The co-author of a paper which claims that planning restrictions add hundreds of thousands of dollars to the cost of apartments in Sydney has hit back at critics of his analysis.
In an online webinar delivered to the Urban Taskforce, Centre for Independent Studies Chief Economist Peter Tulip said criticism which his paper attracted from parties such as NSW Planning Minister Rob Stokes and the Planning Institute of Australia has been misguided.
According to Tulip, the approach adopted in the paper has been used across different countries and is considered to be common practice and best practice.
He says critics of his approach are wrong.
“… the Planning Institute of Australia and Rob Stokes, the Planning Minister, have complained that our approach is contested,” Tulip said.
“I think that is unfair.
“It is true that there are a few urban planners and a few cranks on Twitter who essentially don’t understand what we are doing. But amongst people who have looked closely at this issue – and in particular, researchers on the topic – this approach is not controversial at all.
“What you are seeing is well accepted, standard research. It’s standard, simple economics.”
Tulip’s comments follow last month’s publication of a paper which he co-prepared for the Reserve Bank of Australia (RBA) with RBA with Research Economist Keaton Jenner.
That paper concluded that imposts created by planning restrictions were adding $355,000, $97,000 and $10,0000 to the average price tag of apartments in the metropolitan areas of Sydney, Melbourne and Brisbane respectively.
It has been heavily criticised, however, by NSW Planning Minister Rob Stokes along with the Planning Institute of Australia (PIA).
In Parliament, Stokes said the report ‘completely fails’ to consider wider community costs that any failure to adopt a strategic planning system would entail.
This includes costs associated with localised traffic congestion; retrofitting sewer, water and power infrastructure to cater for more residents; retrofitting health and education resources to accommodate more families; and additional land costs which taller buildings necessitate for open space provision.
This was in addition to further costs such as noise, overshadowing, wind corridors, heritage and urban character.
During his presentation, Tulip explained the methods which were employed for the paper.
Taking the example of Sydney, he said the additional cost of planning restrictions was derived by taking the average price tag of new apartments and deducting from this the cost associated with supplying apartments (including developer margins) specifically by raising the height of buildings.
The difference represented the total amount of impost which can be attributed to planning restrictions.
When deriving the sale price, Tulip says that: (a) an average rather than a median over the year of 2018 was used; (b) new dwellings only rather than established ones were used; and (c) the focus was exclusively on apartments – townhouses and detached houses were not considered.
None of those decisions, he said, were controversial. The number for the sale price ($873,000) was ‘very solid’.
On cost, Tulip says this is more challenging as there are different ways that apartments can be supplied – each of which uses varying data sources and assumptions.
When estimating the cost (including developer margins), the report looked at the additional cost which is incurred through raising building heights and adding additional floors.
Such an approach, Tulip says, offers the ability to exclude land costs. These not only complicate the analysis but add to overall outlays and therefore render lower density housing forms less effective from a cost viewpoint compared with higher density counterparts.
In addition to construction costs, the paper considered additional outlays in areas such as professional fees (legal etc.), marketing, finance, infrastructure and developer profit margins.
As with the sale price, Tulip is confident with the paper’s numbers on the cost side of the equation.
Speaking of the construction cost component, he says the $340,000 figure (for Sydney) is based on data from the ABS Building Activity survey, which is comprehensive in both its coverage of the industry and the items it includes as part of the construction cost.
On the first point, the ABS survey covers most builders within the industry and almost all high-rise builders.
In terms of items covered as part of construction costs, meanwhile, the ABS data includes everything from underground carparks to equipment (e.g. HVAC), in-built furnishings, common areas such as foyers and stairways and fees for design consultants and project managers.
From this, a further $24,000 is added to represent the additional marginal construction cost which arises from building new floors on top of existing storeys – a recognition that the costs of delivering additional dwellings and storeys increases as buildings become progressively taller. Data for this, Tulip says, is also reasonably solid.
On the other costs, Tulip says the main item which causes discomfort is the developer margin – for which there are arguments for either higher or lower numbers to be used.
In determining this number, Tulip and Jenner assessed competing considerations and arrived at the best possible estimate – albeit with room for disagreement about this number.
Add this up and the total cost comes to $519,000. Deduct this from the price tag and a difference of $355,000 remains for Sydney with smaller differences for Melbourne and Brisbane.
Looking into more detail, Tulip says the discrepancy between price and cost for Sydney is primarily concentrated in inner suburbs.
Whereas the price/cost discrepancy barely existed in outer areas such as Penrith and Liverpool, that in places such as Leichardt, Eastern suburbs and Northern Sydney adds to more than $500,000.
Tulip says these are the areas where additional building could deliver most value.
To be sure, Tulip acknowledges a limitation in that the paper deals only with the costs of planning regulations and fails to account for any benefits which those regulations may deliver.
This is a central concern raised by critics of the paper, who feel that it fails to account for broader social and economic benefits which effective planning enables.
Tulip says such a limitation arises out of the need to deliver only one paper at a time.
Indeed, benefits associated with planning restrictions will hopefully be quantified through further research.
Nevertheless, Tulip points out that the paper offers no opinion on whether planning restrictions are beneficial or detrimental and merely quantifies the costs of these regulations.
By doing so, he argues that the paper has delivered a basis upon which benefits of regulation can be assessed against the cost based on how substantial such benefits are believed to be.
On those benefits, Tulip also describes a tendency to focus on disadvantages associated with greater density without affording due consideration of benefits which density may deliver.
These benefits can accrue in terms of employment, innovation, vibrancy, social and cultural opportunities and access to transport and amenity.
As to other criticisms, Tulip says these are misguided.
Criticisms that the paper does not consider factors other than zoning which also contribute to higher apartment prices ignore the point that these are not alternative explanations to zoning in terms of more constrained affordability but are rather complementary and additional matters which further drive up values.
Moreover, these factors can bid up prices only where supply-side constraints prevent the delivery of sufficient numbers of units to satisfy demand.
Next, there are some who assert that current declines in apartment prices reflect an oversupply of dwellings rather than the shortfall to which the paper refers.
This, Tulip says, is also wrong.
Whilst apartment prices have declined, the current oversupply is a short-term cyclical phenomenon which reflects an abnormally strong upturn in the building cycle over recent years.
Once this subsides, longer-term structural shortages will again become more evident.
Also flawed, Tulip Work says, are ideas that housing ‘shortages’ referred to in the paper are really location premiums.
Locations, he says, can only command premiums where supply is restricted.
Indeed, he says, the difference between a $1 million price tag in parts of inner Sydney as opposed to a $550,000 approximate entry point for those in inner Melbourne arises not because Sydney is a ‘premium’ but rather from the latter city having allowed a greater number of apartments to be constructed.
Finally, arguments about other locations which have less restrictive building height regulations still having expensive housing ignore other factors which may have contributed toward housing costs in the cities in question.
Still, not all are happy.
Referring to the argument that that the methodology was commonly used, Planning Institute of Australia Chief Executive Officer John Brockhoff said this did not justify what he says is an incorrect approach.
“Flawed methodology is wrong no matter how often it is used,” Brockhoff said.
“It is important that models distinguish optimal density from optimal supply (over a period of time). Not making this distinction has led the RBA paper down a misguided path and resulted in wrong conclusions.
“In addition, the work does not consider broader value contributed by planning in creating productive and liveable cities.”