In August 2020, the RBA’s Keaton Jenner and Peter Tulip released research claiming town planning regulation was at least one of the culprits behind obscenely high apartment prices in Australia’s big cities. 

They argued a competitive market would produce new apartments priced at the cost of production plus normal profit, if the supply of housing were allowed to respond smoothly to demand, that is, without having to contend with unnecessary planning laws (see paper).  Jenner and Tulip show that prices exceed production cost by some $355,000 in Sydney, $97,000 in Melbourne and $10,000 in Brisbane.  They attribute these premiums to height limits and other planning restrictions on the supply of apartments.

The RBA researchers do not define the ‘building restrictions’ which are supposed to be causing the apartment supply shortages.  This is a big problem in the analysis.  There are no substantial differences in the regulation of apartments via planning rules and processes across the three metropolises cited in the analysis, suggesting other factors are behind the wedge between production cost and price.

Brisbane, Melbourne and Sydney all have ample ‘capacity’ reserved in relevant zones and other planning controls for apartment production.  ‘Capacity’ is the quantity of housing that could be built on all available development sites in a district, taking into account operative planning rules, such as height limits, set back requirements and heritage controls, and allowing for non-planning constraints, like lot fragmentation and recently completed development.

The existing urban footprint of the Brisbane local government area has more than 15 years supply of land to accommodate medium and higher density housing.  This is in line with what has been agreed amongst Queensland stakeholders as the stock of reserve development capacity required to maintain a competitive and responsive market.

SGS studies show that development capacity in sought after suburbs in Sydney is typically in the 5 to 15 years range.

The inner urban region of Melbourne has more than 40 years supply of development capacity.  Much of this rests in brownfield sites and commercial centres rather than general residential areas.  Many such former industrial areas and commercial districts have been successfully transformed into mixed use housing precincts over recent decades and there is a continuing supply of such development opportunities.

So, if the planning system has made reasonable provision for markets to respond to apartment demand, why is there a gap between price and production cost as measured by the RBA?

One reason is the scarcity premium attaching to free standing, semi detached and other ‘garden’ homes in those neighbourhoods slated to accommodate some apartment development under local planning schemes.  Any apartments which are built in these neighbourhoods will, to some extent, be seen to be substitutes for these garden homes.  The price of these innately scarce homes will set something of a benchmark for apartments that might come onto the local market.

As the metropolis gets bigger, this scarcity premium on garden homes gets bigger, dragging up the achievable price on local apartments.  On this count, it is not surprising that the price to cost gap observed in the RBA study is greatest for Sydney and lowest for Brisbane.

The scarcity premium on garden homes in well located suburbs in large cities is only part of the explanation.  Perhaps playing the senior role is the reluctance of owners of sites deemed suitable for apartments under local planning schemes to release their land to developers at a reasonable price.

These site owners – rather than developers – enjoy the uplift in land value when a re-zoning or discretionary approval for apartments occurs.  The land owners have every incentive to sit on their pot of gold, which grows ever greater with continuing community stewardship of local amenity and public investment in local facilities and services.

As once put to me privately by an experienced developer of apartments, “site owners will generally only sell land if forced by one of the three ‘Ds’, divorce, death and ‘dem’ taxes”.  Across most Australian cities, we don’t systematically charge licence fees on development rights issued through the planning system.  The value of these rights become capitalised, untaxed, in the price that a developer must pay to secure the site.

Unfortunately, in a lot of economic commentary, this land supply constraint is conflated with the effect of planning controls.  Yes, planning controls place an ultimate limit on the capacity of a particular urban district to accommodate apartment construction, but as noted, planning systems in Australia typically provide for many years supply of nominal capacity, often under policy direction.

An aspiring ‘definitive’ essay published in the Economist newspaper on January 18, 2020 illustrates the continuing confusion between supply constraints associated with planning regulations and supply constraints associated with private withholding of developable land from the housing production process.  The Economist opines…

“To get a sense of the argument that (overtight land regulation is the root cause of high house prices), compare Singapore with Hong Kong.  Singapore has a fairly elastic planning system.  The government owns most of the land. When house-price growth is too strong or the population is rising quickly, the state can release extra land faster than a barman at the Raffles hotel can mix a Singapore sling.  In Hong Kong by contrast, the supply of developable land is controlled by a small clique of oligarchs.  What will buy you a cramped bedsit in Hong Kong will buy you a decent sized pad in Singapore” ( Williams, C. (2020) No Place Like Home, The Economist, Jan 18, 2020, p 6)

Regulation of development in Singapore – that is, the application of a hierarchy of plans governing the prospective development of a district and the enforcement of design controls – is likely to be as restrictive as that in Hong Kong.  The key difference in housing outcomes in Singapore is the control of the land supply.

Australia may not have oligarchs controlling land supply for housing construction, but disparate land owners have every incentive to hold on to their properties and cash in on scarcity premiums when it suits them.  What we can learn from Singapore is not how to do town planning, but rather how to arrange taxes and incentives so that land flows more readily into housing construction on an as required basis.

Bizarre as it might seem, Singapore style public ownership of development land once formed a key plank of Australian Government policy to moderate house price growth.  The Whitlam Government in the early 1970s provided willing State Governments with large grants so that they might buy up future urban land in key growth areas across metropolises and regions.  In South Australia, the Government used these funds to purchase almost all land likely to be required for outward expansion in the then foreseeable future.  The South Australian Urban Land Trust (SAULT) subsequently planned and released land in wholesale lots to bona fide developers and joint venture partners to produce a steady stream of housing that was not only affordable but reflected Australian best practice at the time in terms of housing mix, water conservation, local walkability and other design innovations.  In part, this was made possible by Government capturing the full uplift in value when agricultural land is converted into suburbs.

In Victoria, the Commonwealth funds were used to provide the State’s land developer (then known as the Urban Land Authority – ULA) with strategic holdings of broad hectare land across selected growth corridors in Melbourne, particularly in the north.  For some decades, the ULA’s competitive release of new lots on these holdings moderated house price growth.

Government acquisition of developable land, whether in greenfield or brownfield areas, may still be relevant today, especially in areas of suspected ‘hold outs’ of strategic lots.  But a wholesale Singapore solution is unlikely to be feasible or welcome.  Nevertheless, Government could assert ownership of development rights if not the land itself.  This, after all, is already the consequence of town planning legislation in Australia ( ).  By charging for access to these rights, through a licence fee linked to the uplift in site value associated with development approval, the major windfalls gained by land sellers can be eroded over time, and with this, the incentive to withhold land from development.