The truth behind the housing supply nonsense

aerial view of land and water

It is widely believed that Australian housing supply is constrained by planning regulations. In a new research paper out last month, I show that this belief is wrong. How can I be so confident about my assessment?


First, I crawled through the annual reports of Australia’s top eight listed housing developers, who represent about 9 per cent of new supply each year, to find the evidence.

I tallied up their landbanks and their new dwelling sales and noted their strategic plans for housing releases. In contrast to the expectation of limited land available for housing, developers hold on their books a stock of supply that takes over twelve years to sell on average—an implausibly large inventory by any stretch of the imagination.

You might think that the long lead times and planning delays are part of the reason for this enormous inventory. To eliminate this explanation, I looked at just subdivisions that were approved, commenced, and already had at least one sale.

The situation here is actually worse. The typical rate of sales out of a subdivision once it commences is just 6 per cent of the total lots each year, or rate that takes 16 years to sell out on average.

So why the delay?

Annual reports also help to answer that, as developers are obliged to be honest with shareholders in these documents, unlike in their claims to the media.

Lendlease provides an interesting example. The company explains its sales rate approach as follows:

The Communities pipeline consists of an estimated 52,333 lots. With an annual target of 3000 to 4000 completions, more than a decade of supply has already been secured. The development pipeline provides long term earnings visibility and the flexibility to be both disciplined and patient with the pursuit of future opportunities. (Lendlease Annual Report 2018, p.76)

It makes economic sense not to flood the market but to be patient. In fact, when I looked at state-wide approvals data it was clear that during boom times developers were more likely to let approvals lapse, delay projects, and later seek new approvals at higher densities.

The other evidence I found to show that planning does not constrain the total rate of supply is that the state-wide approvals data shows that the available zoned land does not correlate with the rate at which that land is converted into housing.

In South East Queensland the estimated potential stock of housing able to be built on zoned land fell from 400,000 to 340,000 between 2013 and 2019, yet the rate at which that land was converted to housing grew from 14,000 to 20,000 per year.

Finally, the array of delaying behaviour that private landowners and developers exhibit also demonstrates why planning does not constrain housing supply, but that it’s constrained by the economic incentives of landowners.

In addition to renegotiating planning approvals, other examples of delay include:

  1. staging developments when instead later stages could be sold to other developers to build in tandem
  2. reducing sales volumes rather than prices when higher volumes could easily be achieved by reducing prices, just as occurs with other products when the discount prices to clear stock.

Oh, and then there is the fact that private landowners and developers choose when to make planning applications, and whether to seek approvals that are likely, and hence fast, or unlikely, and hence slow.

No one forces a landowner to seek approval for a development that conflicts with planning schemes. Regardless, only a maximum of 100 per cent planning applications can be approved. Planning cannot force landowners to develop in a timely manner.

All of this behaviour is logical for developers. They seek relaxed planning controls not because it results in faster supply and lower prices — which, it true, would undermine their own profitability — but because it increases the value of their land.

They reduce sales in a soft market because it increases the total return to their land over time by not further depressing prices in a slump. If it is logical for developers to reduce sales when prices fall, then it is impossible to get supply-led price reductions from private housing markets.

Planners and housing policymakers need to be aware of this reality and not buy into the myth about planning, housing supply and prices. The evidence it all there. Developers tell their shareholder exactly how they behave. We just need to pay attention.

Cameron Murray is a post-doctoral researcher at Henry Halloran Trust, The University of Sydney and author of Game of Mates, how favours bleed the nation

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Comments

9 Responses to “The truth behind the housing supply nonsense”

  • Penny Burns says:

    Great job by Cameron Murray and a very interesting and economically sound addition by Thomas Neeson, I agree that reducing costs at the planning stage could assist in lowering prices and suggest that this be done by intensifying the planning resources applied to achieve the same (or even better) planning work in less time. This could result in higher planning fees, but this cost would be easily offset by time savings for, as Neeson. correctly points out, the bulk of the costs at this stage are not related to the planning itself but to the time delays, in other words to holding costs (rates, taxes, human resources, cost of capital). I am an economist, but economics is not the only consideration here, urban design and longer term community benefit must also be considered: planning is too important to skimp on.

  • Paul Walter says:

    Thanks for the article. However, I’m not convinced that this explains high prices. If the top 8 developers deliver only 9% of housing, it seems unlikely that individual actors could control prices. If prices are unnaturally high for lack of supply, Smaller players or new entrants would enter the market to capture available supernormal profits. I am intrigued to understand inflated pricing in Oz, but haven’t found a satisfying answer..

  • Ingo Kumic says:

    Thanks Cameron. Question is where to from here, especially given the current situation? Clearly the property industry is critical to sustaining the jobs and livelihoods of many. How do they innovate their business model so that they not only maintain this ecosystem but do so in a manner that prioritises planetary health and enables rather than hinders social mobility?

  • Thomas Neeson says:

    Hi Cameron,
    This is a thought provoking article but it is a highly complex topic and there are a few other critical elements to consider:
    1. Land development on the urban fringe is heavily reliant on adjacent infrastructure (roads, water, sewer, power, etc.) being completed and readily available. This infrastructure is completed by private developers (e.g. roads and services for adjacent subdivision) but also by government and public authorities (for example, sewer treatment plants). A land bank of 10,000 lots is meaningless when only 300 lots might be capable of actually being developed until the correct infrastructure is put in place to facilitate development of the remaining lots in the land bank. Simply selling future stages to other developers does not solve this problem as it would still not allow these stages to be developed in tandem.
    2. The development market in Australia is heavily reliant on achieving ‘off the plan’ sales before financing can be secured and construction can proceed. This is an important safeguard for our economy, to avoid excessive speculative development which can (and has) put our entire banking system at risk (for example, the early 1990s commercial property crash). As a result, land is typically sold ‘off the plan’ in our market, anywhere between 6 months and 2 years before the subdivision is complete and the purchaser settles on the land. At the time of settlement, an independent third party valuation has to take place for a financier/bank to be sure that the asset/collateral they are lending against is worth what the purchaser has paid for it. It is therefore not in anyone’s interest (developer, purchaser, financier and planner) to reduce prices for future releases as this would undermine the investment made by all parties when the sale was originally made and would also significantly impact confidence in ‘off the plan’ sales, meaning supply would be constrained further as only speculative developments which don’t require financing would proceed. It is therefore not appropriate to compare the supply of housing to other, much lower value products which are less likely to be subject to finance. Which brings me to my final key point….
    3. One of the most workable solutions to improve housing affordability is to therefore ensure the first stage of any development or new precinct is as cheap as possible. Any planning process costs money, let alone a protracted process, primarily by way of holding costs (rates, taxes, human resources, cost of capital) and design fees. It’s pretty simple – the shorter the planning process, the lower the holding cost and therefore the lower to prices of the first stage of that development or new precinct.

    As I said, this is a complex topic and the above list barely scratches the surface of every associated issue. Developers do (and should) operate in a free market. They are also not perfect. It is true that most are driven to maximise value and driving price growth or density are the most obvious ways to do that. However it is critical to acknowledge that time has a very real and significant cost and the role of the authorities in a free market should be to facilitate and support all market activity that is within the law in a timely fashion.

  • don owers says:

    ….In South East Queensland the estimated potential stock of housing able to be built on zoned land fell from 400,000 to 340,000 between 2013 and 2019, yet the rate at which that land was converted to housing grew from 14,000 to 20,000 per year……How many koala’s lost, how much native forest gone or agricultural land turned into tar and cement? For heavens sake people growth is not sustainable,pleasant or necessary

  • Great work Cameron. Of course there will be variations between states and council, but it is good to see this well explained. I hope the people doing the new NSW Housing Strategy (Discussion Paper out now) are reading this. The discussion paper has Supply as one of their four key areas for improvement. Affordability is another which goes hand in hand with this.

  • Michael Dunn says:

    Hi Cameron – great article and clearly sound findings which address the myth about planning delaying development and thus impacting on housing prices, at least on the urban fringe.

    However this is only part of the picture of course. In Victoria, where I practice as an Urban Planner I would argue that we dont have a housing affordability issue on the fringe. Housing affordability is much more of a problem in existing suburbs (where a lot of people would prefer to live than on the fringe).

    In infill suburbs gaining planning approvals is much more challenging and typically takes 12-18 months for a multi-residential project such as an apartment building or townhouse project. I can only speak for Victoria of course but here it takes so long to obtain approvals due to slow Council processing (often due to lack of resources) and long wait times to consider appeals at the planning appeals tribunal (VCAT). These long wait times cannot assist in helping with supply and housing affordability but I am sure there are more significant impacts on housing affordability from other factors such as the taxation system (stamp duty etc).

  • Nigel Howard says:

    WOW! Great work Cameron Murray – lifting the curtain on planning and housing supply – this is very important intelligence for policymaking – hope it doesn’t get ignored and swept under the carpet to keep vested interests happy?

  • Rick Walters says:

    A fantastic summary – well done! Laying it out so clearly should help the debate. I hope that decision makers are noticing.

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