Few in the community would dispute the urgent need for more affordable housing. Skyrocketing rents, home prices outpacing wages, and a shortage of supply across key markets have made the crisis inevitable.

Unfortunately, the way some state and local governments are responding—through the application of affordable housing levies placed on new development, is creating perverse outcomes. The unintended (or intended?) consequences are undermining housing supply and, ironically, affordability itself.

Affordable housing levies are introduced through the practice of inclusionary zoning. By mandating developers dedicate a portion of dwellings below market price, inclusionary zoning shifts the cost of a broader societal problem and policy response solely onto private projects and the purchasers of that stock.

Affordable housing levies represent a major threat to overall housing supply because they undermine the (already risky) financial viability of housing development.

In higher-cost, high-demand markets, inclusionary zoning discourages development at the margins, effectively acting as a tax on new builds. While it can generate scattered affordable units, it is no substitute for direct government investment or incentives for the private sector. Without incentives, blunt inclusionary zoning  risks stifling new developments while failing to address structural shortages.

But it’s a policy beloved by many local councils, particularly those in the inner suburbs of our cities. It highlights the affordability problem, but prescribes the wrong solution to it.

But it makes for noble-sounding media releases.

The cynic can see the attraction. At zero cost to council (and media hungry, though largely underwhelming councillors) they can jump up and demonstrate that they are “doing something about affordability”. The average (existing) ratepayer remains unaffected, with the cost placed on future purchasers of new housing (who are more often than not unenfranchised in terms of voting for the current council).

It is a cosy deal within councils that sounds great in theory but is disastrous in practice.

Not only does is inhibit housing supply, it affordable housing levies shift the costs of a broader societal problem on a small section of the community – new home buyers. This is dressed up as a tax on developers, but with margins so thin, and feasibilities so tight, it is the new home buyer that ends up paying the tax.

The problem of definition

One of the first challenges is definitional. Federal, State and Local governments have failed to establish a clear and consistent meaning of “affordable housing”, who qualifies, and what they pay in rent.

In some jurisdictions, this means discounted rental units pegged to the incomes of the occupants. In others, it refers to discount to-market rent prices in that area.  Some jurisdictions use an even looser term: that of “key worker housing” without and precise parameters.

Developers are caught in shifting sands, where each council or state or Federal authority overlays its own definition, compliance mechanism, and eligibility criteria.

After a 3-day talkfest examining productivity in Canberra, clarity and simplicity is needed if the housing investment pipeline is to be improved.

Urban Taskforce maintains a simple discount to market rent, when combined with incentives rather than outright levies, is the simplest way forward.

The cumulative burden of fees and taxes

Affordable housing levies cannot be examined in isolation.

They sit on top of an already significant stack of charges: development application fees; open space contributions; local and state government infrastructure levies; specific contributions to fund transport upgrades; GST; company tax; payroll duty; stamp duty on lot sales; environmental offset charges; and more. Cumulatively they weigh heavily on project economics and are currently smashing housing feasibility.

Urban Taskforce published a Research Paper in April this year entitled: Urban Ideas, What Makes Housing So Expensive? This paper detailed the impact of fees, taxes and charges on new dwelling construction.  Sydney came out by far the worst when compared to Brisbane and Melbourne.  In Sydney, government charges and levies now account for over 35% of the cost to deliver a new dwelling.

The paper noted CIE research that ascribed $346,000 in charges to an apartment costing $918,000 to deliver (37.6% of total cost); and a staggering $576,000 in cumulative fees taxes and charges on a greenfield house costing $1.182 million to deliver (48.7%)

We often use the analogy of the ludicrousness of taxing bakers during a bread shortage. The case is the same vis-à-vis housing.

With Labor Governments presiding in most states across the nation, they need to look at the impact of these fees on housing supply because it is the most vulnerable, those in the lowest socio-economic status, that are hurt most by these taxes and charges. They hinder supply.  That pushes housing prices and rents up. Those that can’t afford to pay are forced out.

With this explained, adding a further affordable housing levy pushes feasibility past the tipping point, especially in middle and outer-ring suburbs where end prices cannot simply be raised to absorb another impost. The end result is fewer projects launched, fewer homes delivered, and greater scarcity in the market.

When councils introduce mandatory affordable housing contributions—say, a 10% set‑aside or a cash‑in‑lieu payment—they effectively increase the cost base. Developers are left with two options: pass these costs on to buyers and renters, or abandon the project because feasibility no longer works. Either way, supply is reduced. Ironically, reduced supply is the very thing driving unaffordability.

Feasibility and financing challenges

Banks and equity partners assess projects on predictable margins. Even small changes in “contributions” can disrupt financing. If councils impose affordable housing levies, sometimes in addition to state government affordable housing charges as is increasingly the case in NSW, financiers are increasingly declining to fund projects altogether.

Developers are forced to either walk away or redesign proposals in ways that lower quality, optimise only for yield, or reduces the quantity of housing rather than increasing it. This is not a scenario the development sector wants.

Affordable housing levies also distort land transactions.

If developers are expected to absorb a new contribution, theoretically land prices should adjust downward. In practice, this rarely happens. Vendors anchor to market comparables and resist discounts, particularly in hot markets.

This reality is especially harsh for smaller developers who lack the economies of scale of major listed companies. Whereas large firms may cross-subsidise obligations across projects, smaller operators face genuine insolvency risks when levies are imposed without offsetting incentives. Consequently, competition in the market is reduced, and supply becomes even more concentrated.

Perverse policy outcomes

What results is a classic case of policy backfiring. Rather than generating sustainable streams of affordable housing, the levy regime reduces total housing output and makes housing across the board more expensive. The irony is cruel: levies meant to help low- and middle-income households lock them out further, while developers retreat from marginal projects.

We have seen such dynamics before. In the UK and parts of North America, inclusionary zoning policies with rigid affordability set‑asides have often led developers to abandon projects in challenging locations, concentrating new stock only in premium districts where sales prices can carry the burden. This reduces geographic distribution of affordable units and fuels inequality between regions. NSW risks falling into the same trap.

The numbers tell the story of =inclusionary zoning failure

The performance of inclusionary zoning scheme has been dismal. Take the City of Sydney: it claims with pride that it has delivered just over 1,300 under a scheme that has been in place for three decades – on average 40 a year.

But they are doing well when compared to many of the others.

Inner West has acquired 19 affordable housing units.

Woollahra Council, whose Mayor bemoaned the State Government’s plans to complete Woollahra Station as “doing nothing for affordability”, was exposed in the media in 2023 of technically delivering 23 affordable homes over 14 years – yet none were occupied.

Willoughby’s affordable housing program has,  since its inception in 1998, secured 37 affordable rentals.

You get the picture.

Policies and politicians should be judged on outcomes, not slogans.

The Minns own infill affordable housing bonus scheme, which incentivises rather than taxes developers by offering developers additional building height and floor space bonuses of up to 30% if they allocate at least 10-15% of the gross floor area of their residential developments as affordable housing, which must be retained for at least 15 years. This allows developers to spread the cost of providing the required affordable housing whilst still maintaining ownership.

Financially it works and on the ground it delivers.

Since its introduction in late 2023, the infill affordable housing bonus scheme has already facilitated development proposals that would deliver 1,648 affordable homes, with many more proposals still being considered by the Department of Planning.

And the cost to the taxpayer? Zero.

Yet part of the problem is this sensible policy has been undermined by calls from some for in-perpetuity affordable housing contributions (simple dedication of GFA to a CHP). The State Government did just this with the Tier 2 Transport Oriented Development areas around 37 rail stations.  They applied a 2% affordable housing contribution, in-perpetuity. It has been a disaster and needs to be revisited. Council levies are exclusively in-perpetuity.

Towards a more balanced solution

The development industry recognises our role in addressing the housing challenge. But real solutions require alignment between all levels of government and the private sector.

If councils genuinely wish to unlock affordable housing, they should reduce approval times, make zoning more flexible, and invest directly in enabling infrastructure. These measures lower delivery costs and promote supply at scale, which is the only true path to better affordability. Levies that disrupt feasibility only slow the system down.

Incentive-based approaches—like the Minns Government’s infill affordable housing density bonuses, expedited approvals, and infrastructure partnerships—are far more effective than blunt levies.

Incentive-based programs where the developer retains ownership through a partnership with a community housing provider means more affordable housing, underpinned by a feasible pathway that can be evolve in time into a rolling program of affordable housing stock.

Conclusion

The debate around affordable housing levies and inclusionary zoning cannot ignore their perverse outcomes. By layering costs onto new development, councils risk strangling the very supply pipeline that underpins affordability. For some, that is the ultimate plan. Help cruel feasibility through the guise of an affordable housing program.

By Stephen Fenn, Acting Chief Executive, Urban Taskforce Australia