(L-R): Nicole Gurran, University of Sydney; Rachel Ong, Curtin University; Brendan Coates, Grattan Institute; Cameron Murray, University of Queensland; Peter Tulip, RBA; and Peter Phibbs, University of Sydney.

Last month the Reserve Bank of Australia (RBA) published its conclusions on some of the drivers of housing prices – without considering the full range of alternative explanations and without canvassing a broad range of experts across planning, property and, surprisingly, economics. Against a backdrop of sustained low interest rates, it is no wonder the RBA has been taken to task.

The release of RBA research on The effect of “zoning” on house prices raised eyebrows in the planning profession. The Planning Institute of Australia (PIA) and economists across the property industry immediately paid close attention to the RBA claim that: “zoning” accounts for $489,000 (or around 42 per cent of cost) for an average Sydney house, and a bit less across other capital cities.

By not considering the full picture, and by not assessing the benefits of planning regulation, the RBA analysis has fallen short.

Its paper makes the claim that the difference between the average house price and construction costs is entirely attributable to planning regulations or “zoning”. This claim does not respond to the effect of geography or “place”, nor the value-adding role of planning to improve amenity and make the functioning of cities more effective.

Debate on RBA report

Last week, planning academics and property economists held a forum to debate the RBA research. It was hosted by the University of Sydney under the Henry Halloran Trust. Academic commentators offered views and answered questions following a presentation by Peter Tulip, joint author of the RBA report. PIA contributed to the panel discussion and had published a lead-in article on the super-heating of demand for housing.

Dr Cameron Murray, an economist at University of Queensland and the Australia Institute, challenged the validity of the conclusions. He argued that the attribution of the entire difference between the price of the housing and the marginal cost of supply to a single “zoning” effect – ignored the full range of plausible alternative factors. He also highlighted conceptual problems with the methodology – including that it did not account for the impact of geography and the nuances of how the property market operates.

Brendan Coates, an economist at the Grattan Institute and co-author of their recent report on housing affordability, welcomed the RBA contribution and endorsed the nature of the modelling undertaken. He highlighted the importance of increasing housing supply to address price growth while acknowledging the impact of demand-side tax incentives.

Professor Rachel Ong, an economist at Curtin University and lead author of recent AHURI research on the dynamics of housing affordability, expressed concerns that the RBA paper jumped to the conclusion that their modelled results could be entirely attributed to a “zoning” effect. In any case, she observed (and the author acknowledged) the RBA did not take account of the value created by planning. Rachel noted that in an environment of high demand and corresponding supply of high-priced housing there was a need for a policy focus on subsidies for the delivery of social and affordable housing.

Professor Nicole Gurran, a planner at University of Sydney that leads the Urban Housing Lab, was critical of the RBA report not unpicking what aspects of the effect labelled “zoning” were of interest. She noted that planning regulatory interventions into the market for land and housing are complex and diverse and go well beyond just “zoning”. She observed that planning exists to optimise the value the community get from using land for housing – and to achieve acceptable trade-offs among competing claims for the use of land. To neither value the benefits of planning – nor appreciate the nuance strongly challenges the validity of the RBA results.

Professor Peter Phibbs, hosted a lively Q&A panel session with questions fielded from a full house of around 270 fascinated participants. Some threads that emerged included:

  • That a pure economic appraisal of the role of planning is very welcome – but needs to fully appreciate the nuance of how planning interventions take effect in the property market.
  • That housing in Australian cities is an investment asset – as well as a market for shelter. This means that demand is super-heated by a range of incentives (for example, negative gearing and other tax settings) that distort demand and drive up price.
  • That low interest rates have had an important effect in this regard – which was acknowledged by the RBA author.
  • That the RBA labelling of the estimated difference between the cost of housing and constituent land and construction costs is an oversimplification and misinterpretation.
  • That without appreciating and estimating the beneficial effects of planning on the externalities of congestion, access to work, agglomeration economies and societal valuation of amenity/overdevelopment, then the study does not account for the other half of the ledger.
  • In a market with incentives for developers to trickle out supply, there is a need for intervention to achieve stronger social and affordable housing delivery.

Commentary on problems with RBA report

House prices are a function of both supply and demand. The difference between price and construction costs, which varies over time, cannot be directly linked to planning regulations alone. The author acknowledged that low interest rates over the last five years has had an impact on high house prices – which is inside that $489,000 attributed to the “zoning effect”.

The paper conflates housing supply with the “zoning effect”. As pointed out by Dr Rachel Ong, housing supply is a success story across Australia, having recently been at record highs across Australia and Sydney as well as high in comparison to other OECD countries.

Dr Cameron Murray pointed out that even if a lack of housing supply was behind observed high prices, why had rents only increased by moderate amounts in Melbourne and Sydney respectively in the past decade, while house prices have skyrocketed? Sustained low interest rates would be a key factor.

In addition, the authors have underestimated construction costs for the average house by undervaluing or excluding profit rate, site remediation costs, embodied value of infrastructure (such as access to schools, hospitals, and public transport), and development financing. What this means is that the “zoning effect” is an overstated residual that is a function of both supply (including regulations) and demand (including low interest rates) factors.

The paper also makes the crucial oversight of not providing estimates nor qualitative discussion of the benefits of planning regulations. Just like any other market intervention (for example, the setting of interest rates by RBA) there are both costs and benefits. The RBA paper’s claim is like saying that setting interest rates has costs only (such as impacting the price of a home). But monetary policy also plays an important role controlling inflation and preventing the economy from overheating, much like planning regulations plays a role in ensuring that development is well managed and not creating negative externalities adversely impacting residents, businesses, commuters and pedestrians.

The way forward

PIA believes the debate highlights the need for planners and economists to collaborate on understanding how planning interventions in the property market can work effectively to add value. There is an opportunity for research to quantify the benefits of planning interventions as well as to appreciate where there are unnecessary barriers to housing supply.

PIA understands that for the planning industry to make an effective contribution to the delivery of diverse housing supply for a growing population, government needs to reduce the distortionary effects of tax incentives that superheat demand for housing as an investment asset class. PIA argues the case for a review in the context of a “National Settlement Strategy” to manage the spatial effects of tax, migration and labour policies – as well as major infrastructure investment.

In the meantime, given that the market undersupplies housing at prices affordable to lower income earners, there is a need for subsidies, direct investment and planning interventions (for example targets and inclusionary zoning) to boost social and affordable housing.

Planning is critical to Australia’s productivity and the future wellbeing of our cities and regions. It delivers quality places that grow wealth and jobs and strengthen urban and regional communities. Planning enables economic growth to be achieved alongside environmental goals and community aspirations. The legacy of good planning is a predictable basis for investment in housing, employment and other beneficial uses that reflect community values for a place. The RBA paper unfortunately ignores this contribution of planning to the liveability and quality of Australia’s cities.

John Brockhoff is principal policy officer (NSW and national) at the Planning Institute of Australia.

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  1. Good summary.

    Although, the benefits of ‘amenity’ that planning provides to the majority of well-connected low density land in Sydney does have costs. These costs do include some degree of house price inflation as it fixes the supple of developable land in these areas. Whilst the RBA methodology has been rightfully debunked, surely no planner can believe that large parts of Sydney having high minimum lot sizes can have no impact on prices. This is a trade-off that the planning system creates and should be recognized as such.

    It also increases travel times, congestion, loss of agricultural and spatial inequality as development is pushed outwards and upwards to less contested and connected areas.