Productivity Commission on Planning/Zoning

Regular readers of this blog will know that I am critical of Australia’s urban planning structure and land-use regulations. 

Through growth control policies such as exclusionary zoning and urban growth boundaries, Australia’s governments have effectively told the market where development can and cannot occur. In turn, they have restricted the level of contestability and competition in the land market and helped raise its price, pushing-up the cost of both new and pre-existing housing. Up-front development fees and charges have also contributed to the price escalation.

And because regulatory barriers have prevented low-cost housing from being quickly and efficiently supplied to the market, any extra demand – be it from easier credit, population growth, or other means – has fed into higher prices instead of new construction. In turn, the price rises and perceived scarcity have encouraged speculative demand and ‘panic buying’ from first-time buyers, which has helped to drive home prices up even further, thus creating Australia’s housing bubble. 

On 25 February, the Productivity Commission (PC) released its Draft Report on Planning, Zoning and Development Assessments. The Draft Report examines business compliance costs, and the impact of planning and zoning systems on competition as well as the efficiency and effectiveness of the functioning of cities.

Here are some key extracts from the Draft Report highlighting a number of significant flaws in Australia’s planning/zoning system.

On the regulatory framework:

Planning systems are characterised by ‘objectives overload’ including unresolved conflicting objectives, long time lags and difficult-to-correct planning mistakes…

The regulations and agencies involved in planning, zoning and development assessments are among the most complex regulatory regimes operating in Australia… While each state and territory has evolved different arrangements for planning and zoning decision-making, most have complex systems of regulatory bodies and processes which are difficult for businesses and citizens to navigate. They create uncertainty and transparency problems for users and regulators and significant compliance burdens… This complexity suggests the regulatory systems are in need of further reform.

On the supply of land:

The lack of a supply side response to the increase in demand for housing can, to some degree, be explained by the timeframes for the land supply process… It can take over 10 years to complete the greenfield land supply process. By itself, the process of identifying land suitable for development, completing due diligence and acquiring the land can take years — confronting issues such as fragmented land holdings can further extend these timeframes. These initial investigative activities are not costless and developers would be looking for some evidence of sustained demand before looking to expand production. This would further delay any supply side response. The supply side response has also been hampered by the effects of the global financial crisis and the accompanying reduction in finance available to developers to complete development projects… 

A sample of 20 subdivision developments in greenfield areas across Australia’s five largest cities reveals that up to 10 years may pass from the time a developable parcel of land is assembled and the subdivision of that land is completed  — all this must occur before the construction of houses or commercial/industrial buildings can begin. The most common causes of delays and extended timeframes in land supply processes are: rezoning/planning scheme amendment processes; structure planning processes; and dealing with community concerns and objections. The long time taken to complete the rezoning and structure planning processes (one to six years) is not surprising given the complexity of each process…

Zoning regulations can exacerbate the issue of fragmented land holdings by reducing the number of possible blocks which can be combined into larger sites, thereby giving landholders increased leverage in their negotiations with developers…

State and territory government land organisations (GLOs) hold significant ‘development inventories’. On the limited data available to the Commission, it appears GLOs complete fewer lots/dwellings each year compared to those private sector developers with comparable inventories…

On developer levies:

There is little consistency across jurisdictions in the type or the size of contribution that developers may be called on to fund. Further, it is difficult to discern the basis on which decisions are made as to how much infrastructure developers should contribute to their developments, what level of charges should be borne by the private sector and what infrastructure government should provide…

On competition:

A number of restrictions on competition have been identified… There is little to indicate that impacts on competition, or an analysis of the benefits of the desired outcome versus the costs of restricted competition, were considered in establishing these regulations. Rather than working with markets to allocate land uses, zone classifications are extremely complicated, often prescriptive and exclusionary…

On the need for broader and simplified zoning:

In the extreme, planning systems can suffer, on the one hand, from planners who try to prescriptively determine how every square metre of land will be used, and on the other hand, from developers who play a strategic game of buying relatively low value land and having it rezoned to make a windfall gain. The scope for both would be reduced if zoning definitions were broadened and zones defined in terms of broad uses rather than prescriptive definitions of permitted types of buildings and land uses…

Overall, the PC provides a critical assessment of Australia’s urban planning/zoning system. Put simply, it is far too complex, costly, and slow to enable housing supply to quickly and efficiently respond to changes in demand. As such, the large increases in demand experienced over the past decade have manifested into higher home prices rather than increased construction.

By comparison, let’s compare Australia’s bureaucratic planning/zoning system with Texas’ flexible, market-oriented approach:

The Texas metropolitan areas…have in common an unparalleled openness to growth and development. It all starts with zoning. Texas counties are not allowed to adopt zoning, nor can they adopt binding comprehensive plans. Cities are authorized to zone unincorporated land within specified distances of their city limits (up to five miles for the largest cities), but any land outside that extraterritorial jurisdiction is regulated only by minimal subdivision regulation.

Apparently in Texas, one can buy land and obtain a permit to build, complete the construction, and be ready to move in within 120 days. Little wonder then why Texas’ housing supply is so responsive to demand and prices are so stable and affordable. They allow markets to work and keep the bureaucrat planners out.

Perhaps it’s time Australia did the same.

Cheers Leith

P.S. I highly recommend that readers check out this month’s Quadrant Online article Why Our Major Cities Are in Decayby Michael Warby. It provides a brilliant analysis of the history, motivations and implications of Australia’s urban planning system. I cannot recommend this article enough.  

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Unconventional Economist
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  1. @Leith, I am enjoying your relentless concentration on supply side constraints and housing markets. One thing for consideration is labour force costs in facilitating this. Areas like TX and GA have had access to a highly mobile and plentiful construction workforce (often migrant workers), meaning if there is a sudden demand increase houses can be built quickly as labour can be brought in relatively quickly.

    In Australia, even if permits are cleared, there is still the hurdle of lining up the labour and materials to complete the build, and may prove to be somewhat inflexible to the demands that would be put on a system that must react quickly to increased demand. I can envision this as much a constraint as the permit process.

    It also speaks to looking more deeply how permits are approved. If the process is too rigid, an influx of permits simply produces backlog. What techniques could be used to handle peak loading on the permit approval process without causing “production delays”? It may not necessarily be as complicated as a massive overhaul, but simply assigning someone who can facilitate the process from start to finish by “chasing down” any delays in the system.

    • Thanks Jesse. I agree that construction costs have increased, but not greatly (see this chart). The overwhelming cause of the huge rise in home prices is the cost of land, which has skyrocketted due to supply constraints (see this table). The PC will hopefully provide some reform suggestions on the planning process in its Final Report. My preference would be to significantly wind-back the role of planning from controlling/preventing urban expansion to facilitating it. Instead of responding to needs for new housing, industry and commerce with trunk roads, mainline water, and sewerage facilities etc, planning now seeks to control and canalizing it in directions that the government planners, politicians and inner suburban elites want. Accordingly, planning has become a cost adder not a support. It puts impediments in the way of the wishes of new buyers and forces up the cost of new housing for everyone. Yet it has failed to achieve many of its own goals, namely infrastructure cost savings, lower congestion, environmental benefits, improved liveability, etc.

      • Hi Leith,

        Construction costs aren’t necessarily indicative of much if the approval process throttles the number of permits. That is, increased building activity may simply mean a slowdown in project timelines as opposed to increased costs.

        If the goal is to produce a fast supply response time to demand increases, I see having access to an available and trained pool of labour to facilitate this as an important component.

  2. Anthony Peterson

    Thanks Leith – very intersting blog. I’ve already been investigating a potential class action in the ACT – based on the LDA abusing its monoploy powers in restricting the supply of land. Its a clear breach of the Trade Practices Act – the only catch is in determining ‘public good’ the judges will consider the sections of society that benefit from high cost housing (banks and boomers). Similar arguments kept slavery legal for most of Wilberforce’s lifetime. There’s also a clear argument on the basis of age discrimination when 20 years ago a block of land cost 12 months median salary in contrast with 41 months salary today. Watch this space.

    • I’m not even sure I understand what you’re trying to argue here Anthony…are you suggesting that the government of the ACT, through the use of a legislatively sanctioned monopoly, conspired to artificially constrict the supply of land in an attempt to drive up property values? Furthermore, are you also suggesting that it is guilty of discrimination because, for more than a decade, banks made available cheap credit, real estate agents spruiked, and first home buyers jumped in sight unseen with the aid of Federal grants, and investors speculated? Good luck proving intent…
      I think actions like this smack of profit motivations more so than any concern for the greater good…where’s your plan for a more workable solution? (No, open slather is not a workable solution either.)

      • Why shouldn’t open slather be an option? What is the ratio of urban land to agricultural or total land, in Australia, and in the whole world? Refer to Robert Shiller, “Unlearned Lessons From the Housing Bubble” for some authoritative analysis.

        “The scarcity of land for food production”, will be a valid reason for rising urban fringe land prices WHEN food prices have risen to the point that producing it makes agricultural land so valuable that it would REDUCE its value to convert it to housing or industry. NO country is anywhere NEAR that point, let alone Australia. When you have urban “fringe” land “worth” 100 times (or 200 times, or 300 times) as much as agricultural land, you have a serious regulatory interference problem that WILL be seriously harming your economic competitiveness on multiple levels.

  3. Leith,

    It seems that the productivity commission is happy to reproduce the development lobby’s propaganda without recourse to actual statistical analysis.

    In Chapter 4 – the Supply of Land chapter – and more particularly, the Why the ‘supply of land’ is Important Section, the rely on findings from an LGAQ commissioned report on impacts of supply side constraints on house prices to demonstrate that “the supply
    of land is only one factor that affects housing affordability”. In fact, if you actually read this report, they FIND THAT HOUSING SUPPLY IS NOT A SIGNIFICANT VARIABLE IN EXPLAINING HOUSE PRICES IN 17 OF THEIR 18 MODELS.

    I have critiqued this report before

    So, my point is, that if that is their main statistical support for the supply of land argument, they have been mislead (since the models for land price did not show significant impact of any of their supply side variables).

    You have to think about land development in reverse to normal manufacturing. The price a developer will pay for land is the residual value left over once they calculate the sales revenue from the developments, less the costs and profit (including the costs of planning and time delays, since a DCF model easily factors in these issues).

    So, if in fact there have been greater supply side constraints in the form of planning delays etc, we should see the price of land fall relative to the prices of housing.

    The table in this post explains how the impact of a land tax (another cost) would affect land prices but not the prices of housing

    • Cameron,
      You don’t need 18 models to understand the housing disaster. Even the most basic economics textbook will tell you that price in a market is determined by supply AND demand.
      You seem to have a queer mental attachment to the demand side of the situation. Why not open your mind as Leith has done, and study the problems with the supply side in Australia?

      • DavidV, you want me to believe there is a supply side problem with no evidence for it, and extensive evidence pointing the other direction? My mind is open to the possibility, and when I see some evidence I may very well jump on board. Yet I have seen none.

        You also later say that market price screams a housing shortage. Like in Ireland? The US? Spain? Oh yes, Australia is different – we hardly have any residential zoned land and will all be living on the streets soon enough.

        To the actual arguments at hand. The following points outline why the supply of residential land and housing is not constrained in any way, and why high prices are a reflection of demand (including the role of relaxed credit) and speculation.

        1. If land was constrained, housing would be constrained, and rents would rise in line with prices
        2. You cannot unsupply land (therefore the supply curve must at least be vertical below the demand curve intersection)
        3. You cannot have a supply constraint and an excess housing supply unless a supply constraint is a very temporary phenomenon, since there would have to be longer periods when excess supply coming to market to give a net excess of supply. (Leith, you often suggest this is possible – I would love to hear more details)
        4. Developers are well informed and know the planning rules and expected time delays for approvals. This is rarely the deciding factor on how long a development takes to get from ‘raw’ (non-residential) to completed home. The rate of sales (sales/month) at the asking prices usually determines the time it takes to fully develop a subdivision (given their need for pre-sales for securing finance etc).
        5. Developers will only sell land at a rate that ensures the price does not fall, which undermines the value of their other land holdings (unless they are very, very desperate).
        6. A vertical supply of land curve is a feature of all introductory textbooks on land economics, and is the basis for understanding the deadweight losses from land taxes – eg. here

        What happens in rezoning is a shift of the vertical curve to the right. This is a shift to the right of the total zoned land, not the zoned land on market which is net of developer inventories. The only way a supply shortage could happen is if there was no single piece of residential zoned land left unoccupied. Yet even then, there would be no cause for dramatic price changes if new supply was expected in the near future.

        Lastly, my only experience in this regard is working for large residential and industrial developers running feasibility studies on potential development sites and studying and teaching urban economics at university.

        • Cameron, I’m right behind you on this. There is loads of land for sale on the edge of Melbourne. If a person could only borrow 3 1/2 times there income the house & land package would be priced accordingly. The land component would take a big hit.

          The only supply problem would arise if the agricultural income from the land made it better for the farmer to keep it. NO CHANCE!

        • I’m not going to debunk all of this. I found rubbish early on.
          “If land was constrained, housing would be constrained, and rents would rise in line with prices”
          This is rubbish. Rent is paid with ordinary income whereas house prices are paid with borrowed money. For this reason rents and prices would rise at different rates.
          In fact in Sydney rents have risen tremendously over the years. In 1970 an ordinary house would rent for 1/3 an ordinary wage. Now the same house rents for 1/2 an ordinary wage. A huge rise which reflects the shortage.

          You also make mention of Ireland in your post. What do you know of Ireland? Many shortage-deniers will make obtuse references to Ireland, but go strangely silent when asked for details.
          Is there a shortage there? Can an ordinary wage in Dublin rent an ordinary house there?

        • Cam. All those points are great in theory. I prefer to look at the only stat that really matters – the price of blocks on the urban fringe. In a free market, they should represent their rural value plus the cost of roads, sewerage, etc (ie. $30-$70k depending on the area, size, etc). But in Australia’s cities and towns small land plot prices range from $145k in Hobart to $270k in Sydney (click to view table). And Adelaide’s blocks are equally as expensive as Sydney’s on a cost per square metre basis! The only way that fringe land prices could climb to such high levels is through supply-side restrictions like zoning, urban growth boundaries, developer charges, etc. These values are not possible in free markets like Texas and Atlanta, despite their much higher populations and rates of population growth.

    • Are you seriously suggesting that
      (1) quantity controls have no price effects;
      (2) the difference in the value of agricultural and approved land is not a sign of price effects from quantity controls; and
      (3) that the price of land has increased hugely more than the price of constructing a house is not an indicator of supply constraints?

      Yes, houses get built, yes there is a supply response within the regulatory constraints. All that tells us is that the supply constraints are not totally rigid. But no one is suggesting that.

      A politically active friend noted that, prior to the last state election, the only Victorian shadow minister who was guaranteed to have a sell out fundraiser was the shadow planning minister. That was because all the real estate agents, developers, etc had to pay attention. No other industry is like this. Why do you think that might be?

  4. I’m not too sure if this has been a part of your discussions in the past, if so, as a newcomer I apologise.
    I’m also not too certain if this is the right topic heading to raise the issue. So, from an old Ag Sc bloke FWIW

    One thing that would worry me about a zoning free for all is the use of good agricultural salad bowl land for urban sprawl. Brisbane is a classic example. Virtually all the good Agricultural land around Brisbane is now covered with brick McMansions and plain ugly shopping strips and malls. First thing to be said is that all the damned regulations that are in place didn’t stop it. So, to that extent, this is a side issue.
    I’m a bit older than most in these forums. When I studied Ag some 45 years go, the use of good Ag land for urban sprawl was a serious issue and received a fair amount of discussion. These days it isn’t even a consideration. This lack of awareness of the problem coincided with the economic notion that external debt doesn’t matter so we don’t need to grow our own food. We can just import it all and put it on the ‘never-never’.
    ‘The world’s gone crazy Cotillion’
    So, in summary, I think we do still need zoning regulation. It just needs to be changed from being about bureaucracy to real issues.

    • I saw a TV program where a frightening amount of tomato was being grown in a huge shed hundreds of miles from our cities.
      I suppose you would prefer millions of houses to be banned from what is, in your opinion, prime farmland, in order to make these tomatoes, in your opinion, more comfortable.
      Market price screams that there is a shortage of housing, but no shortage of farmland nor farm produce.
      Pull your head in. You are part of the problem.

      • Well reasoned comeback David, not…Are you a builder by any chance?

        Regardless of supply side impacts on property pricing, are you suggesting that we should compromise our nation’s ability to feed the occupants of these new dwellings for the sake of building the damn things?

        Anyway, have a look at the Senate Committee report on Food Production in Australia, released August last year. In it, they detail the impacts that the convergence of population growth, food demand (estimated to double by 2050), the degradation (over-farming and nutrient depletion) and urban encroachment of farming land and the availability of crop farming inputs such as oil (lubricants & fuels) and gas (nitrogen fertilisers) will have on our ability to feed ourselves.

        Scary stuff in a way, and the more we allow a free-for-all on zoning, the more these properties will come under attack from developers and their cheque books keen to acquire.

        This is not saying that the status quo should remain, just that Flawse’s concerns are real and on the national policy horizon.

        • Aaron,
          The way to ensure we get enough food is a sensible population and immigration policy.
          Choking supply of housing is not the way to achieve this. Choking supply causes the next generation to suffer, and actually enriches the earlier generations. It is a disgrace.

        • Er, does Australia not export food?
          The only economic reason for a country to be producing food these days, is to feed their own workforce that produces REAL value added products. Food production is a LOW value use of land space. The more land you can change into high value urban production and workforce housing, the better.

          The scarcity of land for food production, will be a valid reason for rising urban fringe land prices WHEN food prices have risen to the point that producing it makes agricultural land so expensive that it would REDUCE its value to convert it to housing or industry. Australia is nowhere NEAR that point. When you have (raw) urban “fringe” land “worth” dozens of times as much as agricultural land, you have a serious regulatory interference problem that WILL be seriously harming your economic competitiveness on multiple levels. More on that below.

          Notice that Japan has succeeded economically while IMPORTING food and commodities and EXPORTING value added products. In fact, their lack of resources has been a blessing in disguise. Nations WITH resources tend to default to the least efficient settings in the actual use of them. Australia sells Japan food, and makes stuff all dollar return per hectare, while Japan sells Australia Toyotas, and makes a killing per dollar return per hectare.

          By the way, Brazil and numerous other developing nations are getting really serious about ramping up agricultural production, they haven’t even been TRYING up till now. Don’t bet on economic success by focusing your resources (eg land) on competing in that market.

  5. Flawse has a point – I remember around Redland Bay/Cleveland the amount of good farmland being used to make McMansions was sickening.

    I’m not a fan of Big Brother/Mother planning, but I do prefer New Urbanism developments which tie in well with environmental (i.e anti-Bogan) factors of smaller houses, more open space (including arable land for community gardens and crops) less roads and a variety of living areas – not just box after droning box of 4BED2BATHDLUG.

    Urban sprawl has been one of the greatest misallocation of resources (all that wasted space, concrete, fuel burnt to get to further flung out suburbs, waster productivity etc ad nauseam) this country has seen. And a lazy solution to a complex problem.

    Changing our existing suburbs into New Urban villages could be a better approach in the long run – as providing different levels of accomodation i.e apartments, units, townhouses, cottages, bungalows, houses, mansions would be more flexible to demand.

    The current situation, whereby for the only chance to A. get a development approved and B. to make some money, is a generic, inflexible, unresponsive to demand, McMansion village with too many roads, no services and huge infrastructure bill and the attending overpriced land lots cannot continue.

    But as I’ve said before, I fear letting bureaucrats decide what is “good” as much as I fear developers “giving the market what it wants” as much as I fear new home owners who want a “4BED2BATHDLUG” because that’s all they’ve become accustomed too…..

    • I love the way Prof. Paul Cheshire (London School of Economics) puts it, about planning advocates having nice mental pictures of how everyone is going to react to their regulations, without having the first clue about how distorted land prices are going to completely pervert their intended outcomes. Focusing on “beneficial” results at the micro level – wonderful walkable neighbourhoods of condos near CBD jobs, etc – and ignoring the AGGREGATE results throughout the economy eg lower income earners forced into increasing densities at the least efficient locations. Lots more on this below.

  6. Leith

    I might be a slow, but its just occurred to me that it might be the poor planning controls and slow release on land that may ‘soften’ the property crash after the China bubble bursts.
    Don’t get me wrong i would prefer housing coorrects for our kids sake.

  7. “Pull your head in. You are part of the problem.” Why? Because I’ve been around a while and seen the devastation that bad policy of every kind has wreaked on our land?
    Good considered thinking there David…really admirable.

    Let’s take the SE Qld long-term plan that is SOMEWHERE around at the moment and is supposed to look forward 20 or 30 years. I had a house in Brisbane on a substantial block of land 150M from a railway station. By train it was about 20 mins to the city on a normal run.
    Now, if the market determined its usage it would have multi-level apartments on it. The SE Qld plan was for it to have low level (single story) town house development.
    So at the moment the plan builds over farmland rather than have appropriate multi-story buildings in strategic locations.
    I won’t even start on an oil limited future in regard to this.

    • I understand you very well. You bought cheap housing when government made it easy for you. Now you want to make housing difficult for me, so that you can buy cheap tomatoes grown nearby your nice house.
      I am not surprised by a little self-interest. I want to buy cheap housing and I don’t care if your veges are a bit dearer. What I do mind is you pretending that your concern springs from some higher virtue.
      I notice you now bring in peak oil to bolster your case. Why not use global warming too, and screw me even harder?

  8. An issue that does not seem to be addressed in most analysis of urban land development is that of who should be responsible for the full capital infrastructure (roads, rail, trams, water supply, sewerage, drainage, power) costs. Currently developers do the onsite work (and build this cost into their final price) and it is up to the local / state governments to provide the headworks or off-development costs of all these items.

    As we are now seeing with the desal plant (Brumby’s (now Bailleu’s) folly), all Melbourne water users will be paying a premium to provide the extra water needed by the new developments. The last government tried to address this funding of the infrastructure partly through the levy on land zoned for development. However, in the best tradition of US and Australian free enterprise, these land owners wanted to capitalize the profits from rezoning while socialising the losses (off development infrastructure development costs).

    I would have no problem with dropping zoning restrictions, except for green belts to maintain some sanity, providing the developers pay (directly and / or through a dwelling based levy) for the full costs of the additional infrastructure needed, not the marginal on-site costs. This may also encourage higher density development closer in.

    On the comments on the building over of productive agricultural land, I have had professional experience on the issue around Melbourne. Interestingly, many of the market gardeners had a business model based on buying land with medium term subdivision potential which was sold for development when the houses came in sight with the profits used to either pay out the family members or buy land further out. One family started with land in St Kilda Rd and now have farms in several parts of Victoria.

    With the ready access to refrigerated transport, location of market gardens is no-where near as important now. Increasing specialisation, the ability to gain economies of scale in production and reliable good water supplies (and access to cheap picking labour through labour contractors) are probably more important drivers of the economics of market gardens.

    PS Leith, I cannot accept your praise for the article by Warby. He must have been paid by the word or had a reviewer he had to dazzle with words. There was no guts in it.

    • ITAg. On the desal plant, you are confusing new housing developments with new people (demand). If Melbourne added 500,000 additional people into the existing housing stock, extra water would still be demanded and the requirement for additional supply would be exactly the same.

      I also think that you are completely off-base with your view that new housing developments should cover the full cost of infrastructure. These levies can add tens of thousands of dollars to the cost of a block of land and this has to be paid before a buyer has even built the house. This is unjust on intergenerational grounds. First, previous generations did not have to pay such levies when they built their homes but their infrastructure was financed via debt which their children (today’s first-time buyers) are currently repaying. Yet, under your suggestion, these same children would also have to pay the up-front infrastructure costs on their new homes. Second, there is the injustice that someone who buys a pre-existing dwelling gets all of the infrastructure provided free of charge, whereas when buying in a new land release area, the Government requires you to pay for exactly the same public services. How is this fair or reasonable?

      Infrastructure that is intended to provide benefits across generations should be financed across generations. Period. This system served Australia and prior generations well.

      • Exactly, Leith. The problem is that councils are not containing their costs. We all know how local taxes have risen faster than inflation, but the real problem is far worse because the councils are no longer spending as much general taxation revenue as they DID on things like new infrastructure. Furthermore, “Impact Fees” or whatever you call them, are a form of double dipping by profligate local body politicians.

        Generally, if you work it out, most councils “impact fees” are a further racket, way in excess of actual expenditure by them. It just remains for some groups to take legal action about this.

      • “Second, there is the injustice that someone who buys a pre-existing dwelling gets all of the infrastructure provided free of charge”

        Um, the cost of the “free” infrastructure is built into the purchase price, Leith. An existing house with no sewer connection will be less expensive than the same existing house with a sewer connection. So the infrastructure doesn’t exactly come free….it’s in the purchase price exactly like a new lot on the urban fringe. Similarly, the community infrastructure (eg. libraries etc) are also paid for by way of council rates…again, no freebies there, Lieth.

    • Infrastructure benefits both current and future generations. It is something that it is perfectly reasonable to finance by debt, provided it will provide compensating benefits.

      The deal used to be that governments would benefit from the increased revenue the infrastructure would generate. Playing games with regulatory approval now drives up their revenue without bothering with the infrastructure. Requiring developers to pay up front just adds to the effect. As does foreclosing the previously existing option of accepting a lower level of provision to enter the housing market at a cheaper level.

      But the more regulation affects value, the more it will be “gamed”. Germany has a productive interaction of a constitutional bar to discretionary control with tax incentives that encourage local authorities to respond to supply without. A useful examination of the German system is here.

      BTW What sort of ‘guts’ were you after?

  9. Using the protection of farmland as an excuse to profit from misery is older than you might expect. In a speech in 1909 Winston Churchill had this to say

    The Glasgow Example
    I do not think the Leader of the Opposition could have chosen a more unfortunate example than Glasgow. He said that the demand of that great community for land was for not more than forty acres a year. Is that the only demand of the people of Glasgow for land? Does that really represent the complete economic and natural demand for the amount of land a population of that size requires to live on? I will admit that at present prices it may be all that they can afford to purchase in the course of a year. But there are one hundred and twenty thousand persons in Glasgow who are living in one-room tenements; and we are told that the utmost land those people can absorb economically and naturally is forty acres a year.

    What is the explanation? Because the population is congested in the city the price of land is high upon the suburbs, and because the price of land is high upon the suburbs the population must remain congested within the city. That is the position which we are complacently assured is in accordance with the principles which have hitherto dominated civilised society.

    The “Poor Widow” Bogey
    But when we seek to rectify this system, to break down this unnatural and vicious circle, to interrupt this sequence of unsatisfactory reactions, what happens? We are not confronted with any great argument on behalf of the owner. Something else is put forward, and it is always put forward in these cases to shield the actual landowner or the actual capitalist from the logic of the argument or from the force of a Parliamentary movement.

    Sometimes it is the widow. But that personality has been used to exhaustion. It would be sweating in the cruellest sense of the word, overtime of the grossest description, to bring the widow out again so soon. She must have a rest for a bit; so instead of the widow we have the market-gardener – the market-gardener liable to be disturbed on the outskirts of great cities, if the population of those cities expands, if the area which they require for their health and daily life should become larger than it is at present.

    What is the position disclosed by the argument? On the one hand, we have one hundred and twenty thousand persons in Glasgow occupying one-room tenements; on the other, the land of Scotland. Between the two stands the market-gardener, and we are solemnly invited, for the sake of the market-gardener, to keep that great population congested within limits that are unnatural and restricted to an annual supply of land which can bear no relation whatever to their physical, social, and economic needs – and all for the sake of the market-gardener, who can perfectly well move farther out as the city spreads and who would not really be in the least injured.

    • Love your work DavidV. Spot on. It’s crazy that in a massive country like Australia, with one of the lowest population densities in the world, the anti-developers are using this argument to bolster their case. Self interest maybe?

      What’s even funnier is that most of the land surrounding our capitals isn’t exactly prime farming land anyway. Take Melbourne for example – there’s lots of low quality schrub land to the West and North ripe for development… if only the Government would remove the shackles.

    • What an amazing quote. I keep finding examples of what a brilliant man Churchill was, amazing economic intuition (eg “tax and spend” is like standing in a bucket pulling up on the handle). But I never knew of that land use speech before – what a gem.

  10. Leith, whilst I agree we should be deregulating the housing market and either removing or simplifying our zoning system, I’m not sure Houston represents an admirable model we should be seeking to emulate. I’m not denying the achievements of the city, but can we consider the notion that this may have occurred in spite of its lack of regulation, and not because of it. Edward Glaeser wrote in a 2008 City Journal article:

    “Houston’s success shows that a relatively deregulated free-market city, with a powerful urban growth machine, can do a much better job of taking care of middle-income Americans than the more “progressive” big governments of the Northeast and the West Coast. Still, it’s a bad thing for the country that so much growth is heading to Houston and Sunbelt sister cities Dallas and Atlanta. These places aren’t as economically vibrant or as nourishing of human capital as New York or Silicon Valley. When Americans move from New York to Houston, the national economy simply becomes less productive.”

    We can congratulate Houston for having demand responsive housing supply, but shouldn’t we also consider the problems that have resulted from such a market? If it were as simple as a trade-off between Australian housing unaffordability, and Texan affordability, than no question – it would be a solution. What we see in Houston however is city that has chosen to value housing affordability above all else, and whose residents can now enjoy the worst congestion in the country, notoriously potholed roads and poor public services, the poorest quality drinking water, the least amount of public open space and perhaps the worst air quality in the country. To embrace this laissez-faire approach would involve sacrificing our own quality of life. Of course we face all of these problems ourselves, but not yet to the extent Houston and other American cities do.

    In the long term, successful cities maximise efficiency. Land use in both Houston and Australian cities is clearly very inefficient, but surely removing restrictions on vertical development and land use is more of a solution than encouraging horizontal expansion. New York’s housing affordability problems are more to do with the increasingly stringent building regulations they have introduced over the years, and not just land supply.

    I don’t believe we can put Houston on a pedestal for its free-market driven approach to housing. Surely urban growth boundaries, in conjunction with the removal of planning regulation within the existing metropolitan area would both improve land use efficiency and potentially provide affordable housing?

    • Joshua, it isn’t just the “big” examples of Houston, Dallas, and Atlanta that canbe used to argue for a different land use policy. Germany has had a similar “loose” system for decades: they have experienced little in the way of asset price bubbles, and, by all accounts, benefit from a learned and productive citizenry.

    • I disagree strongly with your analysis Joshua. Consider these facts about Houston and Texas:
      *Site Selection magazine has named Texas #1 and Houston #2 (behind Chicago) for corporate expansions and relocations.
      *Austin, Dallas, and Houston top ranked in attracting young adults.
      * Texas ranked No. 3 for Best Places to Start a Business by Small Biz and Entrepreneurship Council (here and here).
      * Texas ranked #1 state for most Fortune 500 companies (Houston #3 city).
      *Houston ranked #1 top manufacturing city by Manufacturer’s News (Dec 2010).

      And here’s what Edward Glaeser wrote last month in the Houston Chronicle (it seems he has changed his view):

      “When all was done, the after-tax, after-housing-cost income was about 50 percent larger in Houston than in New York. On top of that, the Houstonians could access better public schools and enjoy a shorter, less arduous commute.

      Texas does have real economic strengths. Per capita productivity in Dallas and Houston is about 20 percent higher than the American metropolitan average, and unemployment rates remained low even in a recession. …

      Texas attracts millions because it combines productivity with affordable housing. Lower housing costs in Houston are the most important causes of the city’s real prosperity. America’s anti-Texans would have you believe that housing is cheap in Houston because the area is unattractive, but if greater Houston was so unappealing, why is its population soaring?

      The real reason that Texas homes are inexpensive is because they are abundantly supplied…

      It’s not that pricier areas like Boston and San Francisco lack land. Harris County, Texas, has less land per capita than Middlesex County, Massachusetts, where I live. But Middlesex County generally prevents large-scale building, with high minimum lot sizes and abundant environmental restrictions. Texas does not.

      Ironically, Houston’s laissez-faire, pro-growth attitude has allowed red state Texas to provide far more affordable housing for low- and middle-income people than progressive California and Massachusetts. Texas proves that unbridled private supply, not rent control or public housing, is the most effective way to ensure that every American can afford a decent home.

      Texas’ unfettered construction also explains why the state has enjoyed stable prices. When demand rises in Texas, developers build and that limits both price increases and subsequent price crashes.

      Outsiders make a mistake by ignoring or disparaging the growth of Texas. The great urban areas of Texas have benefited from allowing the change that has been outlawed in America’s costly coastal states. Other places could use a little Texan enthusiasm for growth.”

  11. I certainly hope Glaeser changed his mind from that earlier nonsense statement. I will put it firmly on record here, that NO city or region with inflated ratios of land prices to incomes, is going to preserve a trend to economic success unless they restore land affordability. All the other stuff is peripheral.
    There are multiple reasons for this. 1) land price volatility and periodic spikes and crashes
    2) actual cost to businesses, of land and leases 3) workforce income demands through living cost pressures 4) pressures on demographics, intergenerational wealth transfers putting pressure on younger generations and reducing birth rates 5) reduced “churn” of land use, and increased incumbency advantage 6) diversion of capital from productive uses, to land price bubbles 7) reduced business start-ups (the major source of new employment) 8) REDUCED location efficiencies by households and businesses (yes, you read that right)
    9) REDUCED participation in agglomeration efficiencies 10) REDUCED social mobility and increased “ghetto-isation”.

    The Silicon Valley example is actually very instructive. Silicon Valley was able to come about because of LOW LAND COSTS, and these remained low even as low-capitalised but smart young new entrepreneurs moved in en mass.

    This is what I mean by stating the converse, “reduced participation in agglomeration efficiencies” when land costs are too high. In California today, or Australia, Silicon Valley would be a non-starter.

    New York is also an exception, being a truly international city with international wealth “paying in” for “location” in Manhattan; also its amazing location and economic history; AND its having had low priced surrounding suburban and multi-nodal land until recently. The problem now is that NY metropolitan area has “bumped up against” municipalities with anti-development regulations; this functions in the same way as an actual urban growth boundary. NY is not the only example of this.

    This is why Smart Growth advocates can play endless semantic games with you, arguing that “American cities don’t have urban growth boundaries” yet some of them still have a housing price bubble.

  12. Cameron Murray made some assertions earlier that need to be addressed. Here is some clarity about them, Cameron.

    Britain has had 5 decades of restrictive town planning. The result has been:

    1) A bubble and bust cycle on a time phase of 12 to 15 years
    2) Each price bubble more volatile than the preceding one
    3) “Supply” response to each price bubble, WEAKER each time
    4) Rising actual shortage of homes, now numbering in the millions (Also, substandard old housing is not replaced or upgraded)
    5) Rising inequality in living space, location convenience, and local amenties enjoyed. Paul Cheshire and his colleagues at the London School of Economics calculate that this effect is more severe than the income disparities themselves
    6) REDUCED efficiency of urban form
    7) LOSS of economic competitiveness (see my posting above)
    8) Vastly reduced “building industry” employment, and short duration of firms in the industry due to cyclical volatility.

    Australia and other countries have not been so long on this path. I believe that there are some interesting features unique to land rationing economies that have not been so bloodymindedly imposing obvious privation on their populace. The main one, is that it actually IS possible to have an oversupply of homes AND a price bubble. This is because “investors” buy properties with capital gains in mind rather than rental income. This is also a reason why rentals remain low. Increasing numbers of these homes remain empty, while new homes can be getting built and bought, ahead of actual population pressures. This increases the volatility of the “bust” when it comes: expect prices to “undershoot”.

    Bear in mind that even minor changes to “people per dwelling” ratios can significantly alter apparent housing “shortages” or “excess inventories”.

    Even if you are correct that stringent lending laws would result in less inflation of house price bubbles even if land rationing remained in force, a multitude of other negative effects would remain; including the “inequality” effect, the “diversion of capital” effect, and the “REDUCED efficiency of urban form” effect (which negates the whole point of restricting growth in the first place). You could also expect massive “grey market” practices to develop in borrowing, lending, and sale of land.

    All this stuff is not necessary. We handled land development issues just fine until Green a—oles got control of the planning bureaucracies and educational institutions. If you discuss these issues in sufficient depth with these people (and believe me, I have) they will admit that the ideological underpinnings of it ARE inherently anti human. The actual DATA on land use is turned by them and their media allies, into a series of myths that have little resemblance to truth. We are nowhere NEAR “running out of land”, and this by orders of magnitude, either in Australia or the world. See my other postings above on this.

    • Phil,
      I appreciate the response but I am yet to hear an argument about exactly how apparently ‘restrictive’ town planning impacts price, and why it does not, for example, impact rents.

      You argument seems to be that homes in Britain are poor quality, prices vary, and fewer are being constructed, therefore there must be restrictive town planning rules. But you haven’t quite explained exactly how a link can be made. How about some examples of what makes a planning regime ‘restrictive’ or open? And why this might make prices leap but leave rents unchanged.

      The following are arguments often suggested to explain town planning’s price impact , but actually fail to do so.

      1. That development approvals are slow. This is simply another cost factored into the development, like all other costs. It delays revenue and increases interest costs. If Councils started approving all developments in one week, do you think prices would fall? No. In fact, prices for raw land that needs development approval would rise because costs and risks have now been removed.

      2. Infrastructure charges are high. Again, these are a cost like any other. If these were eliminated (borne by other rate payers) developers would not reduce prices.

      Unless there are genuinely supply restrictions (absolutely all residential zoned land sold to the market and no new zoning foreseen in the pipeline) government planning controls cannot influence the general price level of housing.

      This has never even remotely been the case. If you look and any of the Queensland planning documentation, for example, you would find areas zoned for hundreds of thousands of homes right now (Coomera, Sippy Downs, the Western Corridor and Ripley Valley, major infill sites in Milton, Newstead, Boggo Road, West End, Kangaroo Point etc) There are current approvals for 2,000 new units in my suburb alone.

      This, to me, appears to be the exact opposite of restrictive planning – we are floating in supply.

      • Cameron,
        You say “I am yet to hear an argument about exactly how apparently ‘restrictive’ town planning impacts price, and why it does not, for example, impact rents.”

        Just read a little bit higher up the page where I responded to your other post.

        As I said there:-

        In fact in Sydney rents have risen tremendously over the years. In 1970 an ordinary house would rent for 1/3 an ordinary wage. Now the same house rents for 1/2 an ordinary wage. A huge rise which reflects the shortage.

        You should study the example of Karratha if you want an even more extreme example. A tiny town surrounded by vacant land with extremely high rents lacking only government permission to build on surrounding land.

        Oh yes, prices to buy are also high.

          • I’m not interested in dodgy data. Anyone can generate a flat rent line by fudging the figures. If the average used to be a 4-bed house in Artarmon but is now a 2-bed unit in Liverpool, and we disregard travel time and cost, then rents have not risen.
            You show me an ordinary house from 1970 that is now affordable to rent for a family of ordinary means.

            Try not to be confused by the fact that prices have risen more than rents. Prices are highly influenced by lending standards, interest rates, and speculative zeal, whereas the weekly rent must be paid by wages.

            This is why rent is such a good indication of the shortage caused by restricted supply.

  13. Cameron, assuming you did actually read what I said above, I will try to explain further.

    There is no question at all that there are restrictive urban growth boundaries in Britain, you’d have to be blind to argue about that. Even a simple look on Google Earth will convince anyone with a modicum of intelligence. It is quite clear that “development is not allowed” beyond arbitrary boundaries.

    In Britain, the land prices ARE seriously inflated by the mere presence of a “zone line”, by a factor of up to several HUNDRED accross that zone line. The simple reason is that when you restrict “total urban land”, “space” becomes subject to a bidding war between participants in the market. (So does “location” and “amenities”, in fact, demand curves are different for all these things).

    SO you COULD argue that prices of land would not have risen if incomes had not risen, population had not risen, household sizes had not fallen, and no-one ever moved home for any reason. “Therefore”, would you say, urban growth boundaries were “not responsible” for the prices of land rising?

    If you are going to say that, then you must be some kind of Leninist and I am wasting my time even discussing this with you.

    But to continue; several professors have pointed out (including Paul Cheshire, William Fischel, and Wendell Cox) that to prevent supply of zoned land being “cornered” by speculators, something like TWENTY YEARS supply at NORMAL prices (not bubble prices) needs to be “zoned” for development. Then developers can get on with competing in providing houses, instead of fighting bidding wars to get land and shut competitors out of the process.

    You are right to identify “delay” as a cost that gets “built in”. This is part of the problem too, and unacceptable from the point of view of impacts on the economy and young home starters. This also can include the costs of holding “land banks” for years before development went ahead. “Twenty years” supply involves that these costs will be “too high” for land bankers to bother. But “ten years” might be incentive to take the gamble and hope to end up in an oligopoly position when your competitors go broke -as many do in these bubble situations.

    Demand for housing is cyclical. When new lengthy regulatory delays are involved in providing development to meet “demand”, “supply” now comes so late that PRICES have been driven sky-high and the market has siezed up if not actually crashed. The prices going sky-high ARE the result of speculative expectations; initially they were because of a mismatch between supply and demand, but because “prices went up 10% per year for 3 years”, a mania sets in.

    The Iriah have made the mistake of assuming that because a lot of building DID take place, that they need to introduce stronger restrictions. This misses the point that the problem of PRICE was far worse than the problem of quantity. 100,000 “too many houses” at $180,000 each is far less damaging to an economy than 1,000,000 houses inflated in average value from $150,000 to $450,000 (as well as the 100,000 “too many houses” being $450,000 each instead of $180,000). Can you follow the maths?

    You say: “…..If Councils started approving all developments in one week, do you think prices would fall? No. In fact, prices for raw land that needs development approval would rise because costs and risks have now been removed….” YES, if the quantity of zoned land was low enough to be “cornered”. But if there were no limits, or if the limit was 20 years out beyond the fringe, anyone wanting to get into the market cheaper than the existing incumbents, could do so. This is what free market competition is all about.

    You say: “…..If you look and any of the Queensland planning documentation, for example, you would find areas zoned for hundreds of thousands of homes right now…..”

    Sure, but who owns it all, and how much is it costing them to hold it – which will be built into the end prices? Surely you understand the process by which supply of something can be “cornered” – why is that word even in the dictionary of economic terms?

    It might be possible to break up this “cornering” process – the Chinese are trying some interesting regulations. For example, automatically giving building permissions to existing owners of land at the time it is zoned, which permission is revoked if development has not occurred within 1 year, and cannot be reinstated to the same owner – then forcing that owner to sell it undeveloped. There will certainly be ways that speculators will try and use to get round this system.

    I decsribed earlier how rents can be not as inflated as house prices, and empty “investment” houses boost the available “housing stock” because the investors think capital gains will continue indefinitely. But this is certainly no longer the case in Britain, where after several bubble cycles, actual SHORTAGE of housing stock has deepened, forcing rents up to comparable levels to house prices.

    Whatever the situation in Australia now, the same situation as Britain MIGHT eventuate unless you restore normality to the process of housing supply.

    Of course infrastructure costs something. This varies from one city and region to another. It is simply not true to say that it will automatically be more expensive to provide infrastructure to a new sattelite city, than to provide for the same number of people in existing areas at higher density. In fact, good ideas for “sustainable” low density living are being prevented by anti sprawl policies.

    But note that the old fashioned model of new infrastructure being provided out of total taxation revenue, worked fine for decades. In fact, it is cross-generationally equitable. The problem today is that profligate local politicians have found other things to waste tax receipts on, and try and “ring fence” new infrastructure as a separate issue – which it never was for their more scrupulous forebears.

    • This is where we disagree –

      ‘You say: “…..If Councils started approving all developments in one week, do you think prices would fall? No. In fact, prices for raw land that needs development approval would rise because costs and risks have now been removed….”

      YES, if the quantity of zoned land was low enough to be “cornered”. But if there were no limits, or if the limit was 20 years out beyond the fringe, anyone wanting to get into the market cheaper than the existing incumbents, could do so. This is what free market competition is all about.’

      Explain how a new developer can sell for less than the incumbents? Or buy land below the market price?

      Say the government takes your advice and decides you can build anything anywhere. The market price in an existing fringe suburb is $300,000 for a standard house. Now there is plenty of land around to compete with this existing fringe suburb.

      For a developer to now buy some of this land (to compete on price as you suggest) he has to compete with other would-be developers to buy some land. If costs to develop a house are $200,000 (including a profit factor, council fees, construction, infrastructure charges – all costs), he can pay $100,000 per developable lot for the land. If he doesn’t offer that price, someone else will, because they can still make money at that price.

      Therefore new supply will always match existing prices.

      It doesn’t matter whether the next best use of the land is agriculture and that for agricultural uses the land is only worth $20,000 per lot (whatever area that equates to). It’s value comes from its highest and best use, not the marginal use.

      Prices will only fall when landholders are forced to sell (bankruptcy, etc), not through regular market competition.

      • Cam. Why would a developer pay $100k for this land when they are free to purchase any available block for development? More likely they would pay just above it’s rural value. That’s the beauty of competition, it pushes price down towards its marginal cost. If you need evidence of this phenomenon, just look at Atlanta or Texas.

        • Sellers of raw land have no incentive to sell for less. Why would any landholder take $20k a block and provide a developer an extra $80k profit per block, even if there are hundreds of potential sellers. If the sale is not forced there is no reason to take a cent less than $100k.

          An analogy. An area is in zoned for both residential and commercial development. Commercial uses can sell for $600/sqm and residential for $400/sqm. Working backwards from the final price of office space and houses, a commercial developer could pay, say, $200/sqm of land and make a profit, while a residential developer could only pay $100/sqm of land. The price of land in this area will be $200/sqm, not $100/sqm.

          With your marginal use value argument, the land should be worth $100/sqm based on the second best residential use. Clearly though, this is not what happens in reality.

          Remember, there is competition from developers to buy each block, not so much competition from sellers to sell all the blocks.

          • Following on. We could take our hypothetical res/commercial area and use town planning rules to restrict half the area to residential, and half to commercial. Then we would see the price differential occur. The residential land would be $100/sqm and the commercial land $200/sqm.

            In this case, separating uses with planning actually makes it cheaper to develop residential because you don’t have to compete for land with commercial developers.

            But the price differential is not a sign of a land shortage for commercial use. It is a sign of the greater demand for commercial property, expressed in rents and prices.

          • Cam. The situation you refer to only applies under a restrictive planning regime, like Australia’s. That is, the land owner is able to charge the developer $100k because the land market is not competitive (contestable) due to artificial regulatory barriers to supply. If the free-market Texas/Georgian model was in effect, the land owner would not be able to extract such high rents as the developer would be free to approach any other land owner and purchase land at lower cost. Similarly, competition between developers would prevent them from increasing their margins. The end result in your hypothetical would be a significant reduction in the land cost for new dwellings under a more liberal planning regime.

            In Texas and Georgia, the land component in a typical new family home is around $30k with the home construction costing around $120k (total $150k). Compare this to Australia where the land component is typically around $200k. The difference is regulatory.

  14. At least we know exactly why we disagree now.

    Would you sell for less than $100k in my little scenario? Or would you be tempted to just develop the land yourself and pocket the extra $80k profit per block?

    • I would if there were loads of other landholders out there willing to undercut me. It’s the market power granted to the landholder via zoning/UGBs, etc that enables them to jack-up prices. But if you take away the regulatory constraints to competition and make the land market contestable, landholders are prevented from charging such high prices.

    • Cameron you clearly do not know the first thing about economics and markets.
      Competition works to drive price down. That is why in Thailand the taxis cost so little. The operator makes a minimal but fair profit and no more.
      Contrast this with Australia where a restrictive licensing regime makes our taxis amongst the most expensive in the world. The driver still makes a minimal wage, but the license owner makes a killing.

      You really need to study economics more before you write about it. Go blog about something you understand.