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The latest figures suggest that house prices are rising once more. According to Reserve Bank research, zoning restrictions contribute to high prices – but planning experts disagree. By David Ross.

House prices and zoning

There was a time when Australians saw the growth of house prices as inevitable. So it was a surprise when the rubber band snapped in late 2017.

House prices nationally are down 8.3 per cent in the past 12 months and 3.8 per cent for the year, feeding doomsaying about the health of Australia’s economy. In March, analysts announced the country was in a per-capita recession – that is, the economy is growing more slowly than the population.

But recent relaxations on lending rules from the Australian Prudential Regulation Authority, as well as rate cuts from the Reserve Bank of Australia, may be having their desired effect – if the desired effect is pushing up house prices.

Recent data from CoreLogic shows prices in Sydney have inched up by 0.1 per cent in June, in what some are calling the end of the drop and the beginning of something new. Clearance rates may be pointing the way, with almost two in three houses that go to auction selling.

And despite recent falls, median house values in Australia are still 412 per cent higher than in 1993.

Cameron Kusher, head of research at CoreLogic, told The Saturday Paper it was too early to say whether prices would continue to rise, but the trend showed price falls in Sydney and Melbourne may be over.

“I don’t think there’s going to be a rapid acceleration from here, but we can expect subtle growth,” he said.

He said efforts to keep prices steady, neither rising nor falling, would be ideal but very hard to manufacture.

But prices aren’t the whole story. How do they get so high? Why do they stay so high? Economists and urban planners don’t agree on the answers.

The RBA thinks part of the answer is zoning – the way land is used in our cities. According to research it published last year, zoning restrictions raised the price of a detached house in Sydney in 2016 by 73 per cent above the marginal cost of supply.

In theory, when a site is rezoned for housing, the increased supply should reduce competition and therefore limit the impetus to push up house prices. But according to the RBA research, zoning restrictions have limited the housing supply to such an extent that prices increase significantly with rezoning because there is so much market demand.

RBA economists Ross Kendall and Peter Tulip found land was not necessarily scarce. Rather, the ways land can be used in our cities make it – and, as a result, housing – very expensive.

“This ‘marginal’ or ‘physical’ value of land represents the opportunity cost of extra land, as judged by what people are prepared to pay for it,” wrote Kendall and Tulip in their report.

“This difference represents what home owners need to pay for the right to have a dwelling at that location, or the cost of ‘administrative’ scarcity.”

Dr Stephen Kirchner, program director of trade and investment at the University of Sydney’s United States Study Centre, said he supported the findings of the RBA research. He rejected the argument that access to finance or rising construction costs were responsible for driving up house prices.

“It was not the deregulation of the financial system – yes, it facilitates people borrowing, but if you had a flexible supply side this would not be an issue,” said Kirchner.

“Why did car prices not go up as a result of the deregulation of the financial system? Is the reason that the supply side of the car market is not restricted in the way the housing market is?

“So you have to ask why land is so expensive. It’s because of the restrictions on what you can do with it.”

But Michael Buxton, emeritus professor of planning at RMIT University, told The Saturday Paper the RBA research showed an “abysmal misunderstanding of the way the planning system works and zoning operates”. He said it wasn’t zoning that mattered, but rather where the land is.

“The RBA talk about zoning – it shows the highest prices from zoning occur from the inner city and suburbs, yet the [central business district] and inner-ring suburbs, particularly the CBD, have the least restrictive zoning controls,” said Buxton.

“It’s not zoning. It’s a complex combination between housing markets and construction types. One of the main reasons is the types of development – high-rise is very expensive.”

Buxton said his research had shown there was plenty of supply in the inner and middle suburbs of our cities that could cater for Australia’s growing population. He said what matters is gross density across the city, rather than density by block.

“You can’t build an entire city with areas of the density of the scale that they’re doing [in the CBD],” he said.

“Governments have handed over the decision to the development industry and they want to cram as much as they can on their urban block.”

According to Buxton, governments need to set a plan and stay the course – four to six storeys maximum, with 50 per cent site coverage – to get liveable cities and suburbs for the future. But, he said, developers and governments are in cahoots as profits from high-rise development are too great.

“They’re very costly and very profitable; there’s a whole range of participants in the high-rise boom that are making money,” he said.

Brendan Coates, household finances program director at the Grattan Institute, told The Saturday Paper he agreed with the RBA findings, saying they showed the supply of housing, despite huge additions over recent years, has been unable to meet the rising demands of population growth. House prices have therefore increased dramatically.

“The one weakness of the RBA research is that it doesn’t flow through to the zoning premium. If housing is overvalued then the zoning premium will be overestimated,” said Coates.

“The premium has become much larger over the last 15 years and that’s precisely the period where demand for housing has increased.”

Although the RBA seldom speaks publicly about its research, Peter Tulip has defended his and Kendall’s findings in a lengthy response to criticisms.

“If these criticisms were robust, they would be publishable,” wrote Tulip.

“It is the interaction of inelastic supply, due to zoning, and rising demand that explains the rise in house prices. This explains why, despite interest rates being very low across all advanced economies, sharp increases in house prices have been concentrated in localities with more restrictive zoning.”

But planners The Saturday Paper spoke to do not agree with the RBA or economists about the alleged role of zoning in pushing up prices.

Coates said the density of the inner and middle rings of Australian cities has hardly shifted in three decades, with most new building taking place in or right next to the CBD. He said the issue of zoning has grown in part because Sydney and Melbourne are now so big that commuting times make living near the CBD all the more important.

“Density has barely moved. That didn’t matter as much three decades ago because the urban fringe wasn’t that far from the city,” said Coates.

“[The] zoning premium 15 years ago was basically zero. That was because it didn’t matter as much that you couldn’t build in the middle rings because you could build 20 to 25 k’s from the city and it wasn’t that hard to get to the city.”

CoreLogic’s Cameron Kusher said the lack of supply in wealthy areas has had a striking effect.

“Look at the escalation in prices in areas [where] you haven’t seen a lot of upzoning,” he said.

“The councils there don’t allow higher-density zones. Look at what it costs for an [apartment]; that’s because people are paying such a fortune for the land.”

Brendan Coates agreed it was clear, based on the data, that approvals took longer in wealthier areas of Australia, reflecting the political will in many areas to oppose development. But he said densification often had its downsides for these people, such as more traffic, less green space or greater pressure put on public services.

“The problem here is that local councils reflect the interests of people who live there, not people who want to live there,” he said.

Kate Shaw, urban geographer at the University of Melbourne, disagrees with the RBA findings. She told The Saturday Paper Australia had relatively relaxed planning rules compared with the rest of the world.

“If you look at the inner cities of any OECD country you’ll find most are much more static than Australian cities and that’s largely because of heritage controls,” said Shaw.

“Any planning regime, by definition, is about regulating the market, controlling what can be built where and to what extent.”

In Shaw’s opinion, Australia undoubtedly needs more housing but we don’t need more high-end apartments.

“Developers do not build affordable housing now. They may build them cheaply and use cheap materials but the reduction in cost isn’t passed on to consumers,” she said.

“As soon as prices have the slightest indication of tanking, developers stop building, the economy starts to tank, the RBA drops rates, homeowners are assisted to start buying and the whole thing turns around.”

House prices are high and now look set to grow again, for good or for bad. The extent to which zoning controls contribute to this is something no one can agree on.

But if housing demand continues to grow, as seems likely, then existing zoning restrictions will bind more tightly and place continuing upward pressure on housing prices. 

This article was first published in the print edition of The Saturday Paper on Jul 6, 2019 as "Exclusion zoning". Subscribe here.

David Ross
is a freelance journalist based in Melbourne.