Surging immigration, shrinking household size and a construction sector afflicted by soaring input prices and rising interest rates have resulted in plummeting vacancy rates across metropolitan and regional areas alike.  Commentators everywhere are asking why haven’t we built enough houses?

Let’s look at four possible explanations.  First, and most common in the popular discourse, is that State and Territory governments are applying unduly restrictive planning policies and not making enough land available for housing construction.  Second, even if land is available, would-be house builders find the development approval process too costly and risk laden.  Thirdly, developers can’t easily assemble sites of suitable proportions close to the infrastructure they need to achieve project viability.  Fourthly, and relatedly, owners of development sites don’t want to sell their land because they are hoping to cash in on windfalls arising from rationed access to development rights.

The theory that States and Territories are not providing sufficient land for housing construction does not bear scrutiny.  Most jurisdictions apply statutory planning policies which require ample forward supply of developable land across greenfield, brownfield and infill development settings.  The metropolitan planning strategy for Melbourne requires provision of 15 years supply of land ‘approved for development in new growth areas’.  Depending on how land ‘approved for development’ is defined, metropolitan Melbourne currently has between 12 years and 23 years supply of greenfield land.  Elsewhere, Councils proposing to introduce new controls on housing development across their municipalities must also show that there will be adequate development capacity to accommodate 15 years growth at recent take up rates.

ShapingSEQ, the Queensland Government’s planning strategy for the conurbation in the south east corner of that State also applies a 15 year supply policy for both urban expansion and ‘consolidated’ or infill/brownfield development.  The Government reports that in 2021, SEQ had 25 years supply of land available for consolidated development and between 22 and 38 years supply of greenfield land[1].

The Western Australian Government’s Urban Growth Monitor reported in 2021 that “based on historical development patterns, it would take approximately 27 years to consume the stock of non-urbanised land available for development”[2].

It is likely that more than enough land is made available under planning schemes for housing development.  However, getting approval to use that land for housing construction might be subject to a drawn out and difficult regulatory process.  This could involve public advertising of applications to develop, public approval hearings and appeal mechanisms, and unclear requirements of proponents in terms of yield, design and development contributions.  Approval times can stretch into the years making it difficult for developers and their financial backers to judge market demand, construction cost, interest rate and other risks.

These regulatory travails of developers attract a good deal of commentary citing NIMBY-ism as the root cause of restrictions on housing supply.

Redeveloping land for housing in established urban areas undoubtedly requires due diligence.  Sweeping away prudential supervision of development standards is likely to be counterproductive.  A cost benefit analysis commissioned by the New Zealand Government of full deregulation of medium density housing development across all of that country’s major cities showed that, if agglomeration-related productivity benefits are set aside, the housing affordability gains from planning deregulation would be outweighed by the loss of housing and neighbourhood livability.

Nevertheless, there is certainly scope for smarter development assessment processes to improve the elasticity of housing supply.  The good news is that we know what we have to do.  A quarter of a century ago, the Commonwealth Government brought together State and Territory Governments, developers, architects, planners and economists in a Development Assessment Forum (DAF) to establish a ‘best practice model’ for operation of planning approvals.  In the early 2000s, DAF published its findings in a definitive practice guide featuring ‘track based assessment’.  This would see the level of scrutiny, including requirements for advertising, geared to the scale and anticipated impacts of the projects in question.  Small infill developments could be approved via a ‘tick and flick’ process while larger projects which push the boundaries on the planning policy settings for the site and neighbourhood would be subject to more thorough-going evaluation.

NIMBYism notwithstanding, most jurisdictions have forged ahead with the DAF prescription to varying degrees.  The DAF model has been augmented to include use of independent or arm’s length development assessment committees, thereby separating the role of planning policy development – rightly the prerogative of democratically mandated decision makers – from that of appraising individual development applications – which can be undertaken by technical experts.  Accompanying such reforms has been better definition of the subsidiarity principle in relation to development assessment; that is, being clear about what kinds of projects should be approved by the State or regional authority versus those matters which are of a local nature and should be left to municipal councillors, or local development assessment committees.

While we know what to do in development assessment, and there are many success stories across the nation, it is fair to say that progress has been patchy and has fallen well short of the DAF vision.  A push (and a carrot) from the Commonwealth is in order to accelerate universal and harmonized take up of these principles.

The third possible barrier to housing construction is that developers have difficulty finding sites of appropriate size and configuration close to key infrastructure such as transport.  Planning schemes may designate adequate land for development, but fragmentation of lots could put a substantial proportion of this land beyond the effective reach of developers.  Lot consolidation is an expensive and fraught process, always carrying the risk that particular land owners will hold out for unrealistic prices.  Developers that try to dodge these hurdles by taking up land further afield in growth areas are often confronted with the cost of accelerating expensive trunk infrastructure to their site, which itself may be a deal breaker.

Similar site assembly problems plague infill development.  Most Australian cities have for some decades designated areas for medium and high density development, typically focussed on activity centres and high capacity public transport routes.  In theory, the development capacity identified for these nodes and corridors should make the achievement of urban consolidation targets – usually set at 60% or 70% of housing need being met within established areas – relatively straightforward.  In reality, site consolidation has proven to be a major stumbling block in the realization of these planning visions.

This can be seen as a classic ‘market failure’.  It warrants intervention by public sector development corporations to assemble sites, de-risk them for housing construction and wholesale them to bona fide developers.  This could involve a mix of incentives and penalties to encourage otherwise passive land owners to feed their properties into the housing development pipeline.

The fourth barrier is closely related to the land fragmentation challenge.  Some owners of land designated for development whether in greenfield corridors or designated consolidation areas are not motivated to sell their land to bona fide developers because the price signals they’re responding to are not in sync with those in the wider housing market.  They may not want to sell their properties when housing demand and prices are surging because they prefer to retain the option of larger windfall gains in the future, as their quasi-monopoly position strengthens.

This barrier might also be overcome by deploying government development corporations to assemble land for housing development.  Other approaches could include appropriate taxation of these windfall gains.  After all, these gains in property value relate to development rights prospectively secured through the planning system, rather than the efforts or the value added by the land owner.  In principle, these development rights belong to the Crown, not to individual holders of freehold or leasehold title.  The Crown is entitled to levy a licence fee for the granting of these rights.  If a way could be found to exact this payment without compromising the housing development pipeline, not only would fairness be served but so would efficiency in housing supply as rent seeking behaviour by land owners would be deterred.  Justice would also be served if the proceeds of these licence fees were shared with First Nations people – the true owners of the rights in question.

[1] https://dsdmipprd.blob.core.windows.net/general/media/LSDM_2021_SEQ_LGA_SummaryResults.pdf

[2] https://www.wa.gov.au/system/files/2023-02/Urban-Growth-Monitor-14-Exec-Summary.pdf

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