Zoned out: how land use restrictions divide the nation

Housing policies ensure continual wealth gains for current home owners while leaving renters and potential buyers locked out of the market.

Housing policy is a battle between the haves and the have-nots. The haves are the current generation of wealthy home owners. They have enjoyed large capital gains over the past few decades and are sitting on property worth hundreds of thousands – often millions – of dollars. They support the policies that have delivered these windfalls.

The have-nots are renters and future generations of potential home owners. These groups are disproportionately young and on lower incomes. The increasing barriers they face are reflected in many social problems:

• Home ownership, a central aspiration in Australian culture, is declining. The share of 25-34 year-olds owning their own home has fallen from 62 per cent in 1981 to 44 per cent in 2016. Given the difficulties of accessing housing finance without parental support, home ownership is becoming increasingly hereditary.
• The share of low-income households in rental stress has increased from 38 per cent in 2007-08 to 47 per cent in 2017-18.
• Key workers are now commuting several hours to get to work.
• Homelessness, one of the ugliest features of modern urban life, is closely tied to high housing costs.

The main policy dividing the haves from the have-nots is the planning system, often referred to as zoning or land use regulation. Planning restrictions reserve most urban land for low-density detached housing. In the few spaces where apartments and townhouses are permitted, height and other restrictions limit the number of dwellings. These restrictions reduce supply and hence raise prices. That benefits the haves and hurts the have-nots.

The effects of land use restrictions on housing costs have been thoroughly documented, in both Australia and overseas. For example, in a recent research paper for the Reserve Bank of Australia, Keaton Jenner and I estimated that planning restrictions boosted the cost of the average Sydney apartment by $355,000 or 68 per cent in 2018. They boosted the cost of the average Melbourne apartment by $97,000 or 20 per cent. Given increases in apartment prices since these estimates were compiled, the effect now would be greater.

These estimates are in line with those from many other studies around the world. The research documenting these effects is large and has been surveyed many times. These surveys point to an expert consensus: land use restrictions have substantial effects on housing costs.

Admittedly, criticisms of this research are easy to find on social media; however these criticisms are not taken seriously within the research literature.

For example, it is often suggested that high prices cannot be attributed to planning restrictions because those restrictions have barely changed. This misunderstands the argument. Prices have risen because restrictions have not changed. In a well-functioning housing market, increases in demand – due to low interest rates, immigration, tax concessions and so on – would result in more dwellings. But because our planning system makes new construction so difficult, we get ever-rising prices instead.

As another example, high prices are often attributed to tax concessions for capital gains and negative gearing. But numerous studies using different approaches estimate that the effect of these concessions on housing prices is tiny – about 1 to 4 per cent.

A more legitimate defence of land use restrictions is that they preserve neighbourhood amenity. High-density housing is often argued to be ugly and to result in overcrowding, noise and overshadowing and to change the character of established neighbourhoods.

These arguments are often statements of subjective values and should be respected. Nevertheless, they need to be weighed in context.

This is partly a question of social priorities. Is it appropriate to put the aesthetic concerns of wealthy home owners above those of poor renters and potential home buyers? Is it equitable to side with the haves rather than the have-nots? Overly localised decision-making will over-weight the concerns of wealthy home owners. Centralised government needs to ensure that the interests of the have-nots are taken into account.

Furthermore, it is doubtful whether noisy neighbourhood opponents are representative. Many other people like high-density living. We can see this in real estate advertisements, where proximity to shops, transport, entertainment and other features of high-density living are advertised as selling points.

If high-density housing did harm neighbourhood amenity, then it would lower nearby house prices. It doesn’t. In a recent research paper for the Centre for Independent Studies, Zac Lanigan and I examined eight examples of pronounced high-rise development: Chatswood, Green Square, Forest Lodge, Turrella and Liverpool in Sydney; and Box Hill, South Yarra and Footscray in Melbourne. In every example, house prices near new developments move in line with prices in adjacent suburbs. Judging by willingness to pay, neighbourhood amenity is little changed. It appears that for every intransigent neighbour hostile to development, there are other willing residents who enjoy living in a walkable, lively neighbourhood.

There are also strong efficiency arguments for relaxing zoning. Buyers are willing to pay $870,000 for the average Sydney apartment but it only costs $550,000 to supply. That wedge of $355,000 (the effect of planning on prices discussed above) reflects the amount that society would be better off for every extra apartment we allowed.

Planning restrictions would be efficient if this wedge corresponded to large negative externalities of housing density. However, as discussed above, the net effect on neighbourhood amenity appear to be small. Furthermore, there are large positive externalities from urban density – it boosts wages, promotes technological progress and reduces carbon emissions. For both equity and efficiency reasons, we should be encouraging higher density housing instead of stopping it.