These issues are always complex and it is easy for decision makers to be distracted by furphies.
The current spike is housing prices is driven by many factors including a shortage in supply, the slowness of the planning system, the consistent piling on of new solutions to the issues of the world onto the price of new homes, record low interest rates, first homes owner grants, stamp duty concessions for first home buyers, the Homebuilder grants, returning ex-pat families and more. The RBA were talking about keeping interest rates low for three years. They still are, but the language has changed. The RBA is watching the CPI and it is watching housing prices. Further, APRA will be keen to use their leverage with the banks to limit the availability of credit for borrowers if they feel we are heading into a housing prices bubble. This complex issue demands serious analysis and the full and urgent attention of the NSW planning system.
On the supply side
The Supply of new homes in Greater Sydney is low – The NSW Productivity Commission clearly holds the NSW Planning System accountable for rising housing prices and the under supply of housing. The Productivity Commission states boldly:
“The existing planning system is not delivering for New South Wales” (NSW Productivity Commission Green Paper, page 221, September 2020)
“… inevitably, when demand for housing outstrips supply, prices and rents rise” p.221
“To improve the affordability of housing, we need more development, not less. And we need a planning system that will deliver it”. p.221
“With a relatively unresponsive planning system, New South Wales completed 212 dwellings for every 1,000 extra people over the 10 years to 2018. This compares to Victoria and Queensland that have each completed 295 dwellings for every 1,000 extra people over the same period”. p.223
This independent NSW government analysis of the dismal state of the NSW planning system was based on figures before the planning system ground to a halt under the weight of GSC strategic planning, new Local Environment Plans, Local Strategic Planning Statements, Housing Strategies, then COVID-19.
There have been two factors at play here. The planning system (The EP&A Act, Councils, DPIE, Government policy and as a result, the Local Panels, the Regional Panels, the Independent Planning Commission) is complex, slow, duplicative and a massive hand brake on the productivity of the State. DPIE have acknowledged this but the slowness of change is hampered by the Act and the desire to hand back responsibility for decision making to Councils and independent panels. Even if Government’s abrogate responsibility for decision making and hand them to Councils or independent panels, they remain responsible for the outcome of the system. The NSW planning system is a creature of the NSW parliament and its law – the EP&A Act – and it is not serving us well.
To bring us up to date, Development Application approvals in Greater Sydney in 2020 were very low – 31,000 in 2020. While some in the planning world thought that COVID-19 would ease pressure on demand for housing, they were wrong and we are suffering once more from the consequences of this error.
Low approval numbers inevitably mean low completions in the years ahead. Based on the historical nexus between approvals and completions, the 2020 approval numbers mean there will be only 23,000 – 25,000 new home completions in Greater Sydney arising from last year’s assessments. This is roughly half the target stated in the 2020 NSW Housing Strategy.
New home completions never equate to approvals for a range of reasons. Sometimes this will be due to the withdrawal of finance (for example, many relying on investment funds from overseas have withdrawn due to COVID-19 and others due to punitive Land Tax and Stamp Duty surcharges). The message is starting to get through at the top of DPIE at least, but their drive and zeal for reform is limited by an ingrained culture of resistance to flexibility and to economics.
For example, in November 2020, DPIE published its new “Faster Assessments Program” – a combination of new resources like the PDU, better case management and system improvements to “slash” assessment times by June 2023. Yes – June 2023. After the next State election.
- Rezoning decisions cut by 191 days (a 33% time saving – but still leaving a national performance low of over a year to process a rezoning application)
- Decisions on DAs for larger, regionally significant projects cut by 91 days (a 25% time saving but still setting a most unacceptable target of 279 days on average)
- Decisions on major projects of significance to the State cut by 20 days (a 17 per cent time saving).
The targets for reform show no urgency at all. The reflect the very problem that the Productivity Commission has called out. The need for cultural change and the need for a major system overhaul.
There is no point blaming developers for this – it is simple fact and should be taken into account when planners set housing targets. They have overseen a system which consistently results in an under supply of Housing. The NSW Productivity Commission found that:
“Housing construction has persistently fallen short of projected need. Even during periods of peak construction activity, the number of dwellings completed has not been sufficient to alleviate the accumulated undersupply.” P.221
Not only are the approval numbers low, the slowness of the system is extremely costly and this adds to housing prices. The continual battle with the State, Council and other government agencies in obtaining development approval has significantly contributed to delays in starting our developments. The establishment of the Planning Delivery Unit in DPIE is belated recognition of this crisis – and it is a great step forward – but the delays remain.
The time it takes to obtain development consent (even if it is a fully conforming proposal) is on average 12 months, if not longer. The delay adds to the perception that developers are holding the delivery of stock but in reality, developers are reluctant to release lots for sale ‘off-the-plan’ until there is certainty the DA will be approved without any significant changes. In additional, market conditions may have changed during the time the DA was lodged to when consent is achieved. Disruptions to the market such the GFC, COVID, and the banking royal commission as examples that have impacted the industry more recently and over the years
Land that has been rezoned for housing is waiting for Government agencies to deliver infrastructure
In greenfield development sites across the outskirts of Greater Sydney the Government points to land that has not seen development despite it being rezoned for development. This is due to four causes:
- Infrastructure has not been completed by Government agencies
- There is currently no demand for the housing type that the land has been zoned for (eg. Leppington is all zoned for high density apartments – yet none have been built because there is no demand for that housing type at that location. So you have a rail station, a car park and a bunch of empty chicken sheds.
- The land is zoned for development, but the ownership is fragmented with no government plan to resolve this issue (eg. the entire suburb of Rossmore)
- The planning system requires further steps which have not been completed (eg. in Wilton, the land is zoned, but you can’t lodge a Development Application until the Council completes a Development Control Plan and a Local Neighbourhood Plan (this has been two and a half years in the making so far).
Feasibility is cruelled by the uncompetitive cumulative impact of fees and charges
The cumulative impact of government fees and charges challenges the feasibility of development. It is noteworthy that those producing new housing (thus putting downward pressure on housing prices) get hit with massive DA fees, Local Infrastructure Charges, State Infrastructure Charges, Voluntary Planning Agreements to pay for other local community projects, Affordable Housing levies, as well as all the normal corporate taxes (Payroll tax, Stamp Duty, Land Tax, Company Tax and GST). The Productivity Commission has completed a review and made recommendations for reform of the local infrastructure fees and charges framework in NSW. We eagerly await the Government’s response.
Demand Stimulus has also driven new home prices up
As noted above, on the demand side, a large number of ex-pats have returned from overseas (though a similarly large number of temporary migrants have also left our shores). This has gone a long way to offsetting the impact of the COVID-19 plummet in permanent and temporary migration. So the drop off in demand was more a shift in demand – and was not as initially anticipated. Many Councils sought to go slow on housing approvals using COVID-19 and the drop in migration as a rationale. This is coming back to bite us all through steepling new home prices now. Confidence has returned to the Australian economy and to New South Wales in particular. GDP growth was an astonishing 3.1% in the December quarter at the end of last year and it is likely to further improve this quarter.
In the meantime, both the Commonwealth and State Treasuries are urging their respective governments to do everything possible to expedite a return to normal levels of both temporary and permanent migration. This will further exacerbate demand for the limited supply of housing.
The planning system needs to move fast and be flexible. Plans to achieve a 25% reduction in the time taken to review planning proposals over 24 months are unambitious and reflect the very problem we face – a highly unresponsive planning system and Act.
Do developers land bank – is it their fault there is an under supply?
This argument comes from groups like the Better Planning Network – blaming developers for “holding land with DAs”.
The notion that developers are ‘land banking’ is ill-conceived. There are very few developers, including the larger corporates, in our sector that can hold ‘zoned land’ that is DA approved for long periods of time. In greenfield development locations, the development community unanimously advise that there is currently a boom in demand and they can’t construct land subdivisions fast enough to meet the market. Very soon – the approval process will result in very tight constraints in new home builds and this will push prices further upward as well as having a flow on impact into the apartment market.
There are normally three key factors in developers “land banking” (or not proceeding with construction after receiving a consent):
1. The approvals for potential supply are in areas of low demand, ie, apartment’s in Leppington where the demand is for houses – but the land prices and taxes are set on the basis of high density development so there is no feasible solution.
2. Unresolved, uneconomical, or un-funded servicing and contributions plans.
3. Existing landowners demanding retail value from developers for undeveloped land preventing consolidation.
A further reason why construction does not commence is typically because of the availability of bank and non-bank finance; and more recently a lack of off the plan sales for new apartments. The ABS approvals show the continued underperformance of approvals in NSW, and this combined with various taxes, fees and charges (as well as the impact of Opal Tower and Mascot and the Building Commissioner all scaring people away from off the plan sales) cumulatively is the problem.
So all this is complicated and multi-factorial. But it is the planning system (legislation, policy and practice) that drives the time it takes to get land re-zoned, agency consents granted and eventually for consents for construction. It is the planning system that consistently sets approval targets too low to meet demand thus systematically driving up prices. It is the NSW planning system that is too inflexible to deal with changes in demand. After a decade of under supply, something dramatic needs to change. While no-one is blaming the planning system for the impact of COVID-19 or the GFC, the lack of supply of housing to meet demand and the resultant spike in new home prices, ultimately, is determined by the economics of supply and demand. Even with very low interest rates, process will go down if there is an over-supply of housing in the locations where there is a demand for housing.
The first thing that DPIE must do is own the problem and stop shooting the messenger (be that the Urban Taskforce, the RBA, or the NSW Productivity Commission). The second thing is accept the need for significant change (the NSW system has been under performing in terms of housing supply for a decade). The third thing is to be bold. Move quickly. The economy urgently needs action now (not in two years’ time).
Let’s hope things change fast of it could be our planning system that drives housing prices up to the point that it becomes a major political head ache and if it also drives up inflation, yet another can of economic worms could open.
That would be a very disappointing outcome with implications for the whole of Australia.