The great Australian town planning give-away

It is the gift that keeps on giving for the Australian property developer lobby. Planning gains. Betterment. Whatever you call it, it is a multi-billion dollar give-away to the politically connected happening every year.

It works like this. Property developers buy land with the accompanying right to use it for a certain purpose, which is typically prescribed in the local council planning documents. They then lobby their mates in power to change the prescribed uses in the plan, in the process giving them a new property right which they did not pay the previous owner for. Nor did they pay the government for that new right. It was a gift.

But in Australia’s beloved capital city this game of giving planning gifts to your mates doesn’t work. There is no gift. In the Australian Capital Territory, if you want more property rights, you pay the government for them.

The ACT government achieves this in two ways. First, it has a public body that plays the role of land developer, the Land Development Agency, which converts land into urban uses, invests in infrastructure, and sells the new plots of land at market prices. When it sells this land it comes with the requirement to build on that land within two years in accordance with the purpose clause of the land title. By acting as the developer, 100% of the windfall planning gains goes to the government in manner that is economically efficient.

Second, if you have land that can be developed to higher uses within relevant zoning rules of the town plan, you must pay the government a Lease Variation Charge (formerly a Change of Use Charge) of 75% of the value gains to the land from allowing the higher value use.

These two schemes earned the ACT government $164 million and $19 million in 2014-15 respectively. That’s $183 million in revenue that would be given away to land developers in other states.

So how big is the great betterment give-away occurring in other states? We can scale up the ACT data to get a good estimate of the size of this give-away happening in the rest of the country.

There are two main adjustments necessary to do this. First is to adjust for the dwelling price differences across states. While the two schemes apply to all types of land, including residential and commercial, the residential values dominate. I therefore adjust the figure by the ratio of state median dwelling prices to ACT median prices to get the price ratio. I then adjust for the number of new dwellings in other states completed in that year to get the dwelling ratio. I then calculate the total scaling factor as price ratio times the dwelling ratio. Then I multiply this by the ACT betterment revenue and sum across states.

The result is summarised below. And the answer is $11 billion.

Median price

(May 2015)

CoreLogic

Trend new private

dwellings (ABS, year

to June 2015, State)

Price ratio Dwelling ratio Scaling factor Scaled

revenue

($m)

Sydney $ 691,000 51,368 1.39 14.13 19.57 3,582
Melbourne $ 502,000 64,529 1.01 17.75 17.86 3,267
Brisbane $ 424,000 42,055 0.85 11.57 9.83 1,799
Adelaide $ 383,000 10,079 0.77 2.77 2.13 389
Perth $ 528,000 30,343 1.06 8.35 8.83 1,616
Hobart $ 299,000 2,734 0.60 0.75 0.45 83
Darwin $ 510,000 1,648 1.02 0.45 0.46 85
Canberra $ 499,000 3,636 1.00 1.00 1.00 183
Total 10,821

That sounds right to me. $11 billion is what the Australian states gave away to landowners and property developers in 2014-15, that they could have recouped had they had the system of betterment taxes that the ACT has had since 1971.

As a final point, you might think that the degree to which the ACT government controls land uses might have some effect on slowing new investment in dwellings. This is not the case. The ACT has the largest homes in the country, and has the same bedrooms/person ratio (a measure of dwelling stock per capita) as Queensland, slightly behind Tasmania, but in front of NSW and Victoria. While I remain cautious about the ability for such systems to be gamed, I see the current system of private landowners taking planning gains and determining the new supply even more prone to political corruption and favouritism. Rezoning gifts don’t even come with obligations on developers in other states to actually build what they promise. They can sell the land with the new rights the following day and cash in their gains.

Comments

  1. This is an important principle to understand, and Cameron Murray has done a good job highlighting it. Many urban planners assume that allowing higher density will result in more affordable housing, because site values can then be split up over more housing units. But there is urban economics literature that correctly states, “site values are elastic to allowed density”.

    In fact this elasticity is so volatile and exponential that the average housing UNIT price tends to RISE as the average housing unit size FALLS. Otherwise, Hong Kong would be cheap and Atlanta would be expensive. Even Chicago has cheap land for a large “global” city, because it is so low density, and even New York is far cheaper than it would be otherwise, because it has so much low density suburban sprawl all around it.

    It is one thing to include “value capture”, but this does nothing to the underlying economics of quota, monopolistic competition, and social injustice in housing. The British have been doing perverted forms of “value capture” for decades, and their urban land values just get higher, and higher, and higher, even as crowding and homelessness get worse.

    An alternative model is of course the era before land-rationing was introduced on environmental and fiscal pretexts – simply allow conversion of land between uses, in sufficient freedom of quantity, that all land values are suppressed by a “differential” effect. You will not find the “value uplift” effect described by Cameron Murray, in any city with a house price median multiple of 3, and the cause every time, will be that development of rural land to urban uses, is FREELY allowed (and even expedited) in leapfrog or splatter or “out of sequence” patterns. Our own cities in this part of the world developed in this fashion for decades, and that is the reason housing was “affordable” for decades.

    We are getting the “splatter” development anyway, but it is not “freely allowed”, it is part of the same quota scheme with the accompanied gouging in land values.

    • surfbeach2536

      Phil, many people including me consider environmental concerns more that a pretext as such I strongly disagree with your idea to freely allow land development. The cost of housing can be overcome using population control, restrictions on foreign buyers, etc. Once the environment is degraded it will take generations to recover if ever.

      • Globalization means free capital movement. As long as the houses are treated as an “investment”, no restrictions will be allowed to stop the buying frenzy of our established properties. Hence, your suggestions of population control is just that – a good suggestion, but will never ever be applied as a policy. Without the population growth there is no capital growth, so capitalism would be dead. There was only one man in history who really understood capitalism better than anyone else born after him.

      • The enviro movement in the 70’s was a lot more rational – sustainable living was just as much about low density, ex-urban, as anything else. The modern idea that concrete jungles are “the” only “solution” is just useful idiocy for the big rentiers in land and finance. Fiscal incentives are far more effective, but the big rentiers don’t make a killing that way. Guess why your ideology is liberally funded by Soros, the Rockefellers, etc?

    • Stewie GriffinMEMBER

      All good that the ACT extract the profits from their land monopoly rather than give it away to land developers, but Phil is quite right, without the right to freely develop land on the fringes it simply creates a publically owned monopolistic product, delivering supernormal profits to well feed bureaucrats and their budgets instead of developers and their wallets.

      It does nothing to improve the productive use of land, nor does it do anything to improve the affordability of land – the exorbitant price of plots of land in the ACT being ample evidence. So does it do one iota in terms of improving one of the root causes of Australia’s gross lack of international competitiveness, being our astronomical land prices? Nope, nothing, nada.

      What it represents is merely the public side of the same Intergenerational rorting – getting young people to pay exhorbitant prices for land, only in this case the proceeds flow into consolidated revenue and what remain after supporting bloated bureaucracies budgets, goes back to largely subsidising the services of largely existing (older) land holders.

      Instead of championing a crony capitalism we’re championing crony socialism with a distinctive Intergenerational flavour. By limiting immigration the need to limit land use on the outskirts of cities is also consequently limited, and land can be allowed to be freely developed, destroying the monopolistic super normal profits that enrich developers in other states, and subsidies baby boomers in the ACT.

      • Exactly, the UK has been doing this stuff for decades and are a salutary lesson to others “don’t go there”. Like smokers dying of lung cancer. “Don’t start”. But the window of opportunity to roll back this racket in our part of the world, is closing the longer the interests get entrenched.

      • Stewie, yes, here we get back to a key mechanism in the process described in your earlier monumental post:

        http://www.macrobusiness.com.au/2016/07/how-australian-youth-can-fight-off-the-boomer-war/

        Housing price inflation: “… An additional cost overlay is added to EVERY stage of production, thanks to inflated asset cost overlay – net result, final production is going to be lower than what it would otherwise be…”

        This point was reinforced to me attending a forum of Aussie start-ups returning from a tour of the London start-up scene. London described as relatively “very” easy to get capital backing for your idea up to 750,000 GBP. Funding however, quickly re-absorbed by local economic ecosystem via inflated costs. Asked which they preferred (Oz or London) most said it was a wash taking living expenses against ease of funding benefits (standout factor may be the ‘agglomeration’ benefits of London and ability to make 2nd stage growth maneuvers later if required). Ideas described as “no better” than Aussie start-up ideas and across the city many “much worse” then here but seemingly well funded. Housing and living cost overlays required the funding to flow from the co-habiting London banking sector to start-ups. My takeaway – financialisation of London City is reflexive and locks enterprise into dealing closely with the financial sector. In turn you just get more waste and more miss-allocation of capital. Per capita do you get more winners or final productivity gains given the additional waste and misallocation? Doubt it. Looks flash over there though, good marketing!

    • Brilliant Cam and thank you, Phil.

      The idea that zoning controls prevent ‘splatter’ is a planner’s fantasy that does not accord with what happens on the ground. Melbourne has a population approaching 4 m and another 1 m live in the periurban area. Policy failure writ large.

      Our Dear Planners have been gamed. They now constitute a key element in the retail price maintenance of land. All value accrues to the holder at time of rezoning.

      • Are you saying you reject neoclassical economics as well as price mechanics… ?????

      • Disagree David as both are the dominate econnomic system architecture by which such arrangements occur for some decades and if you can’t or refuse to deal with that… it says more about you than anything else…

        Dishevel Marsupial… or was is socialism – communism that brought this all upon us…

      • David…

        You rail against decades of out comes yet completely fail to reconcile the failed metaphysical agency which produced such results or the well spring whence it came from…

        Disheveled Marsupial… whilst your intentions might be ethical I fear your grounding is misinformed…

      • David…

        What part of neoclassical economics don’t you understand and if as such you need tutelage gives you the impression that you know anything….

      • David, my guess is that Skippy THINKS something he THINKS is “neo-classical economics”, is responsible for the mess we are in because it assumes “the market will sort things out if it is allowed to”.

        Skippy is of course willfully blind to the fact that urban planning as it currently exists, violates all assumptions that there is a free market working as a free market should, in urban development. “Neo-classical economics” is the wrong term for what we have, which is actually boilerplate rentier capitalism of the kind that has been denounced by everyone from Karl Marx to Ayn Rand.

      • Skippy, you write… pseudo-riddles. I decline to expend any energy upon your blatherings. Learn to use the English language or desist.

      • Both of you have conveniently hand waved away the reality of decades of ideology…

        Disheveled Marsupial… am I to be informed that both of you are unable to carry the conversation…

        BTW lumping “Karl Marx to Ayn Rand” in the same sentence is absurd…

  2. JunkyardMEMBER

    The ACT still has a rep for some fairly extreme drip feeding at times though doesn’t it?

    • At all times. They recently released land via lottery, and the lottery was sold out in the first few seconds of opening.

  3. I’m a little hard on Canberra. Have been know to propose it as the new Maralinga.
    But this, this is brilliant. Give the man or women who came up with the concept of a Lease Variation Charge an AO.
    The term “property developer” is a misused catch-all. Those who merely “lobby their mates in power” to get land rezoned are not developers. At best they are speculators. At worst they are brown paper bag passing crooks.
    These property speculators then get a 10x multiple with resale to the real “property developers” – those companies that undertake the design and civil works required before construction.
    Unfortunately the latter group are tarnished by the former.

  4. “Nor did they pay the government for that new right.”

    Disagree. Paid for via political donations, which needs to end, but unfortunately won’t.

    • Well, there is a very simple way to make those political donations worthless and the ACT have implemented it, as described above. If the payments are over the table instead of under the table, they are put into general revenue rather than the Obeids of the worlds pockets. Hard to see any downside to that.

  5. It’s worse than them just lobbying.

    It’s actually being invited inside the local Council as a member of a planning advisory committee, where they can then essentially dictate (sorry, recommend) planning policy to the same gormless councillors they wine and dine throughout the year.

    And those councillors will justify the amended height allowances on the basis of having to meet the demands of federal & state government population policy (also a recommendation of same lobbyists).

    And anyone objecting to the approval of six story apartment buildings being plonked down in a low rise neighbourhoods will be labelled a NIMBY. And anyone objecting to the population growth will be shunned as racist and economically ignorant, and both Labor and Liberal protecting their own particular interests on either side, and on it goes.

  6. Cameron Murray, if you don’t get some kind of honorific title for services rendered to Australia by the end of your career I will eat my hat – Legend.