rezoning will still provide the right signals to increase housing supply.

Record number of dwelling approvals

My final comment relates to the operation of the planning system. As mentioned above, whilst the developer lobby still rails against the “evils” of the planning system, their arguments have been dented somewhat by the performance of the planning system in recent years. For example, the developer lobby argued in 2012 as part of their NSW Planning reform process that the horrors of the NSW Planning system was the main reason why dwelling construction was so low in NSW and in particular Sydney. Since then the same old NSW planning system has been able to generate a record number of dwelling approvals. For example, in NSW the dwelling approvals have risen from 33,759 in the twelve months to the end of February 2012, to 74,622 for the twelve months to the end of February 2017. The equivalent figures for the Sydney Metro area have risen from 23,142 in 2012 to 59,474 in 2017 – an increase of over 250 percent. Given that dwelling completions in Sydney are running at about 35,000 dwellings per annum annual dwelling approvals are running at almost double the annual level of completions. Given that this trend has been occurring for many years and that most dwelling approvals last for at least 5 years, the planning system is unlikely to a major bottleneck in terms of total housing supply

In summary, we do need to do something to shake our politicians out of their default positions. The voices of Australians frustrated in their attempts to access home ownership, and baby boomers seeing their overseas travel fund being threatened by the housing needs of their children, are getting louder. We need to keep the pressure up to halt the current “game of homes” played by the political class. In a wealthy country like Australia we need smarter housing policy not more of the same tired rhetoric.

Professor Peter Phibbs is the Director of the Henry Halloran Trust at the  University of Sydney as well as the Chair of Urban Planning at same University. He spent the first part of the his career compiling evidence to assist politicians in their endeavour of improving the Australian housing system and the second part of his career thinking about why they aren’t interested in evidence.

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