According to the Reserve Bank of Australia, we should be building high rises everywhere to address housing supply “shortages”. Here’s one view why this is approach is “conceptually flawed, relies on lobbyist input and doesn’t interrogate housing supply evidence or quantify the effects of planning controls”.
This time the RBA is arguing that zoning adds around $355,000 to Sydney apartment prices, but only $97,000 in Melbourne and a mere $10,000 in Brisbane. The difference between price and costs is entirely attributed to the “zoning effect” (the idea that zoning artificially restricts supply) without any quantification of the variation in planning controls, which can be measured, should the authors have so desired.
At the same time, the research demonstrates that actual housing supply (not capacity or the “zoning effect”), was 20 per cent higher than the similar sized Melbourne and 2.5 times higher than Brisbane (which is about 2.5 times smaller than Sydney).
So how can zoning block supply and add such a significant premium in Sydney, despite the fact that Sydney has had the most and fast-growing supply in Australia? Indeed, Sydney has seen record housing supply but at the same time house prices are the highest they’ve ever been.
The report “relies heavily on evidence provided by the Urban Taskforce … using a contested methodology to produce findings that are both superficial and misleading”
– Minister Rob Stokes
The NSW Minister for Planning and Public Spaces Rob Stokes has correctly acknowledged in a private member’s statement in the Legislative Assembly that the report “relies heavily on evidence provided by the Urban Taskforce … using a contested methodology to produce findings that are both superficial and misleading”.
And while the RBA research does point to other work completed in Australia showing the same conclusion, it admits that these are based only on “anecdotal observations” rather than empirical evidence.
Planners and economists should rightly call out misleading research, develop a shared understanding of planning’s role in the housing market and unite in advocacy for evidence-based urban policies that foster sustainable, equitable, liveable and productive cities that meet the housing needs of all.
It is important that we have a sound basis for public policy decision-making in housing and planning, and we need to be under no illusion of their relationship. That’s why, when a major claim is made about planning, housing supply and prices, it needs to be closely examined to see whether it holds up.
Full disclosure: I acknowledge and thank the authors for accepting feedback on an earlier version of their paper. However, I will argue that their approach is conceptually flawed, relies on lobbyist input, doesn’t interrogate housing supply evidence or quantify the effects of planning controls.
Unfortunately, like the 2018 paper, uncritical coverage from the mainstream media has simply regurgitated the media release, despite the fact that the RBA’s method has been discredited in peer-reviewed research.
This misguided paper couldn’t have come at a worse time for a planning system under siege from state treasuries and the influence of developer lobbyists’, and facing a raft of “reforms”, including fast-tracked major projects and the ability to appeal rezoning decisions at the Land and Environment Court.
The thinking is based on ideological arguments that regulations equate to “red-tape”.
Like other debates within economics, the housing supply debate is inextricably linked to ideological political economy. The RBA research takes its cues from the Chicago school of economics movement or “supply-side economics”.
The key argument from this school of thinking is that economic growth should be driven by changes to supply-side mechanisms (rather than demand-side policy); underpinning ideological arguments that regulations equate to “red-tape”. Supply-side economics is sometimes better-known as “trickle-down” economics.
We know how this story ends. In the same way that cutting taxes for businesses and the rich didn’t deliver better wages for everyday people, cutting “zoning” regulations won’t deliver lower house prices for end-consumers.
Confusing supply with capacity
The paper is conceptually flawed because it uses zoning (that is, housing capacity) as a proxy for housing supply rather than focusing on actual housing supply.
The actual rate of housing (typically measured in annual flow) is the supply of housing.
Housing supply in Sydney is a success story
Housing capacity and supply are two related but different concepts and shouldn’t be conflated. The approach of this study confuses the optimal number of dwellings per land area at a given price (optimal density) with the optimal number of dwellings per period of time at a given price (optimal housing supply).
The RBA research uses seductive but ultimately misleading arguments to make its point, conflating development rights per site and flow of housing. The key example is a Melbourne site that tripled in value from upzoning (from $20 million to $56 million).
Industry seeks to capture the planning system: to gain more “development rights” to make a windfall
It’s true that development rights per parcel determine land value. But all the RBA highlights here is the obvious reason why industry seeks to capture the planning system: to gain more “development rights” to make a windfall. It ignores the link between the record high-level supply of housing that we’ve seen and how this supply has barely moved prices.
The RBA’s method is like assuming that car prices aren’t determined by the flow of cars delivered to the market, but by the size of car factories. It’s take-home is that if the car factories increased in size – without actually increasing the production of cars – then prices would come down.
Supply is driven by the market, not “zoning”
Even if you “uncapped” heights across a large area, then according to the RBA’s logic, prices should come down over time because more developers could build.
However, developers have to get sufficient pre-sales, which is why they’d be forced to drip feed like they do now. There are many apartment projects across every major centre in Sydney that are not going ahead because developers can’t get capital (waiting on other projects to settle) or they can’t get sufficient pre-sales (and hence banks won’t lend to them).
If prices start to fall, developers stop building and banks tighten or stop lending
If prices start to fall, then (for good reason) developers stop building and banks tighten or stop lending – they stop lending to off-the-plan purchasers because their apartments are worth less than when they put down their deposit two years earlier and they stop lending to developers (or reduce Loan to Value Ratios) as their projects become too risky.
There is empirical evidence for this all across Sydney as supply recently peaked. And if banks think there is too much supply, they will simply stop lending. The major institutions “blacklisted” entire suburbs of Sydney for this reason. Moreover, you simply couldn’t increase supply substantially enough for long enough, given limited capital, labour and land in our cities.
The take home is that “zoning” or the planning system does not limit supply.
Land is a monopoly market
This entire piece rests on the assumption of perfect competition, where price equals marginal cost. This is a highly restrictive assumption to apply in a market that exhibits monopoly characteristics.
While the research attempts to demonstrate that the number of builders (firms) is competitive, it misses the issue about the location-specific nature of housing (that is, land and locations are monopolies). Land around Sydney Harbour is expensive because of access to employment and amenity – there are geographical and topographical constraints to accommodating supply in this area.
Demand factors have created high house prices
A better approach to understand the role of supply (zoning/planning controls) would be to create an empirical model including all supply and demand factors for capital cities over the last 20 years. And use the actual annual supply of dwellings (not capacity aka zoning).
Actually, the same RBA economists completed this research in 2019 titled “A Model of the Australian Housing Market”. This rigorous research was based on robust empirical evidence, unlike the zoning work.
The 2019 work revealed that demand factors created high prices, not supply (zoning): “low interest rates explain much of the rapid growth in housing prices and construction over the past few years. Another demand factor, high immigration, also helps explain the tight housing market and rapid growth in rents in the late 2000s.”
On the “undersupply” of housing, it stated (albeit in a subdued tone) that there “might be considered an ‘excess supply’ of housing”.
The RBA research demonstrated that while a 1 per cent drop in interest rates would increase prices by 30 per cent, a “1 per cent increase in the number of dwellings lowers the cost of housing by 2.5 per cent”. Given that new housing supply only adds just over 1 per cent to total housing stock each year, even a doubling of housing supply would have a negligible impact on house prices where these are set by all house sales, old and new.
While the 2019 RBA research didn’t garner any headlines with outrageous claims, it is consistent with much of the literature (here, here, here and here) which proves that supply in the last 20 years has kept pace with population growth in Sydney and across Australia.
In contrast, the RBA’s recent zoning research argues that “fluctuations in demand seem to be small relative to uncertainty about planning”.
Despite the fluctuation in demand being enormous over the period of 2014 to now – it explains almost all of the price movements, from the explosion of prices (2014-18) driven by interest rate falls and overseas investors, the big fall over 2018 and 2019 driven by macroprudential controls, decreased foreign investment, the construction quality crisis (Opal and Mascot towers) and the recent increase over the last 12 months (interest rate falls).
Entire apartment towers were selling out in hours at the beginning of the boom. Now some developers haven’t been able to move stock in the past 12 months. Meanwhile, there were no changes to “uncertainty about planning” over this period. Arguably, there has been greater certainty, especially in Sydney. Planning responded to demand, with approvals reaching an all-time high.
The RBA research is dismissive of demand, stating “high demand increases prices because supply is unresponsive.” Housing supply is obviously “sticky” and it responds to the market signals of increasing prices. Even without controls there would be a supply lag (it takes years from commencement to completion, especially for high rise) and, as previously stated, annual increases to supply only add just over 1 per cent to total supply.
By ignoring the price differential that can occur between nearby suburbs, the RBA research dismisses a critical demand factor influencing prices. Instead, it simply suggests that tighter planning restrictions in one area increases price in another.
From a Sydney perspective, that’s like arguing that lower height controls in middle-ring suburbs increase the price in inner-city suburbs, with taller height controls. Why are prices in Mascot and Eastgardens (high rise areas) two times higher than the neighbouring (low rise) Hillsdale? Clearly, the difference in these areas is driven by demand, not supply.
Substitutability can change dramatically, even across the road in some areas and certainly by suburb. Which all points to the issue that land is a location-specific monopoly, that is, apart from adjacent lots, lots further away decrease in substitutability (and hence have different demand pressures).
What about rental prices?
Rents are a much better proxy for assessing true supply and demand balance – as rents reflect “underlying demand” (not the “effective demand” of prices, which is driven by speculative, asset-based thinking). Real rents have remained relatively flat or falling (compared with prices) in most capital cities over the last decade because supply has kept pace with underlying demand. If supply wasn’t keeping up, then rents would be increasing as well.
When growth in housing, services, jobs and major infrastructure delivery is coordinated there is greater scope for social and economic benefits
The implication of the RBA’s latest research is to “uncap” zoning and allow greater heights across our cities.
While the Reserve Bank instructs us on how to plan our cities, they seem to have a very rudimentary understanding of the economic (let alone social and environmental) reasons for deliberate planning intervention in the market to focus growth in precincts.
When growth in housing, services, jobs and major infrastructure delivery is coordinated there is greater scope for social and economic benefits. Strategic planning addresses this by providing more certainty about how communities will develop, lowering the costs and maximising the benefits of investment.
Land use (zoning) and infrastructure coordination is intended to address what economists term
“coordination failure”. It can provide a clear signal to developers, prospective residents and businesses as to how a neighbourhood is expected to evolve over time, and in doing so can affect their decisions about where to locate and the appropriate built form to suit the neighbourhood’s characteristics.
It also ensures that infrastructure investment is efficient and optimised. You want new houses where the infrastructure has been planned – particularly transport infrastructure. If you simply uncapped zoning heights, or relaxed them, then you could get lots of new housing (pun not intended) away from infrastructure and services, and underutilised infrastructure in other areas.
As the NSW Productivity Commissioner suggests, “developers may be unwilling to locate to areas without understanding the nature and extent of future developments, or the location of key infrastructure and services.”
More importantly, the purpose of planning is to intervene to correct market failure – one of these being to mitigate negative externalities and encourage positive ones. Again, the NSW Productivity Commissioner highlights that “a key function of the planning system is to address the potential for land use to adversely impact others”.
We need planning controls (zoning) to avoid diminishing residential amenity, such as overshadowing. But planning also has an important role in encouraging positive externalities, such as the clustering of uses such as employment (agglomeration economies) and also coordinating land use and infrastructure.
Is the answer high rise everywhere?
The RBA concludes that more high-rise is the answer. However, you can achieve the same density with different approaches – Paddington (terraces), Bondi Beach (two up, two down apartment blocks) and Bondi Junction (high-rise) have the same density but with different typologies. High-rise comes with negative externalities that many communities don’t accept.
Whether a market is optimal is a question of whether you can do the maximum that you can do. However, optimality shouldn’t be considered just from a producer or consumer point of view, but also from a total social welfare point of view – aligning housing with transport and infrastructure requirements, as well as residential amenity such as overshadowing, privacy, view loss, sky-exposure, urban wind tunnels and urban heat island effects, to start. These are all constraints that should be considered as part of the equation.
We need a more mature understanding of planning and its interplay with housing along with a greater appreciation of the benefits and purpose of planning. Urban policy on the structure and form of our cities should not be unduly influenced by contested and misleading economic modelling.
Tim Sneesby is a manager of strategic planning at a Sydney council. He previously worked in an urban economics consultancy in Sydney, as a planner in London and throughout his career has worked closely with developers. He is a recipient of the Planning Institute of Australia’s National Young Planner of the Year award. His views are his own.
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