Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E4. Housing affordability

E4–4 The effect of non-tax policies on housing supply

A range of policies restrict the supply of new housing, whether in new 'greenfield' areas or in infill projects.

Planning and zoning, approvals and building regulations

Features of the planning system intend to enhance the efficiency of land use in two ways: by managing or preventing perceived negative spillovers from development activities that may extend beyond the site of the development itself; and by facilitating positive spillovers through the provision of public goods (National Housing Supply Council 2009). However, planning can also add costs, such as where the regulations are not well-targeted and lengthy development assessment processes are involved. The key question is whether the benefits outweigh the costs.

The zoning process is one aspect of the planning system that controls the manner in which land can be used and regulates the supply of land for new housing. Zoning can have many rationales. It can be used to manage land use to protect the property rights of neighbouring land owners. Zoning can reduce spillover costs by congregating spillovers (such as noise pollution) in common areas (such as industrial zones). Some forms of infrastructure may also be provided at lower cost if they are specific to some forms of land use. Zoning is therefore one mechanism for coordinating different uses of land and reducing spillover costs between owners.

Zoning and planning also can reflect other public policy objectives. A number of Australian cities employ boundaries or growth corridors that aim to limit the expansion of urban land. Limiting the expansion of cities can reduce the need for additional infrastructure, which tends to be more costly to deliver further from urban centres. These limits can be used to contain urban sprawl. The desire to contain sprawl can be motivated by cost considerations, such as reducing costs caused by congestion that results from longer commuting times. Objections to urban sprawl often reflect a range of values, such as a preference for non-urban land to be preserved or a concern that more distant communities may be socially isolated, particularly if the communities do not have access to public transport.

The use of zoning and local interpretation of zoning settings, however, restricts the supply of land for housing and necessarily increases its price. While land values for different types of rural land can be in the range of $50 to $5000 per hectare, the value of land on urban fringes can be substantially higher. For example, the value of land can increase by $300,000 to $400,000 per hectare when zoned for residential purposes (Department of Sustainability Victoria 2005). Such a significant increase will largely reflect the value that results from restricting supply.

Land already zoned for residential use is still subject to a range of constraints on its use. This may include preventing the construction of higher-density dwellings (such as dual occupancy or multi-story dwellings) in certain parts of a city. These restrictions may be motivated by similar reasons to those that underlie zoning itself. For example, a new higher-density residential development may impose social costs on existing residents by lowering the amenity of an area or congesting infrastructure. Another type of spillover is a 'pecuniary' spillover where increasing supply reduces the value of existing homes. Existing owners may therefore oppose the removal of restrictions on the supply of housing that maintain house prices at high levels. Limitations on higher density in existing urban areas may harm housing affordability more than restrictions at the fringe. This is because it would be cheaper to house people in areas close to services, transport, workplaces or places of natural beauty. The higher land and house values in inner-urban areas also reflects the fact that these areas are where more people want to live.

The removal of such building restrictions is not justified simply because it would reduce housing prices. Concerns for housing affordability need to be balanced against other policy objectives. Further, potential exists for some of these objectives to be addressed more effectively through price mechanisms. For example, moves toward more effective road pricing and congestion charging would reduce the need to use a growth boundary as an indirect way of reducing congestion costs. For many of the other policy motivations, however, there are clear trade-offs that need to balance concerns of competing groups who can benefit or be harmed by the maintenance of housing restrictions.

One such trade-off is reflected in the governance issues that affect development. In general, State governments are responsible for determining the plans for a city, as these require coordination across a number of local councils and the provision of large-scale infrastructure, for which they are responsible. Local governments often control the zoning or approvals that put broader plans into effect, such as by allowing higher-density housing in the areas designated by the plan. This can result in tension between the wider objectives, which can often include objectives for higher-density housing, and the decisions of local government, which reflect the concerns of their citizens who are most strongly affected by change. It can therefore be difficult for State governments to implement urban infill strategies. There appears to be scope for reforms to planning governance to achieve greater clarity in the roles of institutional policy-setting and decision-making between levels of government (National Housing Supply Council 2009).

Regulations on the use of land need to be governed by approval processes to ensure they are enacted in a transparent and fair manner. These processes require consultation with affected stakeholders and assessment against a range of criteria, such as environmental requirements managed by Australian government legislation. Where these processes are slow, they add to costs of house building and the risk of developing land, thereby reducing the supply of housing. There is some evidence that delays have increased and that approval times can be 50 per cent longer in inner-urban areas than at the fringe (Productivity Commission 2004). Where approval processes are streamlined, they are likely to result in supply being more responsive to changing conditions.

While much of the recent increase in house prices reflects increasing costs of land, higher building costs can also affect housing affordability. National building codes mandate a minimum quality standard of construction. These standards ensure a minimum quality standard to ensure safety, promote environmental outcomes or improve the energy efficiency of buildings. Standards may be imposed to correct perceived market failures, particularly information asymmetry between home buyers and builders and spillover costs to the community that parties to the transaction may ignore. Improving the quality of housing raises its cost. These higher costs need to be balanced against the social and private benefits they deliver.

Findings

Higher house prices are likely to result from restrictions on the supply of housing that result from zoning, lengthy approvals processes and building code and other standards imposed on building quality. Housing affordability needs to be considered against the other policy objectives that motivate these regulations.

Scope for reform

Recommendation 69:

COAG should place priority on a review of institutional arrangements (including administration) to ensure zoning and planning do not unnecessarily inhibit housing supply and housing affordability.

Australia is likely to benefit from greater emphasis on housing supply in a range of policy areas. In particular, there appears to be scope for reforms to planning and approvals processes to enable more responsive supply of housing in greenfield and infill developments. However, the Review has not considered these mechanisms and is not in a position to identify those regulations that may prevent or delay viable developments.

Reforms that could promote the more responsive supply of housing will present serious choices for both the Australian people and their governments. Most starkly, 'improving' housing affordability for purchasers involves policies that cause house prices to be lower or grow more slowly than the community would otherwise expect. While this will benefit those who gain access to housing, it will affect the wealth of the majority of home owning Australians.

Increased housing supply may also change the shape of Australian cities and towns in ways that many existing residents may not desire. How different tiers of government balance their concerns against those of potential new residents is an important question of governance. This suggests that a serious community dialogue is needed on the distribution and quality of housing across Australia. As a first step, the COAG should review the administration of land use policies by local councils and planning authorities, with a view to facilitating greenfield and infill developments.