Cheaper homes often come at a high price

29 January 2007

News that Sydney has the dubious honour of being the seventh-most unaffordable housing market in the world has triggered the blame game again. The latest Demographia study points the finger at planning and purports to discover a link between levels of land use regulation and house prices.

The main way that planning affects house prices is by creating or preserving an attractive and efficient urban environment - an amenity with value that people are prepared to pay for. But it is also important to consider other things related to planning that may affect house prices - regulating land supply, imposing infrastructure charges or other fees, and specific development controls.

The supply issue is a reasonable concern because a lack of land for housing relative to demand may increase prices. But supply blockages are not only related to planning decisions to release land by rezoning it or reallocating it for urban purposes. If too much land is zoned for urban development it can depress land values so that landholders will choose not to sell until conditions become more favourable for them.

In the long term, an oversupply of vacant land zoned for urban purposes leads to piecemeal growth across a region. As well as diminishing the scenic, biodiversity, or agricultural values of such land, these developments are difficult to service and are situated far from transport, employment and infrastructure. Think of the sprawling landscapes of suburban Houston, Cleveland and Detroit - some of the "affordable" cities named in the Demographia study. Housing in these places might be cheap, but don't try to walk across the freeway to buy your milk or bread. Footpaths are a luxury in these utopias - assuming there is anywhere to walk to.

A sufficient supply of housing depends on the availability of infrastructure - water, roads, electricity and, hopefully, footpaths, parks, libraries and public transport. If housing is scattered because of a very liberal land supply regime, providing even basic infrastructure is expensive. Without infrastructure, land can't be developed. In the absence of large public infrastructure investment programs to support urban development (such as those once sponsored by federal governments), planning-based infrastructure charges can enable development and counteract supply blockages.

But are the costs of this added to the price of housing paid by the house buyer? Not necessarily. Research in the US and Britain suggests that if the market will bear a given price, developers will charge it. So, even if fixed costs associated with housing production were reduced, it is likely that the price of new housing would not change much. On the other hand, infrastructure charges can push up house prices by improving neighbourhood amenity. Here the house buyer ultimately benefits, but such charges should not be so excessive as to make areas deliberately unaffordable.

Similarly, development controls should be challenged if they make homes more expensive to produce. Controls such as large lot sizes, generous building set-backs, or expensive building finishes all increase house prices.

The Demographia study objects to "extravagant amenities" such as "entrance walls" (read gated entries), fountains and the like. The irony is that such facilities are not mandated by land use planning but by private covenants imposed by developers to achieve higher prices.

We need planning systems that deliver a timely supply of land for housing, serviced by the most efficient and sustainable forms of infrastructure. We also need flexible development controls that encourage great design but not expensive or homogenous housing forms.

Even the best planning system won't solve the problem of high house prices, however, because only a small proportion of the market relates to new houses. There are many more complex factors at work, such as the increased capacity of people to pay high prices by combining two incomes and accessing readily available finance.

Unfortunately, the only way that a more liberal planning regime will lower house prices involves the kind of laissez-faire development that degrades landscapes and heritage, and ultimately creates places no one really wants to live in or visit. Those places are cheap. But can we afford them?

Dr Nicole Gurran is a senior lecturer in the Urban and Regional Planning Program at the University of Sydney.