It’s important to unpack just how planning regulation might affect the responsiveness of housing supply.

The purpose of town planning is to bring about a pattern of land uses and built forms that will optimize the net community benefit from urbanization.  This task could not sensibly be entrusted to laissez faire market transactions because of the multiple positive and negative externalities involved in city building.

In the first instance high level strategic planning will be applied to establish the structure of land uses and the associated infrastructure for a region, district or suburb.  Typically, this establishes the broad zoning of land into one or a combination of residential, commercial, industrial and public uses.  For land designated for residential development, it is common for these higher level strategic plans to outline expected densities, grading from detached dwellings on their own allotments through to high rise apartments.  But these density designations are rarely fixed or prescriptive; they are there as a guide for more detailed precinct and site level planning.

High level strategic planning therefore defines what might be called a ‘gross capacity’ for housing development across the area in question (element (A) in the following chart).  Most Australian States require strategic plans to provide ample capacity for market supply of housing.  Usually, a quantum of land or buildable space needs to be designated equivalent to around 30 years of recent annual take up for housing construction.

Further, more-fine grained, town planning will need to be applied before any of the gross capacity identified in high level strategic plans can be made available for housing development.  This work calls up skills in urban design and infrastructure planning (item (B) in the chart).  The former will address functionality, livability and sustainability at the precinct, street and site levels, dealing with issues like walkability to services, streetscape, tree canopy, climate robustness and amenity in the public realm.  Meanwhile, infrastructure planning tackles how essential services and assets such as community facilities, public open space, water cycle management, active transport, roads and other utilities can be delivered (and funded) efficiently and equitably.

After due debate and scrutiny through the local and State political process, the products of this fine grained planning will be enshrined in the regulatory documents with which most developers will be all too familiar.  These set out what is statutorily expected of proponents of housing projects.  Requirements may cover site density, height, set-backs, design harmonization with existing development, usage share contributions for road, drainage and community facility investments, inclusionary requirements for parking, public open space, social and affordable housing and on-site stormwater run-off retention, conservation of pre-contact cultural values, conservation of post contact heritage and maintenance or restoration of biodiversity values.

Generally speaking, Councils lead this more detailed town planning, fitting in with the higher level strategic plans which, in the main, are prepared by State or regional agencies.  Recently, State Governments in a number of jurisdictions have moved to take over this precinct planning work for areas which they deem suitable for accelerated higher density development.

The refined capacity for housing development that emerges from the precinct planning process – regardless of whether it is led by State or local government entities – will not necessarily constitute useable capacity for housing developers.  Projects which fit within the standards and requirements established through detailed local area planning have to be commercially viable.  Many planning schemes make provision for higher density housing around outer suburban activity centres, in line with sound urban design principles.  However, it may be some time before the achievable prices for apartments in these outer urban locations are at a level which can support the costs of project delivery and the developer’s warranted margin for profit and risk.  So, this nominal capacity for housing development in the planning system may be dormant, pending the rate of maturation in the local housing market.

To the extent that town planning dampens housing supply responsiveness, the problem is likely to rest in element (B) – the establishment of standards and requirements to guide the development approval process.  Unlike the case studies which dominate the US literature on ‘YIMBYism,’ the issue in Australian cities is unlikely to be about broad scale prohibitions on residential intensification.  In Australia’s State controlled planning systems, most jurisdictions, as noted, require Councils to provide substantial stocks of developable capacity and scrutinize local government planning proposals accordingly.  Rather, the Antipodean culprit is more likely to be the lack of clarity about what is expected of proponents in areas enabled for housing intensification.  Otherwise market achievable capacity either remains untapped, or is unnecessarily delayed in its exploitation, because of the additional risks associated with this planning uncertainty.  These can manifest in protracted periods for development assessment without bankable knowledge of the outcomes, and the costs of litigation.

This lack of clarity in what is expected of housing developers was not always part of the Australian planning system.  How did it creep in?

Ironically, one explanatory factor relates to the pro-market planning reforms undertaken in the 1980s and 1990s as part of National Competition Policy.  Previously, planning rules had been highly prescriptive across most of Australia.  Land designated for housing development in strategic plans was carved up into discrete density categories, and proponents were required to meet unambiguous standards around set-backs, heights and parking to secure a permit to proceed.  Economists critiqued this regulatory regime on the grounds that a crude, one-size-fits all approach wastes development capacity; that is, proponents would be arbitrarily limited to a given density when, in individual site circumstances, more housing could be provided than what the rules permitted without infringing the amenity of neighbours or compromising strategic planning objectives for the district.

Following this critique, statutory planning practice was to move from a prescriptive to ‘performance based’ approach.  Planning schemes would set out performance requirements expected of housing projects, covering such things as overlooking, overshadowing, infrastructure loading etc. but leave it up to the initiative and ingenuity of proponents to offer design solutions to meet these outcomes.  Proponents would not be tied to a pre-determined solution around these design parameters.  However, if they were disinclined to take on the challenge of a customized design solution in line with the performance requirements for whatever reason, they could readily secure themselves a development permit by complying with a default set of design standards around height and density.  These were known as ‘deemed to comply’ provisions and would be set at conservative levels to protect local amenity.

These reforms swept the planning system, but two things went wrong.  Firstly, contrary to best practice, few adoptees of the performance based approach in State and local governments managed to define their outcome requirements in quantitative or measurable terms.  Rather they were described qualitatively.  This stoked disputation, procrastination and litigation as to whether a proponent’s design solution met the performance objectives set out in statutory plans.

Secondly, few adoptees bothered to set out conservative deemed to comply provisions.  As a result, the only option open to proponents was to make a pitch to decision makers around the performance of their projects against loosely defined objectives.

Sadly, in seeking to resolve the inefficiencies in prescriptive planning systems which arbitrarily capped development capacity, the planning reforms of three decades ago may have set up a frying pan to fire scenario.

The uncertainty which plagues planning regulation of housing development can also be linked to the question of value capture.

Development rights in this country are reserved by the Crown (the State).  Once secured by a proponent (or a speculative trader), development rights have a financial value.  This relates to both the necessary targeting, or rationing, of development rights in pursuit of an adopted plan for a locality or district, and public investment in infrastructure and other services which underpins broader urban functionality and amenity.

If there is no public capture of this financial value, it will be privately captured as a windfall by the owners of the land subject to development approval.

In the absence of systematic public retention of value uplift – by way of a development licence fee or similar – many planning authorities see it as part of their remit to negotiate value sharing on behalf of their communities, on a case by case basis.  In this world, it makes sense to keep performance requirements vague; this provides a platform for negotiation on the community’s behalf.  Unfortunately, the harm done by way of diminished supply elasticity and additional transaction and risk costs in the development process could well outweigh the trickle of community benefits generated by negotiations over development approvals.

Resolving the uncertainty question in the planning system requires a ‘take 2’ on a performance standards approach, which, this time, should include quantitative, non-negotiable and readily discoverable development requirements around site design parameters and all development contributions, including for social and affordable housing.  Take 2 should also give proponents the option of a fast route to approval if they comply with a conservative set of default standards and development requirements.

Resolving uncertainty also requires a simple system of development licence fees.

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

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