The Productivity Commission and the Grattan Institute have weighed in on the nation’s housing affordability crisis, suggesting that nothing short of radical planning deregulation is required to bring prices and rents within reach of ordinary Australians.
At the centre of their argument is evidence from New Zealand where the Central Government has moved to strip away planning constraints on medium density housing development. In the Government’s latest initiative, all councils in ‘Tier 1 cities’ – Auckland, Hamilton, Tauranga, Wellington and Christchurch – are required to up-zone almost all of their residential areas to implement default Medium Density Residential Standards (MDRS) which give proponents automatic permission to build three units of up to three storeys on any site.
Based on experience with a more contained deregulatory move undertaken in Auckland in 2016, it looks like the MDRS policy will boost housing supply, lifting rental vacancy rates and pushing down rents.
But is this deregulation good policy?
A cost benefit analysis of the MDRS initiative undertaken by PWC for the New Zealand Government is instructive.
According to PWC modelling, the MDRS will generate an additional 74,600 dwellings across the Tier 1 cities over 5 to 8 years from commencement, compared to what might be expected in these urban areas without the reforms. This is expected to dampen dwelling prices creating a benefit for consumers valued at NZ$1.015 billion.
However, this gain in housing affordability is won at the cost of smashing housing utility and neighbourhood livability. PWC’s findings show that implementation of MDRS would lead to substantial additional costs including more congestion, loss of sunshine to dwellings, loss of views and loss of environmental quality.
Looking at housing and residential amenity issues alone, the PWC analysis indicates that MDRS would generate a welfare loss for New Zealand of the order of NZ$2.2 billion. This is the difference between the gain in consumer surplus from lower housing prices and the costs generated by the policy in lost amenity.
What saves the policy in headline terms is that the increase in housing densities in well located areas generates a huge benefit unrelated to housing affordability. Having more workers available in accessible areas improves the functioning of the labour market and boosts productivity. This agglomeration benefit is so large at NZ$5.5 billion that a net community benefit of NZ$3.3 is produced for the MDRS initiative overall.
If planning deregulation along the lines of MDRS were the only means by which housing supply might be improved to the extent of producing an additional 75,000 dwellings over the medium term, the policy might be regarded as economically justified, regardless of the loss of amenity.
But it isn’t the only way.
Planning schemes across Australia’s major cities typically make ample provision for additional housing in preferred locations linked to public transport and activity centres. The problem in unlocking this supply is site withholding by land owners (not developers), fragmented development parcels and inadequate infrastructure to support densification. These are all key market failures that could use some attention from the Productivity Commission and the Grattan Institute
Governments could do a lot more to build a pipeline of medium density housing development in preferred locations by applying licencing fees to deter rent seeking by passive land owners, mandating public development corporations to assemble development ready land and better coordinating open space, transport and community facilities provision in areas slated for redevelopment.
A ham-fisted policy of planning deregulation would likely lead to a net loss of housing utility. It would also deliver inferior agglomeration benefits because of the indiscriminate dispersal of densification. Why take this huge risk when better options are available?
Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd
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