Zoning restrictions drive up home prices

by AB12 Mar 2018

Restrictive zoning laws have helped drive up home prices across Australia because they restrict housing supply, according to a recent study by the Reserve Bank of Australia’s Economic Research Department.

Such policies include minimum lot sizes, maximum building heights and planning approval processes. While these regulations come with benefits, the researchers contend that the rules have stoked price increases.

According to their estimates based on 2016 data, zoning restrictions raise the price of the average house in Sydney by 73% above the value of the physical inputs (structure and physical land) required to provide it. Comparable figures were pegged at 69% for Melbourne, 42% for Brisbane and 54% for Perth. Zoning has also raised the price of apartments well above the marginal cost of supply, especially in Sydney, it added.

Nevertheless, the study said removing or relaxing zoning restrictions will not necessarily lead to fall in home prices. If anything, housing in Australia would remain expensive relative to cities where zoning is permissive and land is less physically scarce. “We also note that physical land costs are higher in Australian cities (particularly Sydney) than overseas,” the researchers said.

For its part, the Planning Institute of Australia (PIA) has shot down the study, and said it missed the point about planning controls, which was that it improved the way society allocates and shares the use of land.

“Planning has a key role in preventing land-market failure leading to wider community costs – expressed in costs to doing business as well as social and environmental costs,” national principal policy officer John Brockhoff said.

“A classic example is planning for public utility services. The demand for land for sports fields, materials recycling facilities, and electricity sub-stations is rarely strong enough to be competitive in the market,” he added.

In a television interview with ABC last week, Master Builders Australia CEO Denita Wawn said an extra 20,000 homes could be built over the next five years if zoning restrictions are relaxed. “We know that we need an additional 200,000 homes in Australia to meet current demand, let alone (the) population increases that we're going to face over the next few years,” she added.


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