If you wanted to strike it rich in property, one way would be to buy land on the outskirts of metropolitan areas, wait for it to be rezoned into residential use, and reap windfall gains by either selling to a developer or building on it yourself.
Ordinary mum and dad investors, however, stand little or no chance of doing this.
In a 2015 study, University of Queensland economists Cameron Murray and Paul Frijters looked at six selected areas in which decision making about rezoning was taken from local councils and assumed by the state’s Urban Land Development Authority. The change in decision making authority took place over a six-year period spanning 2007 to 2012 under a program designed to boost housing supply and increase the speed and scale of residential development within those areas.
Murray and Frijters then used micro-level data from multiple sources to compare the relationship characteristics both inside and outside the ULDA areas and to compare outcomes for landowners who were considered to be well connected with those experienced by less well connected owners.
Their findings were revealing. ‘Corporate’ owners (i.e. property development companies) owned 75.3 per cent of the land which was rezoned but just 12.5 per cent of the land nearby outside of the rezoned areas. Members of the Property Council of Australia and the Urban Development Institute of Australia owned almost 40 per cent and 23.5 per cent of the land within the rezoned areas respectively but owned just over one per cent of the land in the nearby surrounds.
Political donors owned 40 per cent of the land inside the rezoned areas but just 1.5 per cent of the land outside. Hiring a professional lobbyist increased your chances of having your land rezoned by 37 per cent. Being part of a ‘connected’ network did likewise by 25 per cent. Of the $710 million worth of gains which Murray and Frijters calculated were derived from the uplift in values during these rezoning periods, around $410 million was captured by ‘connected’ landowners.
Well connected parties did not simply own land in the right areas. When they looked at areas which had been rezoned, Murray and Frijters found some strange shapes which could not be explained by rational decision making.
The above study underscored an ugly truth about how political decision making in Australia is influenced not just by public interest considerations but also the vested interests of powerful stakeholders. In the property sector, this includes the development industry itself but extends to other powerful groups such as existing home owners and residential property investors. Less powerful groups such as renters, other would-be home owners and public housing tenants get a raw deal – as can broader public interest considerations. This extends beyond rezoning to policy areas which impact housing and rental affordability as well as public housing provision.
According to Murray and Frijters, this phenomenon affects more than just the property sector. In their recent book Game of Mates, the two economists argue that the idea of favouritism extends across many areas of the broader economy.
Nicolas Gruen, chief executive officer of economic consultancy and public policy advisory Lateral Economics, divides stakeholders into four categories: the development industry, existing property owners, those who would like to buy a home (renters or those living with parents) and the broader aesthetics of the built environment. The latter groups he said, often get a raw deal compared with the former.
As well as their lack of political influence, Gruen says part of the challenge for the latter groups arises from their interests being impacted not by single individual decisions but rather by the cumulative effect of a large number of individual decisions.
Interests of would-be home owners in terms of housing affordability, for example, are impacted not by an individual decision to approve or block any one development but rather by the overall impact of a large number of decisions which cumulatively effect available housing supply. As a result, he said, it becomes difficult for the public interest to inject itself into decision making mechanisms regarding individual projects notwithstanding the fact that these decisions will deliver an overall cumulative impact.
A particular area which Gruen says has not been well served is the aesthetic interest. Whereas many public buildings constructed from around the 1890s through to the 1920s and 30s had good character and were nice to look at, much of the new stock nowadays is bland. As a result, he says, cities such as Sydney and Melbourne in Australia and Paris overseas were beautiful places prior to the 1950s but are witnessing a considerable volume of new stock which is less aesthetically pleasing.
“The interests of both developers and locals are well represented and powerfully represented,” Gruen said.
“Local residents have been very successful at slowing densification and local development. That’s in their interests as they judge it but not in the interests of outsiders who might want to live in that area because it pushes up house prices. That represents a very large problem for us.
“Developers interests are well represented because there is a lot of money at stake and they make a large windfall from decisions about property – most particularly rezoning. That goes into all kinds of activities – legal and legitimate or otherwise and borderline.
“But through all that, the interests of the community get short shrift.”
According to Murray, the most affected area is land rezoning. Indeed, he talks of an industry which can be divided into two sides.
First, he says there is the ‘construction’ side of the industry which builds homes adds to housing supply.
Second, he talks of a ‘property development’ side. In this side of the industry, Murray says developers make large amounts of money by buying up agricultural or industrial land and then working their connections to have the land rezoned for residential use. This, he says, sees the value of land holdings multiply by several times and is where much of the money is made.
Once land has been rezoned, Murray says developers further lobby to have taxpayers fork out billions of dollars to put in roads, rail lines and utilities – a process which further inflates the value of developer holdings yet is paid for by taxpayers.
He talks of an industry mired in potentially illegal corruption but more so ‘grey’ corruption. This, he says, is where developers use legal means (such as employing lobbyists) to gain a decision-making outcome which is more favourable to them than would be the case with an ordinary outcome in which decisions were influenced solely by public interest.
“A lot of the time, it’s about buying land such as a farm or an industrial building, paying the value of the land for that use and then lobbying either the council or the state government to change what you can do on that land to then be able to build, for example, a high-rise apartment building on that industrial site,” Murray said.
“What you are getting is a different property right than what you paid for. You paid the seller the right to run an industrial warehouse. What you are getting when you make that rezoning application, is that you are surrendering one property right and getting one which is worth a whole lot more to build a high-rise building or whatever you propose. You paid the previous seller for one right at one price and you make an application and the government grants it on behalf of everybody – the right to use it for something which is worth a whole lot more.
“This is the whole industry. This is how the big developers make money.”
A means by which this happens, Murray said, involves a revolving door in terms of employment between the public sector and private sector developers. He says many employed in state or local government planning roles have either previously worked for private developers or have gone on to do so after leaving public office – a process he says enables implicit favours given to private developers whilst the person was in public office to be repaid.
Professor Peter Phibbs, a planner and social economist at Sydney University, says the degree of vested interest influence over land rezoning was borne out by the Murray and Frijters.
Phibbs agrees about the revolving door. In New South Wales, he says, the number of those who go from working within the planning department or from being on planning panels to subsequently working for private sector developers is concerning. He is aware of one case where a person was serving on a planning panel one month and the following month after leaving was engaged as a consultant to a developer who was trying to get a decision through that panel. Whilst emphasising that he was not suggesting wrongdoing, Phibbs says such situations reinforce negative perceptions amongst the public.
“If you look at New South Wales, a number of people have rolled out of the Department of Planning and ended up working for private companies and developers,” Phibbs said. “I don’t think that’s a great look.
“I think if you are a member of the public and one month you go there and a person is sitting on a panel and next month they are arguing the case for the developer for a planning proposal, it’s not a good look.”
At a broader level, Phibbs says many feel there is an imbalance of access to decision makers. Such fears are not unfounded. A scan of appointments in the diary of NSW Planning Minister Anthony Roberts over three months from April to June this year, for example, shows that around half of his meetings about policy which were not with other ministers or MPs were in fact with private companies or industry lobby groups. Whilst again there is no suggestion of wrongdoing, this does suggest that influential stakeholders enjoy access to ministers at a level beyond that enjoyed by ordinary members of the public.
Beyond land rezoning and infrastructure, favouritism also impacts decisions housing and rental affordability decisions.
Assuming you hold income levels and monetary policy settings constant, there are effectively two ways in which housing can be made more affordable.
First, you could encourage greater volumes of new housing at lower pricing points. This could be achieved by opening up new greenfield areas, delivering more housing in regional cities or by encouraging units and flats rather than detached houses.
Beyond that, housing can only be made more affordable by making houses cheaper – reducing the value of property or at least limiting the pace at which it is increasing. This might be welcomed by the 30.9 per cent of Australians whom the ABS says currently rent their homes or by others who want to enter the market but would be opposed by two more powerful groups.
First, the cashed-up development lobby has no interest in housing being cheaper as this would mean their stock would sell for less. Moreover, there are existing home owners for whom reduced home values would lead to a lower base of net wealth. Comprising almost two-thirds of all Australians, this voter cohort outnumbers renters and those wanting to enter the market by more than two to one. Compared with their renting counterparts, owners are also typically wealthier and more politically active.
The upshot, Murray says, is that politicians might want to make housing more affordable but will not do anything to make housing cheaper.
In this environment, Phibbs says, politicians make noises about affordability but have done little other than first-home-buyer handouts – a phenomenon he says will change as renters grow in number and existing home owners increasingly see their children locked out of the market.
In rental affordability, as well, Murray points out that the needs of tenants for affordable (and thus cheaper) rents butts up against those of the wealthier and more politically active cohort of investors who want to maximise the return they derive from their investment.
Not only is the power of existing home owners and investors a factor in politicians not wanting to make housing cheaper, it is also a direct factor in decisions regarding tax concessions and planning. On tax concessions, the Coalition at least does not wish to remove these for fear of backlash among a significant part of their voter base. On planning, development within urban infill areas and especially in established middle suburbs often encounters fierce resistance from local property owners irrespective of the broader need for greater housing supply in these areas. Again, the wealthy and politically active are favoured.
When new residential zones were introduced throughout Victoria in 2013, local councils in wealthy Melbourne municipalities such as Bayside, Glen Eira and Boroondara rushed to apply the most restrictive of the zones to three quarters of their municipalities despite their municipalities being well serviced by transport links, cultural and education facilities and having close proximity to employment opportunities.
Finally, there are the least powerful stakeholders: social housing tenants. Over the five years to June 2017, the number of public sector houses approved for construction throughout Australia came in at just 17,012 – the lowest rate of building for several decades and less than half of the 38,448 public houses approved over the same period 20 years earlier. This is happening as around 200,000 sit on social housing waiting lists (AIHW statistics, June 2016). The quality of that housing is not great. In a recent survey conducted by the Australian Institute of Health and Welfare, half of all public housing tenants reported at least one structural problem such as major cracks or rising damp with their dwelling. One in six dwellings had three or more serious structural problems.
These people are too few in number and too politically inactive for their voice to be heard. Numbering around 817,300 (excluding those on waiting lists), social housing tenants comprise less than four per cent of the population. Moreover, with this cohort being seen as largely ‘Safe Labour’ voters, neither major party expends much energy in battling over their vote.
Because of this, Murray says there is ‘no political appetite whatsoever’ for public housing investment.
Murray says the consequences of all this are serious. In regard to the land rezoning and infrastructure provision, he says taxpayers are handing billions of dollars’ worth of gains each year to private developers. Due to influence associated with political favouritism, these decisions are not necessarily reflecting the best interests of society. Spending billions in taxpayer money to put railways out to some wasteland where influential developers have land holdings is wasteful, he said. Finally, favouritism of toward existing home owners and the consequential failure to address housing affordability is leading to a significant social divide.
He says action is needed across several areas. First, he would like to see the removal of tax concessions for residential property investment. More social housing should also be constructed, and this should be done according to a needs-based system. Rights of long-term renters should also be improved along the lines of models adopted in some European countries which limit the ability of landlords to increase rents.
Beyond that, he would like to see action to reduce the opportunity and incentive for favouritism and corruption to occur. To address the ‘revolving door’, he would like restrictions upon the ability of those who work in public sector planning roles to accept private sector work in the development industry for a set time after they leave public office.
Moreover, to reduce the overall incentive for grey corruption to occur, he would like to see the implementation of value capture measures. In particular, he would other states and territories to follow the current system in the ACT, whereby landowners who apply to have their land rezoned pay an upfront charge equal to 75 per cent of the assessed uplift in land values which occur from the rezoning. Under that system, the gains associated with the revaluation are split 75/25 between taxpayers and the developer. Merely doing across all other states and territories, he says could raise $11 billion per year for taxpayers.
Likewise, additional value capture mechanisms such as taxes on the unimproved value of land would enable taxpayers to automatically capture back part of the uplift in land values which occurs as a result of public sector infrastructure investments.
He says the best way to tackle corruption of any kind – legal or otherwise – is to reduce the size of the value which can be gained from such activities.
Phibbs agrees that restrictions on the ability of those involved in public sector planning decisions to work for private developers for a period after leaving public office are needed. To improve transparency, meanwhile, he would like every rezoning decision to be made public along with an assessment of the uplift in land value associated with that decision and contact details of those involved with the decision. This, he argues, would make gains associated with land rezoning more transparent and would make those involved in decision making more accountable.
Gruen agrees that capturing back the value of any gain is essential. He says a betterment tax like that first proposed in the 1890s by American Economist Henry Gorge under which tax is levied on increases in the unimproved capital value of the land would be one of the few taxes which did not harm economic efficiency and was fair.
Australia relies on its politicians and public-sector staff to act in the public’s best interest at all times.
Despite the best efforts of many, it seems that decision making is largely impacted by the vested interests of powerful stakeholders.