The great land banking scam exposed

Property development can be a dirty business, particularly when it comes to land-banking, which is the speciality of Australia’s largest developers.

Land-banking involves the speculative buying of large parcels of land that are currently unsuitable for development in the hope of future development potential. But hope alone is not a business strategy. How can land banking be so routinely successful for developers in Australia?

One argument is that successful land-banking comes from political favours in terms of rezoning and public provision of infrastructure. These favours provide substantial value gains to landowners at no cost to themselves. While in certain cases this account appears to have some merit, there has been no systematic evidence that rezoning favours the politically connected.

Until now.

My new working paper, co-authored with Professor Paul Frijters, can be download here. In it we report a systematic and controlled study of the role of relationship networks in land rezoning decisions in Queensland.

The basic result is this: How well-connected you are determines how successful you will be in getting your land rezoned for higher value uses. In Queensland $410million worth of additional development rights were given to mates in just our sample of decisions.

In the study we use sample of planning decisions and landowners involving a total area of 12,676Ha, made by one State authority, the Urban Land Development Authority (ULDA), which took planning powers away from local councils with the intention to increase the scale and speed of development in the rezoned areas. Throughout its time the ULDA was no stranger to accusations of bias, with the Local Government Association of Queensland arguing the government is “playing politics and favouring developers.”

In order to establish how well-connected both rezoned and non-rezoned landowners were, we trawled through a wide range of data on political donations, lobbyists and their clients, industry groups memberships, politicians and their former employers, relationships of ULDA board members, and landowner’s corporate records, in order to construct a relationship network.

We also compiled historical sales data to estimate that this series of rezoning decisions increased the value of the rezoned land by $710 million.

Our main finding however, is that well-connected landowners owned 75% of the rezoned land, but only 12% of comparable land immediately outside the rezoning boundaries, indicating that these decisions were primarily driven by the relationship networks of the landowners, rather than any technical assessment of efficient and appropriate locations for urban expansion.

Political favours in the property industry were found to be much more about being part of the entrenched well-connected political class, whose tight-knit mutual relationships support implicit favouritism, than about visible activities such as making political donations.

These well-connected landowners made $410 million in profit from the rezoning decision, at the expense of the public at large who had the option to instead sell those additional development rights. The data tells the story that connected property developers bought land unsuitable for development on the urban fringe, then successfully lobbied State politicians and bureaucrats through their relationship networks to rezone areas where they had bought properties, wrong-footing both councils and other property developers. This process of influence took 7 years on average.

Scaling up our results suggests that the ‘back-scratching’ rezoning game has probably cost the general public many billions of dollars in Queensland in the last few decades.

We propose a number of technical solutions to this great game of political favouritism in land rezoning. The size of the gains to rezoning can be diminished by increasing land taxes. Development rights could instead be sold to land owners, perhaps through local auction processes, or the value gains recovered through a betterment tax. Even a local democratic system for voting on new areas for urban expansion would counterbalance vested interests with the interests of the public more broadly.

One unfortunate lesson however, is that the same relationship networks that allow favouritism to thrive in rezoning decisions will obstruct any systematic reform of rezoning processes.

Comments

    • The point is, we needed such prof, what we need now is names, photos and addresses of the people who did this.

      • +1 agreed
        Name and shame… Until the laws are changed and epic civil penalties are applied retrospectively.

    • Agree – it has always been so… talked to a land developer who made sure that he put in the right local councillors. Not sure how they get paid – but its a big thing in NSW!!! I thought everyone knew about it? I mean ask the question – why is there so much money involved in advertising with local council elections????

      Although close call – it seems that Labour councillors are often the most amenable. But I don’t really know – its just a view from the outside. And look, the system seems to work… although they need to build more houses out West.

      • Stewie Griffin

        Median house price approaching $1m
        Third world concealed corruption alternatively enriching the few and impoverishing the masses.
        You sure have a strange view on what constitutes successful policy – have you considered apply for a policy advisory role with Tony Abbott or our Ordinary Joe?

  1. It’s the system man! Your study should have been about how to profit from it. Cheers!

  2. From the paper:
    “A typical example of the close connections between politics and property in recent times is given
    by Campbell Newman, State Premier from 2012 to 2015, who failed to declare his wife Lisa
    Newman’s stake in a property that won high rise development approval from Brisbane City
    Council at the time that he was Lord Mayor of Brisbane, providing his wife windfall gains of
    millions of dollars . In Queensland such connections are not illegal”

  3. The James Lee Burke novels often center around a similar theme. Set in and around the Southern states, the “redevelopment” of environmentally protected land is a favorite, along with building casinos on Indian land. Looks like Highrise and co might be reading them regularly…..

  4. The whole problem is easy to fix, Just give up the notion of “control” and allow all individuals the right to develop their property along simple understandable achievable guidelines.
    It’s that simple, that simple.
    I wouldn’t expect it to change Sydney prices, however at least you’ll have done the ground work that’ll enable tomorrows new businesses to develop and utilize Australia’s most abundant resource (land)

    • I agree, but it has to be implemented with land tax reform to make holding land expensive. Otherwise the land bankers will continue to drip feed the land release since they have an effective monopoly.

  5. Crocodile Chuck

    In NSW, look at the the ownership of land in/around Badgery’s Creek. Hint: Ron Medich.

  6. How did a recent Premier die with $25m?

    My father knows/knew lots of these blokes, and says it’s rotten to the core. He was very high in a major party and says the entire system is corrupt as anyone could even imagine. Chinese property buying and immigration is as corrupt as Fine Cotton.

    IMO, they are there for this exact reason. They are corrupt and crawled over all others to get their fat fingers into the biscuit tin. It’s human nature.

    The ONLY SOLUTION is have single term ministers and councilors appointed like a jury with business managers that make it happen. In other words, corruption is here to stay. There’s not a fucking thing you can do about it.

    BTW, I saw an ex-premier of NSW get out of a Rolls the other night.

    NSW, Australia, Sydney, your prosperity and lifestyle has been sacrificed to feather the people you vote for. Get used to it.

    • After the revolution, we’ll see the Federal Police go through the finances of every single public official and of course their families as well while they remain on remand.

      • rich, what revolution?
        People will moan and complain and go straight back to watching tv, more than likely AFL or NRL. That’s it, end of story.

      • If that comes to pass @rich i’ll donate my time freely to assist in stacking copious amounts of corruption evidence against the deserving (including the whole families where involved).

        @dennis: that’s more likely 🙁

      • HA! Sorry to burst your bubble – but there will be no revolution, and even if it were – there won’t be enough blood-letting to purge these parasites. I have been through one in the old country – and within months – new parasites or old ones with new faces made sure the new course of affairs suited their own interests… again!

      • “HA! Sorry to burst your bubble”. Nah. My bubble burst decades ago when I had a look around me and worked out what was going on. What’s coming will be a massive shock for most of the country. I must say though, I won’t be shocked, but thinking about it, I’m not that well prepared. I really don’t know what to do re that.

      • @dennis. I agree. NRL tonight will distract me for 80 minutes and that is all.

        @Andy!. Let’s hope.

  7. mafia run real estate business – surprise? It’s the same everywhere just to a lower extent because almost no other country has such a corrupt local level of government (not to mention that our councils are unconstitutional so they are effectively state government run businesses operating under ABN).
    In other places, land zoning is usually done using long term general plans for much larger areas (whole states, cities or counties – not small councils). These plans are hard to change especially without huge media attention.

    Here, local councils do change zoning of a single block on some secretive meetings that nobody attends. So it’s like big invitation for corruption.
    What is interesting is that

  8. But of course, this is already obvious. City council planning committees/boards are stacked with developers or those connected to them ! why should you be satisfied with a 25 storey height restriction when you know a 40 storey will truly give you highest and best use. Lobbying and stacking council is like shooting fish in a barrel. Even better if you can shore up political support via your party contributions at the Fed level for continued immigration and foreign investment to maintain the stream of buyers and tenants for those residential apartments you are looking to generate a 20%+ profit on. how are we going to maintain the flow of capital investment in construction if councils can’t see if from the developer’s point of view ? hard to blame developers, really. they are just doing what comes naturally to them.

    • Yes, but the real racket in its fullest extent involves the overall supply of land being rationed. When there is no growth boundary or proxy for one – and this was the case for decades, and economists came to regard it as the norm – site values tend to be derived from “differentials” relative to the value of exurban rural land. The graph curve of land prices tends to slope up gradually from surrounding rural land, reaching a peak at the city centre.

      This is still the case in every city that still has a median multiple house price of 3, most of which are in the USA. But it was a historical norm in most of the first world.

      Under those conditions it was correctly assumed that building more intensely resulted in cheaper “housing”. But a growth boundary violates all this and flips the entire urban land market into a condition of “extractive economic rent” where all participants are forced to pay as much as they can stand for space, and the more households you can cram on a site, the higher the value the site owner will capture.

      Hence Hong Kong having 66,000 people per square mile, and a median multiple equivalent of 17. Median multiple 3 cities tend to have 2500 or less people per square mile. It is about as truthful to say that planned “intensification” to cope with population growth will create “affordability”, as it would be to say that rationing bread would lower the cost of bread to everyone. Actually, the tighter the rationing, the MORE people pay for LESS. It is time we stopped letting urban planning be run on “sun rises in the west” assumptions about land economics.

      Houston CBD apartments are really really cheap because site values do not rise as added households are “gouged” of economic rent. In fact even Manhattan, as it was being built “up” over the decades, had pretty flat, differentially-derived site values; the affordability problems in New York since the 1990’s stem from a de facto Green Belt effect, rural zoning in adjoining municipalities that NY’s fringe has run up against.

  9. No doubt there are cases of relationships assisting with land releases/rezoning. However, a number of Council’s in Sydney are essentially mandating what is effectively a ‘betterment tax’ through planning agreements where land is rezoned. Council’s are slowly reaching the position of requiring these ‘public benefits’ to be worth up to 50% of the uplift in value of the site based on the resulting development potential. The problem from a supply perspective is, it takes so long for these to go through the system, that supply cannot be turned on quickly.