3.1
Previous government reports have often concluded that supply restrictions due to the planning system have substantially boosted the cost of housing. For example, the House of Representatives Standing Committee on Economics’ 2016 Report on the inquiry into home ownership concluded that:
The committee’s view is that government policy in this area should predominantly focus on boosting dwelling supply in underserved markets. Many of the witnesses before the inquiry stated that a lack of supply was contributing to rising house prices in Sydney and Melbourne. In the committee’s view, state and territory governments need to do more to adequately address land supply and ensure that existing policies and processes are not unnecessarily causing an undersupply.
3.2
More recently, the New South Wales (NSW) Productivity Commission’s 2021 White Paper argues that:
Housing supply has failed to keep up with demand. That has led to an undersupply of housing, increasing the cost of living for households and making New South Wales a less attractive place to live and work.
3.3
When considering what is ‘holding back housing supply’, the NSW Productivity Commission further stated that:
One of the fundamental determinants of housing supply in New South Wales is the strict regulation of land use.
…
Housing will continue to fall short unless housing targets are reformed.
3.4
Reports from the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and foreign governments have reached similar or stronger conclusions.
3.5
The evidence has only strengthened since most of these reports were written. As one United States (US) commentator observes, ‘[a] steady drumbeat of new research continues to confirm that building new housing… makes housing more affordable.’ This chapter discusses that evidence and related issues.
Evidence of a housing shortage
3.6
Many submissions argued that Australia had a shortage or undersupply of housing. According to the Urban Development Institute of Australia (UDIA):
This historic undersupply problem emerged acutely from the 2005-2012 period when the then-National Housing Supply Council (2012, 2013) determined that a national accumulated dwelling supply shortfall was north of 200,000 dwellings. Australia has been playing catch-up ever since, and despite the record levels of residential construction over the 2017-2019 period, supply outpaced demand by only 4,500 dwellings on an annual average, according to NHFIC [National Housing Finance and Investment Corporation].
3.7
Domain broadly echoed this view and submitted that ‘Australia has had a chronic undersupply of housing since roughly 2005’, but that ‘[t]his undersupply started to play “catch up” around 2015.’
3.8
Other submissions provided a variety of estimates. The NSW Productivity Commission cited a 2016 NSW Government estimate of an accumulated shortage of 100,000 dwellings in NSW. According to the Grattan Institute:
Australian cities have not built enough housing to meet the needs of Australia’s growing population. Australia has just over 400 dwellings per 1,000 people, which is among the least housing stock per adult in the developed world. Australia has experienced the second greatest decline in housing stock relative to the adult population over the past 20 years.
3.9
Direct estimates of undersupply typically compare dwelling completions with a measure of household formation. To estimate household formation, they assume that household size is given. However, in response to a shortage, the cost of housing will increase which will tend to increase household size. An indicator of undersupply that bypasses this difficult complication is the high and rising cost of housing. For example, the NSW Productivity Commission noted that real residential rents in Sydney (as measured by the Consumer Price Index [CPI], deflated by the index for all groups excluding housing) rose 24.5 per cent between 2005 and 2018. Estimates like these tend to be interwoven with discussions of planning restrictions, outlined below.
The effect of planning restrictions
3.10
Many submissions argued that planning restrictions seriously limited supply and hence boosted the cost of housing. This position was echoed by several builders and developers who appeared before the Committee.
3.11
According to the Centre for Independent Studies (CIS):
These restrictions limit the density of land use. They make it difficult to replace detached housing with townhouses or apartments. When higher density is allowed, height limits restrict the number of apartments that can be included in new buildings. Like any limitation on supply, these restrictions raise prices.
3.12
The Property Council of Australia (PCA) noted some further dimensions of the problem:
Inadequate strategic housing supply. Key states, especially NSW, have failed to provide enough properly zoned land to meet the demand for new dwellings.
Inefficient planning in key states. A culture of ‘no’ or ‘slow’, resourcing gaps and process ‘black holes’ in approval authorities and local governments and between agencies and utilities.
Over-reliance on minimum lot and apartment sizes, directly raising the market entry point regardless of the quality and liveability of the design and the clear market demand for smaller product.
3.13
The PCA argued that the effect of planning problems on supply is shown by ‘stagnant building approval rates for detached housing and declining apartment approvals,’ and the fact that all bar one Sydney council will fail to achieve all its 10-year new housing targets agreed in 2018, according to analysis done for the PCA.
3.14
Many of these submissions pointed to two Reserve Bank of Australia (RBA) research papers which estimate the undersupply of housing by the gap between market prices and the cost of supply. Those papers describe this gap as a standard measure of shortage and of the effect of quantitative restrictions. Estimates are in Table 3.1.
Table 3.1: Estimates of the contribution of planning restrictions to property prices
|
|
|
|
|
Sydney
|
$489,000 (42 per cent)
|
$355,000 (41 per cent)
|
|
Melbourne
|
$324,000 (41 per cent)
|
$97,000 (16 per cent)
|
|
Brisbane
|
$159,000 (29 per cent)
|
$10,000 (2 per cent)
|
|
Perth
|
$206,000 (35 per cent)
|
-
|
Source: Kendall and Tulip 2018; Jenner and Tulip 2020
3.15
A NSW Treasury paper cited by the NSW Productivity Commission, using a different approach, estimated that relaxing floor-area ratios in central Sydney would reduce the cost of floorspace by about 28 per cent. A Victorian Government Department of Treasury and Finance paper cited by the CIS, using a different approach again, found that supply restrictiveness almost doubles the price of detached residential land in local government areas such as Melbourne and Yarra, a substantially larger effect than the RBA estimates reported in Table 3.1. As discussed further below, studies from other countries are extensive and show qualitatively similar results.
3.16
The CIS submission argued that large effects of planning restrictions were also evident in everyday observation, such as the large increases in land values that accompany changes in zoning. For example, in 2014 a property at 661 Chapel St, South Yarra in Melbourne was sold for $20 million when it was zoned for 13 storeys; it was then rezoned for 31 storeys and sold later that year for $56 million. The CIS argued that countless examples like this indicate that legal permission is scarce and a binding constraint on supply - otherwise, it would not be valuable.
Criticisms of a housing undersupply
3.17
Findings of an undersupply of housing were challenged in many submissions. The Committee consider these criticisms and offers its assessment, point by point.
Is there an undersupply?
3.18
The Planning Institute of Australia (PIA) submitted ‘there is no accumulated [housing] shortage’ and cited evidence which indicates that:
…in many parts of Australia – house building has been running well ahead of local household growth for much of the last 30 years (except post GFC) [Global Financial Crisis] and especially recently since 2015.
3.19
The PIA further stated that ‘[h]ousing supply is currently a success story across many of Australia’s cities’:
In 2018, Australia had one of the highest dwelling completions rates in the developed world. Except for South Korea, Australia produced housing faster than other OECD [Organisation for Economic Co-operation and Development] nations at 8.2 completions per 1000 persons… Sydney produced more dwellings than London, despite having a population less than half the size.
3.20
Dr Cameron Murray told the Committee that ‘market housing supply has exceeded household demand’, and stated that Australian Bureau of Statistics (ABS) Census data indicates ‘that dwelling construction has outpaced household growth, with unoccupied dwellings in Australia rising from 4.8% of the total stock in 2001 to 11.2% in 2016.’ To further justify the view that current housing supply is meeting population demand, Dr Murray added:
[t]he fact that rental prices have tracked close to the consumer price index, and below their expected rate which would match household income, suggests that the supply of new dwellings in Australia has easily accommodated the population demand.
3.21
It appears to the Committee that many of these submissions were arguing at cross-purposes. Submissions that claim there is an undersupply of housing are discussing the level of housing or a long-term accumulation that has built up over decades. In contrast, those submissions that claim there is an oversupply are discussing short-term changes. Of course, the two claims are quite consistent. The most comprehensive assessments presented to the Committee were that there was a long-run shortage which has been improving slightly in the past few years.
3.22
Similarly, those submissions that infer an undersupply from prices or rents look at long run changes or the level of prices. Those who think there is an oversupply refer to changes in rents over the past few years. Again, these two claims are quite consistent. The cost of housing is too high, even if rents have fallen slightly from recent peaks.
Would extra supply improve affordability?
3.23
Some submissions argued that achieving greater housing supply will not adequately address housing affordability issues because ‘superheated demand factors swamp any price impact of delivering housing supply into the market.’
3.24
This appears to the Committee to be a logical error. Many factors determine prices. The recent increase in house prices is widely attributed to lower mortgage rates. However, it does not follow that the effect of other factors, such as future changes in supply, need be small.
3.25
Other submissions simply denied that extra supply would improve affordability. The Australian Housing and Urban Research Institute (AHURI) stated:
The affordability of housing and supply of housing are two different things, and it does not immediately follow that adding to supply will improve housing affordability.
3.26
Others who shared this view include the City Futures Research Centre of University of New South Wales (UNSW) which told the Committee that ‘the argument that increased supply will lead to lower prices and more affordable housing is conceptually flawed’ and cited one study that showed that new dwellings do not reduce, but rather moderate price increases.
3.27
Statements like these strike many observers as a denial of basic economics. Mr Jonathan Rochford, Managing Director of Narrow Road Capital, outlined:
Rental housing is primarily a supply-and-demand equation. If the supply of housing grows faster than the population, there will be more properties available for rent and rental affordability will improve.
3.28
According to Dr Shuping Shi:
…when there is enough supply, you won’t have this concern about shortage or the concern that the house prices will go up continuously.
3.29
The Committee observes that, in other markets, when supply increases, prices fall. No evidence was provided to the Committee explaining why the housing market would be different in this respect.
3.30
For quantitative estimates, several submissions cited an RBA research paper on this question. This paper summarises many studies of the effect of supply on prices (technically, ‘the elasticity of demand’) and concludes that a central estimate is that a 1 per cent increase in the Australian housing stock would reduce prices and rents by about 2.5 per cent.
3.31
However, this effect will be slow. The RBA submission noted that:
…almost all the supply of housing already exists, and factors such as regulation affect only the supply coming from the flow of newly built housing. In any one year, newly built housing only shifts the stock of housing incrementally. Even the most flexible construction sector is therefore limited in how far it can respond to and absorb rapid increases in demand… there are limits to the scope to meet increased demand with additional supply.
3.32
The City Futures Research Centre of UNSW similarly outlined that ‘[r]esearch evidence strongly suggests that it would be very difficult to expand housing construction sufficiently to significantly reduce the rate of housing cost inflation, let alone to deflate property prices.’
3.33
The Grattan Institute argued this meant that increases of supply would need to be maintained for very long periods of time:
…adding an extra 50,000 dwellings to Australia’s housing stock – an increase of about 25 per cent on current levels of construction nationally, or roughly 0.5 per cent of the national housing stock – would lead to national house prices being only 1-to-2 per cent lower than otherwise. But these estimates also imply that a sustained increase in housing supply would have a big impact on house prices. For example, if an extra 50,000 homes were built each year for the next decade, national house prices and rents could be between 10 and 20 per cent lower than they would be otherwise.
Effect of supply on affordability for low income earners
3.34
A more subtle question is whether increasing housing supply will improve housing affordability for low income earners. Many submitters and witnesses expressed doubts about this.
3.35
The PIA and City Futures Research Centre of UNSW both identified that new market housing supply is generally not affordable for low income earners, and thus would be unlikely to improve housing affordability for this cohort. Councillor Linda Scott, President of the Australian Local Government Association, agreed and told the Committee that: ‘…increasing supply does not simply lead to an increased availability of affordable and social housing.’
3.36
In the Committee’s view, these concerns are misplaced. They focus exclusively on the direct effect of housing supply. That is, how much will a newly constructed dwelling sell for. These arguments ignore the larger indirect effects. When a newly supplied house goes on the market, it reduces the price of every other house it is in competition with. And they, in turn, reduce the price of other houses. As noted above, central estimates are that the average level of housing costs needs to fall 2.5 per cent for every 1 per cent increase in the housing stock to be purchased.
3.37
It is incorrect to see the housing market as completely segmented. If builders are prevented from supplying luxury housing, the wealthy buyers who would otherwise buy it purchase middle-level housing instead, which pushes out mid-level buyers who then buy low-end housing. Ultimately, people at the bottom are priced out. Studies of ‘filtering’ show that new supply results in long chains of turnover, with all sectors of the housing market benefitting.
Estimates of the effect of planning restrictions
3.38
Reflecting their focal role, the estimates of the RBA research shown in Table 3.1 were criticised in several submissions. According to the PIA:
The authors incorrectly ascribe the difference in average price of housing and the marginal cost of supplying them to a ‘zoning effect’. However, their static modelling methodology is incapable of attributing the results to planning regulation or anything else with the potential to limit capacity. By not taking into account the ‘market absorption rate’ (rate at which stock can be sold into the market while maintaining price) in a dynamic model, their conclusions are irrelevant. At best, the ‘costs’ they attribute to a ‘zoning effect’ reflect amenity value and access to jobs and services in a well-planned city.
3.39
Dr Murray similarly commented on the approach used to derive those estimates: ‘this method does not reveal any information about supply or planning …. marginal and average prices of land lots should not be equal’.
3.40
Dr Peter Tulip, Chief Economist of the CIS argued that criticisms like these were ‘simple misunderstandings that aren’t taken seriously by people who who look closely at the issue’. He elaborates on that position in two papers which defend the estimates in detail. The CIS submission notes that the estimates of the RBA in Table 3.1 are in line with a large body of Australian and overseas research. It pointed to six surveys of the research literature that convey strong agreement with the finding that planning restrictions significantly boost the cost of housing. The CIS quotes The Economist magazine - ‘no one needs any more papers showing that stringent zoning regulations raise housing costs.’ Submissions of the Urban Taskforce and other industry groups made similar arguments.
Land banking
3.41
Numerous submissions argued that private developers restricted housing supply. Although this was presented as an alternative explanation to the role of planning, it is not clear why the existence of land banking would prevent planning restrictions increasing house prices. These seem like distinct arguments. Land banking is discussed separately in Chapter 7.
Box 3.1: Planning reforms in Tokyo, Japan
During the inquiry, the Committee received evidence on the planning reforms undertaken in Japan since the 1990s.
The CIS stated in its submission that Tokyo ‘has several times as many residents as Australian cities but its housing is less expensive’. It pointed to research that shows that Japan responded to housing demand by building houses faster, and in turn has enjoyed lower housing costs, whereas countries that restrict housing, like Australia, have a growing affordability problem.
A Financial Times article referred to in the CIS’ submission stated that to help the Japanese economy recover from ‘the brink of collapse in the 1990s … the country eased regulation on urban development’, giving people the ‘freedom to demolish and rebuild’. It emphasised that the lower housing costs are ‘not the result of a falling population’, rather Japan ‘delivers to its people a steadily improving standard, location and volume of house.’
Dr Tulip of the CIS told the Committee that:
Japan is the famous example or, to be more precise, Tokyo. Over the past few decades, they've built a lot of housing and, as a result, housing prices in Tokyo have fallen in real terms… The central issue is that we need planners to stop saying no and start saying yes. The actual institutional reforms that get you there are a lot harder.
Mr David Reiling told the committee that he had lived in Japan for over five years and had witnessed the enormity of Tokyo as a city. He went on to add:
‘[i]t's growing, and they do not have any of these supply or affordability issues. They have their own challenges, but there are models there which they employ for building houses effectively and affordably.’
Mr Brendan Coates, Economic Policy Program Director at the Grattan Institute also stated that Japan is a good example of a country that has seen reforms to its planning system support more affordable housing. Mr Coates went on to say that Japanese authorities ‘essentially took over the planning system and nationalised it … it's a very liberal planning system that allows you to build the housing you want. Planning has a purpose.’
Dr Cameron Murray disputed the relevance of the Tokyo example, telling the Committee ‘you can pick and choose time periods that show you anything.’ He described the use of this kind of international comparison as ‘cherry picking’, and argued that ‘many countries have cycles in property asset markets that are out of sync.’
Dr Murray noted that between 2015 and 2020, for example, Australia had lower real house price growth than Japan. He further commented:
Pick a place that's currently cheap. You may as well say, 'Darwin's got great planning. That's why it's cheap.'…. Tokyo is twice as expensive as any Australian city, on a per-square-metre-of-rental-apartment basis. The news this year is that Tokyo's apartment prices have reached their bubble highs of the 1980s, when they also had super low interest rates. The fact that properties move in cycles over a sort of 18-year period really confuses a lot of people, especially when cities are out of sync, and you have cities like Houston, in Texas, that follow a mining cycle more than a property cycle. That's my general view there.
Benefits of planning restrictions
3.42
Even if one accepted the argument that planning restrictions have large effects on housing affordability, it would not necessarily follow that those restrictions should be changed. Planning restrictions may have substantial other benefits.
3.43
Mr Saul Eslake, economist and Principal of Corinna Economic Advisory, noted that while he supported planning reform to boost supply:
…there are two sides to this story, and I have a lot of sympathy with the desire of residents in established areas to prevent developments which detract materially from their quality of life (and/or from the value of their properties).
3.44
Mr Coates from the Grattan Institute likewise told the Committee:
Just to be very clear; planning is not a bad thing. We don't want to put a school next to an abattoir. We don't want you to build a whole bunch of housing and then allow an abattoir to move in next door. Planning is about mediating the externality costs that different land-uses have upon one another. But you can go too far, and I think a lot of planning systems at the moment are weighing too much on the side of respecting the interests of those that are living there already and not the interests of those that would move in to those areas.
3.45
The RBA noted that land use regulations ‘promote other social goals’, for example:
…ensuring buildings are constructed safely and that neighbouring residents do not have costs and inconveniences imposed upon them about which they are not consulted; recent concerns about quality and safety defects in higher‐density buildings, including those related to waterproofing and fire safety, demonstrate an ongoing community preference for such safeguards.
3.46
In principle, good planning should ensure that complementary services go together while incompatible uses are kept apart. The PIA argued that there are many benefits of planners, including that they:
undertake strategic planning, forward thinking, plan for land that is suitable and ensuring links with infrastructure and transport;
improve liveability in growing and changing urban areas by setting quality, diverse, sustainable building and place outcomes;
translate land use strategy into spatial plans via rezoning, considering and making trade-offs among local community views and broader stakeholders; and
manage the development assessment process on behalf of the public to assure alignment between proposals and adopted community outcomes.
3.47
The PIA claimed that ‘having a sequenced plan with knowledge of where patterns of housing growth and activity can be located is a pre-requisite for cost effective infrastructure delivery’ and ‘planning for housing supply includes community expectations for improved amenity and liveability.’
3.48
The DSDILGP noted suggestions that land can simply be ‘upzoned’ (that is, zoning changed to allow higher density) and responded that ‘a key matter that must be considered in such decisions is the availability of supporting infrastructure’:
In many locations that may be suitable for urban consolidation there is often a deficit of infrastructure or infrastructure is sized such that it will not support increased population. In greenfield areas most necessary infrastructure is non-existent. Planning for, and delivery of, infrastructure to support increased growth/development is a long-term process and infrastructure supply and delivery requires long term planning and investment. This means that infill development and new growth fronts cannot be immediately established simply by changing zoning. Deliberate and far-reaching decisions need to be made regarding the planning for and funding of infrastructure that is required to support growth.
3.49
Most of the evidence provided to the Committee on the benefits of planning was qualitative and descriptive. There was little quantitative evidence that might facilitate decisions about social trade-offs. One exception was submission of the CIS, which discussed the externalities from restrictions on housing density. It summarised a study showing that in Sydney and Melbourne ‘nearby house prices are essentially unaffected’ by high-rise apartment buildings. They infer from this that neighbourhood amenity is not damaged by increases in density. The CIS submission notes international studies finding substantial benefits from density in the form of productivity growth, high wages, and greater diversity and choice in consumption and employment. Overall, the external benefits of urban density were estimated to be positive. It submitted:
Restrictions on density, like height limits or reserving land for detached houses, would be appropriate if density generated bad spillovers (‘negative externalities’). However, the results above suggest these spillovers, on net, are more likely to be positive than negative. That means many restrictions on density lack justification — they appear to increase housing costs unnecessarily.
Administrative costs of planning
3.50
Evidence provided to the Committee also highlighted the extent to which planning and zoning regulations affect the timeframe of developments. For example, the City Futures Research Centre of UNSW reported that its study of 881 apartment developments in Sydney completed between 2010 and 2020 found that, on average, the ‘planning determination process’ accounted for 33 weeks out of 4.7 years’ total development time, or 13 per cent. The process was a larger percentage of the total time for smaller developments and a smaller percentage for larger ones, which are more complex to build.
3.51
The results of this study were strongly contested as an underestimate by the developers Mirvac and Stockland, with the latter commenting that the time for land to be rezoned (which must occur before assessment of the development application) must also be considered. Mirvac stated that ‘rezonings in New South Wales are now taking in excess of seven years’ and ‘development approvals for civil works’ are taking ‘a further 18 months to two years.’ According to Stockland, ‘we've had a number of instances where developments can take anywhere from five to 10 years to get rezoned, and then you need a year for development approval.’
3.52
Mr Andrew Helmers, Managing Director of MJH Group, gave a builder’s perspective:
Twenty years ago, it used to take us four weeks to get an approval to build a home …. It takes us close to nine months in some areas. The average would be closer to six to get an approval to build a home now.
3.53
Mr Saul Eslake stated that:
… metropolitan planning authorities and inner-city local governments have made it increasingly more time-consuming and onerous to undertake higher-density or ‘infill’ developments on ‘brownfields’ sites – in particular by imposing tighter planning controls, and by providing more opportunities for objections to and appeals against planning decisions.
3.54
The CIS discussed quantitative estimates of the costs of ‘red tape’ and noted several studies, with estimates being of the order of several thousand dollars per dwelling. It concluded:
While the estimates above are significant, they are tiny relative to estimates of the ‘zoning tax’… [including those in Table 3.1 of this Report], which are often several hundred thousand dollars per dwelling. By far the main effect of the planning system on housing affordability comes from the restriction of supply rather than from the administrative burden.
Incentive payments to state, territory and local governments
3.55
Land use regulation is primarily the responsibility of state, territory and local governments (hereafter, just ‘state and local governments’). However, many submissions argued that the Australian Government had a role in encouraging better housing polices. It was argued that state and local governments were overly averse to increasing housing supply. This partly reflects difficulties in financing associated infrastructure, and it partly reflects excessive localism. Although a growing population is good for the broader community, too many governments want others to bear the burden of housing the extra population. For these and other reasons many submissions and witnesses recommended that the Australian Government financially encourage lower levels of government to boost supply. This policy has also been recommended in recent surveys of the Australian economy by the OECD and IMF.
… a new federal incentive based model that finally breaks through and prompts the states to fix their planning systems that are at the heart of the problem – that is, reward the states that are reforming their planning systems and meeting required annual supply targets by federal-state funding partnership arrangements for key infrastructure delivery to unlock supply.
3.57
UDIA proposed that incentives should be in the form of enabling infrastructure (discussed further in Chapter 7) and that they should be linked to actual outcomes. This would distinguish such an approach from that taken in the National Housing and Homelessness Agreement (NHHA), which requires ‘evidence of a strategy, not outcomes’. UDIA also suggested that:
NHFIC should be tasked with designing a benchmark for housing supply targets – as well as a set of reporting metrics on the fundamental elements of planning systems across the nation
and further told the Committee that these metrics would enable the:
…production of annual ‘league tables’ that compare and contrast the relative progress and success (or otherwise) of states and territories.
3.58
In contrast, the PIA cautioned against using a league table approach for comparing jurisdictions’ performance in terms of reforms to the planning system or the creation of new dwellings. It explained that there is variation in planning systems between different Australian jurisdictions, which makes it difficult to accurately compare data. The PIA explained:
Have the KPIs [key performance indicators] that reflect the way that [the planning] system works, and don’t just measure the speed for a standard type of development, because developments aren’t standard… It’s absolutely appropriate to have the right KPIs, but they should be quality KPIs, not just speed KPIs.
3.59
The CIS outlined that there is precedent for the Australian Government providing financial support to promote reform at the state and territory level, citing the National Competition Policy that ‘from 1997-98 to 2005-06… involved payments averaging about $600 million a year to the states and territories for regulatory and competition reform.’ The CIS further commented that a 2005 review of the National Competition Policy by the Productivity Commission found that on balance the benefits achieved by the program outweighed the costs.
3.60
The CIS provided an example of how Australian Government infrastructure spending could be linked to housing outcomes, suggesting that:
The federal government’s 10-year infrastructure program involves expenditure of $110 billion, including an additional $15 billion in new project funding in the 2021–22 Budget. Much of this is on regional road and rail. The federal government could require states to build more housing in return. For example, intra-urban rail, such as the Metro in Sydney or the Suburban Rail Loop in Melbourne could require that new train stations be accompanied by high-density housing.
3.61
The NSW Productivity Commission proposed that the Australian Government ‘should establish a “Productivity Fund” to incentive state-based reform’ and suggested this could encourage ‘the states to undertake taxation and regulatory reform that will improve development feasibility and encourage up-zoning of land’. The NSW Productivity Commission anticipated that this policy would strengthen federal finances in the medium term through ‘higher income and company tax receipts while containing the need for welfare outlays.’
3.62
The NSW Productivity Commission additionally suggested that ‘Commonwealth grants to local government should incentivise housing supply’ and outlined that all levels of government would experience economic and fiscal benefits if federal financial assistance grants to local government were ‘contingent on the delivery of new housing supply.’
3.63
The PCA advocated for the establishment of:
An expert Federal taskforce designing National Competition Policy-style Federal housing productivity incentives for states, territories and/or local governments.
3.64
The PCA further suggested that an incentive-based framework and metrics would ‘need to be negotiated by a credible expert of the calibre of Professor [Ian] Harper [AO], with the assistance of the Productivity Commission and NHFIC’.
3.65
The idea proposed by the PCA is that the framework would require jurisdictions to ‘report on their progress in relation to these metrics’, and thus enable:
… annual productivity score-carding and ranking of state and territory housing strategies and homes produced as well as the tax and regulatory costs embedded in the average new home in each jurisdiction.
3.66
The PCA submitted that to incentivise action at other levels of government, ‘financial incentives should be provided [to jurisdictions, by the Australian Government] on the basis of this progress.’ The Deloitte Access Economics report A Federal Incentives Model for Housing Supply, commissioned by the PCA, also identified that ‘in addition to using financial incentives, infrastructure provision can also provide an incentive to drive coordinated policy action on land supply and housing affordability in Australia.’
3.67
Mr Tom Forrest, the Chief Executive Officer of Urban Taskforce, suggested that such an approach whereby the Australian Government provides infrastructure funding in return for planning system reforms could have a ‘double benefit’ - with the reforms leading to more efficient planning systems and the infrastructure helping unlock new housing supply.
3.68
The CIS commented that coupling enabling infrastructure funding with new housing supply could be a fairer allocation of government funds, explaining:
Making [infrastructure] funding conditional on housing construction is not just a matter of boosting incentives. It is arguably a fairer and more deserving allocation. The standard benchmark for considering grants is on a per-capita basis. However, it is the growth in population, rather than the level, that drives the demand for new infrastructure.
3.69
The CIS highlighted that for an incentivisation approach to be effective, ‘the associated grants would need to be quarantined from fiscal equalisation’, and cited as a precedent that ‘half the past payments to the National Land Transport Network have been quarantined.’
3.70
The Commonwealth Grants Commission defines horizonal fiscal equalisation as the ‘transfer of fiscal resources between jurisdictions with the aim of offsetting differences in revenue raising capacity and the cost of delivering services’. Thus, the proposal from the CIS is that under an incentivisation model, Australian Government enabling infrastructure funding should be allocated to states solely on the basis of new housing construction, and not distributed based on their fiscal capacities and the differing service delivery costs for jurisdictions.
Committee comment
3.71
The contribution of planning restrictions to housing unaffordability is perhaps the most controversial issue facing the Committee. The Committee considered lengthy submissions on both sides. It is clear to the Committee (as indeed, it has been to previous inquiries) that the weight of evidence is not balanced. The many submissions which argued that planning has large effects on housing costs, supported that argument with a wide variety of evidence, including highly regarded research. The Committee found those arguments convincing, as apparently have many others, including a large majority of experts. In contrast, the empirical support for dissenting views appears to be weak. It was not clear that their arguments attracted wide support.
3.72
Available estimates of the effects of planning restrictions on housing costs are large. So large, that it is hard to see how benefits of planning restrictions could be comparable. It appears to the Committee that these restrictions have been allowed to bind ever more tightly without a proper justification. The Committee accepts that there are important benefits from planning, but it does not accept that these are sufficient to justify denying affordable housing to renters or to future generations of home owners.
3.73
The Committee recommends that state and local governments should increase urban density in appropriate locations using an empowered community framework as currently being trialled in Europe.
3.74
Australia’s cities are some of the least densely populated in the world. There are significant benefits of higher density living.
3.75
However, the benefits of higher density are not shared with those bearing the cost. Government planners force density on communities without discussing the benefits of their proposals and how they are going to ameliorate negative outcomes.
3.76
State and local governments impose a growing list of levies on developers that are ultimately passed onto the purchaser. These levies are increasingly not used to improve local areas, creating communities that feel disempowerment.
3.77
We recommend that state and local governments need to create more density in appropriate locations, specifically those well-serviced by underused transport infrastructure. This should be done by allowing local communities to negotiate for higher densities in return for better infrastructure and more convenience, and in such a way that protects and preserves the character of surrounding areas.
3.78
The objective is to ensure that communities that are open to higher density experience an uplift in value and improved infrastructure.
3.79
The Committee recommends that the Australian Government should provide incentive payments to state and local governments to encourage the adoption of better planning and property administration policies.
3.80
There is abundant and growing evidence that planning restrictions substantially boost the cost of housing. Land use policy is primarily the responsibility of state and local governments. Nevertheless, the Australian Government can and should play a useful role in co-ordination, guidance and improving incentives.
3.81
Specifically, the Australian Government should provide financial assistance to state and local governments to encourage better planning policy and administration of that policy. We should reward better planning policy administration, for example streamlining of approvals or bringing infrastructure contributions in line with social costs such as value capture and sharing. A good model is the National Competition Policy, which made payments averaging about $600 million a year from 1997-98 to 2005-06.
3.82
The Committee recommends that the Australian Government should institute a grant scheme that pays states and localities for delivering more housing supply and affordable housing.
3.83
The Australian Government should reward better outcomes with grants for those states or localities that deliver more affordable housing. Grants could be in the form of cash or infrastructure. They could, for example, be proportional to overall housing completions or proportional to completions in excess of some benchmark. If the latter, consultation would be needed to determine appropriate benchmarks.
3.84
If budgetary conditions are tight, these incentive payments could replace existing programs that deliver low value. In particular, the Australian Government provides substantial grants to state and local governments on an unconditional basis. The Committee recommends that these payments are linked to outcomes that result in better and more available housing that will in turn see an uplift in home ownership.