To state the obvious, market supply of housing depends first and foremost on market conditions. 

To mobilise private capital into housing production developers must make a reasonable margin for profit and risk. Achieving this margin is a challenge right now.  With the exception of luxury apartments, prices for new medium and high density housing remain too low to compensate for the sharp run up in material and labour costs triggered by the Pandemic.

Ultimately, the forces of supply and demand will restore the required margins for investors, capital will flow and dwellings will be built.  The speed with which this happens depends, in part, on macro-economic conditions and policy.  For example, new housing supply is inversely related to interest rates.

The speed of market adjustment also depends on ‘micro-economic’ policy, covering the rules and regulations on housing production, the training of workers to build housing and the propensity for innovation amongst builders.  The goal on these matters should be to reduce costs and risks in the housing production system so that developers can move swiftly when commercial conditions improve.

Leaving aside macro-economic policy and those aspects of micro-economic reform which are the province of the Commonwealth, what can the States do to improve the responsiveness of market housing supply?  Within the urban policy space, four opportunities loom large; sensible reform of planning regulations; timely provision of infrastructure; precinct master planning and land assembly; and value sharing.

Planning systems should ensure that there is sufficient zoned capacity for housing development.  This needs to be calibrated at several multiples of annual housing take up based on demography, to ensure ample scope for market competition.

Development approval pathways should be based on sound design rules determined through cost benefit analysis.  And the time and cost of development assessment should be proportionate to the scale and impact of the proposals in question, as well as the degree to which they have been anticipated in local planning provisions.

By and large, Australian planning systems have historically done well on the zoned capacity issue.  The story is less encouraging on development approval systems.  In part, this can be put down to a bungled national initiative of the 1990s to shift planning away from simple prescriptive controls to a ‘performance – based’ framework where proponents would negotiate with approval authorities based on their compliance with loosely specified outcome measures.

Market supply is a co-investment process involving the commercially oriented developer and the community represented by its mandated infrastructure agencies – Council, water authorities and providers of health, education, transport, recreational, cultural and community services.  According to Infrastructure Victoria, the infrastructure outlay required to support an additional greenfield lot is of the order of $220,000.  In infill areas, this outlay may be around $165,000 per dwelling.

A sizeable proportion of these infrastructure outlays is taxpayer or ratepayer funded.  The fiscal capacity of State and local governments is limited; they cannot co-invest every time and everywhere the development market wants to go.  If infrastructure is to be available in a timely fashion to support housing supply, it makes sense for the planning system to identify staging programs or priority areas for development.  This should not mean that market agents would be confined to priority areas pending the opening up of the next stage of development.  Most likely, that would create monopoly pressures in market supply.  However, proponents wanting to break from the priority sequence should expect to compensate infrastructure agencies for accelerating the provision of facilities and services to their projects.

The housing targets identified by most State governments imply a transformative change in our major cities.  For example, the housing capacity mission which the Victorian Government has laid out for local governments amounts to 1.36 million new homes in the established parts of Melbourne in the next 25 years or so.  That means more than two new dwellings for every three that already exist. That’s the same as fitting one and a half Perth’s into the metropolitan area’s current urban footprint.

This implies a radically different approach to city building compared to our 200 year-old model of urbanism which is founded on constant greenfield accretion, supplemented by pepper and salt redevelopments of suburban lots and, more recently, regeneration of obsolete industrial precincts in inner city areas.  At an average site density of 150 dwellings per hectare, the housing target for metropolitan Melbourne would require development sites to be sourced and made ready at the rate of more than 360 hectares per year, year in year out.  That’s equivalent to one MCG (playing area) every 2 days.

Our housing industry is not configured to this challenge.  It needs help by way of government led master-planning of redevelopment precincts, assembly of fragmented sites and co-ordination of enabling infrastructure.  This is not happening at anywhere near the required scale.

Land development rights in Australia are owned by the Crown (read State or the community) and are awarded to proponents based on compliance with relevant planning requirements.  It is reasonable that the State should levy a licence fee for these rights in the same way as charges and royalties apply when proponents want commercial access to other community property such as minerals, forests, fisheries and the like.

Only the ACT currently charges a fee for the granting of development rights.  This is levied at 75% of the uplift in land value upon granting of planning permission.

The ACT scheme is a logical outworking of the Territory’s leasehold land system.  The Government is the technical owner of all land in Canberra and rightly expects to be the beneficiary of the value uplift that arises from infrastructure investment and the award of development rights.  In other Australian jurisdictions, this uplift is almost entirely privately captured either as a margin premium for the developer or, more likely, as a windfall to the passive land owner.

There is no reason in principle why an ACT-like scheme could not be replicated in other jurisdictions notwithstanding their largely freehold land systems.  Introduction of a simple development licence fee could replace the complex development contribution arrangements that State and local governments currently operate.  It would obviate the time consuming and risk laden haggling over how land value uplift should be shared when major projects are approved.  If local government is assigned a fair proportion of the revenue from a development licence fee, Councils would have an even greater incentive to promote housing construction in their areas.

Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd

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