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Festival of Urbanism: Patrick Fensham on affordability and value capture

The University of Sydney is again hosting the Festival of Urbanism, featuring two weeks of lectures exploring the planning challenges of Sydney and other Australian cities.

On Tuesday night, SGS Economics and Planning’s Patrick Fensham spoke at the NSW PIA Presidents Award Lecture, titled “Putting the public interest back into planning”, partly in response to Elizabeth Farrelly’s recent comment piece “Sydney will be unrecognisable now that the planners have gone”.

Fensham was asked to discuss whether planners were doing enough to address the social and economic issues facing our cities, and whether they’d lost sight of the public interest.

Affordable housing and value capture were two hot-button issues on which planners should advocate for better outcomes, he said.

Patrick Fensham speaking at the Festival of Urbanism

Patrick Fensham speaking at the Festival of Urbanism

Affordable housing as social infrastructure

Fensham told the audience there should be a requirement for a minimum proportion of social and affordable housing in developments city-wide, known as inclusionary zoning.

This would mandate a minimum percentage of affordable housing for the community sector “as part of the infrastructure of the area, just like the minimum amount of open space”.

Currently in Sydney, Green Square and Pyrmont are the only areas with state-sanctioned inclusionary zoning targets. Fensham believes this must be extended to all locations.

“It’s like the environmental fabric of the place.”

Victoria, he said, has long mandated a minimum open space provision of five per cent.

“We should be mandating the same sort of outcome in terms of social and affordable housing.”

Car parking needs to go

Fensham said there was a disturbing trend of high density apartments being built around public transport nodes, yet the same provision of car parking applied, driving up costs.

“Providing basement or podium parking in new apartment developments near stations not only increases cost of development in areas where we want lower to middle income people to live, it also locks in car use and ownership,” he said.

The evidence “all over Sydney” showed there was a high number of households living without cars near train stations.

“We should be encouraging and facilitating this trend, not trying to reverse it.”

It’s not just about supply

An “area for planners to be outraged” was homelessness and the lack of affordable housing.

Planning advocacy to government needed to include more than the provision of more efficient supply, Fensham said.

“It isn’t sufficient to continue arguing – or hoping – that increased market-based supply will solve the problem. And it’s staggering that this argument keeps being pushed when recent evidence clearly doesn’t support it.

“The dry economists clutch onto the hope that the supply chain will get sufficient oil to meet demand by reducing planning controls and planning getting out of the way and allowing the market to respond.

“They don’t account for the need to maintain urban amenity while increasing supply – a massive challenge for planners.”

He said rather than house prices moderating as supply increased, prices closely tracked new supply, as the following graph shows.

housing-supply-costFensham said there were a number of reasons why.

The Reserve Bank in its submission to the affordable housing inquiry said population settlement habits meant that housing demand was concentrated in just two large cities – Sydney and Melbourne.

Having just two large cities that attracted a lot of interest in investment globally had made the two cities extremely expensive. The RBA report also said Australia had a lack of medium-sized cities that could provide alternatives for those seeking to avoid high housing costs while also having good job prospects.

“This RBA paper acknowledges there may be limits to the extent regulatory or planning changes can address supply sufficiently to impact on affordability.”

New housing only accounted for 1-2 per cent, and prices were set by the established market of mainly tax-assisted investors and wealthy incumbent homeowners.

“They’re all just trading amongst themselves, really.

“So without a significant projection of lower priced supply, [new housing stock is] only a supplement to these high price points.”

Fensham quoted housing market professor Geoffrey Meen, who has said general increases in supply would only have limited effect on affordability unless the releases were large, sustained and accompanied by changes in fiscal policy such as capital gains tax and negative gearing.

On value capture

Fensham said value capture was another area where planners should be “natural supporters, because they see what happens to land values when new infrastructure is provided or land rezoned for more intense or higher value usage”.

The idea is that part of the uplift in value of land from rezoning or infrastructure investment should be returned to the community rather than go entirely as a windfall gain to the landowner.

Fensham said we should be concerned by these massive windfall gains that occurred because of decisions made by governments on behalf of the community.

“There is a clear market failure in these instances and a public interest case for change.”

The most obvious case for change was when industrial land was rezoned to high-density residential.

As an example, Fensham, using estimates, told of a former industrial site in Mascot being redeveloped as Mascot Central, which would contain 811 apartments, 386 service apartments and 5666 square metres of retail floorspace.

The Mascot site was purchased from Goodman by Meriton for $100 million. With stamp duty and holding costs, the initial cost could have been around $150 million.

Development costs, factoring in 25 per cent profit, could have been $700 million.

With revenues beginning to roll in as product is released, $1.25 billion could be realised.

The value of the land after the development was estimated at $450 million.

“So on the basis of these relatively conservative estimates – stressing that they’re estimates – the mere act of rezoning the site has increased the value of the land by about $300 million.”

Fensham said he was unaware of any voluntary planning agreement for the particular development that would have captured any of the land value uplift.

The point, though, wasn’t to blame developers. They were just operating within the system that currently exists.

How it could work

He said a robust system of value capture would involve a two-pronged approach.

“The first is a comprehensive land tax across all properties in the metropolitan area, which recognises the uplift comes from a variety of factors.”

The beauty of a land tax system, Fensham said, was that it rises and falls with the actual land value.

He said it could be branded a metropolitan transport levy, which would make it more politically palatable, rather than a simple broadening of the land tax base to include the family home.

The stamp duty system would also need to change and even eventually be eliminated.

An easier change politically would be a betterment levy on new development, which would have the character of a development licence fee.

“This recognises that the community grants development rights on a rationed basis.”

The development rights would have a value equivalent to the uplift in land value generated by the rezoning or development approval.

The value would be based on a pre-existing schedule of rates for different types of floor space.

Better than VPAs

Fensham said voluntary planning agreements were currently being used in NSW to capture value uplift, and a variety of approaches existed, which created uncertainty and was open to gaming by both councils and developers.

What Fensham is proposing is locally specific, prescheduled rates to provide more clarity, and enable development assessments to be kept separate from decisions about how much value uplift should be captured.

However, he warned value capture was not “a panacea for our funding deficits” for key infrastructure.

He said private transport proponents were “off with the fairies” if they thought they could get 100 per cent of infrastructure paid for through value capture.

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