..Sydney lurches to housing affordability disaster

...John Muscat / 27 November 2016

Now and again Australia erupts in controversy about housing affordability. Each time it follows the same course. Some new statistic or media story confirms that prices are out of control, especially in Sydney. A senior politician is prompted to call for deregulation and more supply, and is backed-up by the property industry. Then come progressive policy wonks saying no, the issue is high investor demand stimulated by tax concessions on expenses (negative gearing) and capital gains, and absence of a broad-based land tax. Next emerge the welfare lobby, calling for tax reform as well as more social housing and interventions like “inclusionary zoning”. After a round of claims and counter-claims, it all fizzles out.

From the surveyed general public who feel Sydney house prices are “cause for concern”, to the former Governor of the Reserve Bank, who called them “crazy”, almost everyone agrees there’s a critical problem. Such sentiments are more than warranted on a number of measures, including the Annual Demographia International Housing Affordability Survey. Sydney is consistently ranked at or near the top of the world’s “severely unaffordable” housing markets. The wrangling isn't over whether to reduce prices, but how. And that depends on where you fit in Sydney’s system of interests with a stake in property development and construction, now Australia’s largest industry.

Conflict of interests

Generally, these fall into three groups, each with their distinct but sometimes interlocked agendas.

First, the producers and beneficiaries of Big Projects, large-scale housing and urban renewal schemes, particularly high-end apartment developers, top-tier architectural practices, urban planners and designers, rail transport engineers and “sustainability” consultants. Joining them are local and state governments levying value-based property charges, financial institutions with large home mortgage books, and media groups dependent on luxury apartment advertising. “In a strange way”, writes finance journalist Robert Gottliebsen, “three of the biggest forces pushing up dwelling prices (the banks, state governments and councils) are like drug addicts: they are hooked on keeping dwelling prices at the current levels or increasing them further”. In some ways a high-land-value (or rent seeking) coalition, their agenda encompasses residential densification, preferably on infill or brownfield sites, transit-oriented-development (TOD), and a tendency to CBD-centrism. On the whole, they are supply-solution advocates and supporters of tax concessions. 

Second, progressive policy analysts and welfare advocates, closely aligned with the university system and highly educated knowledge-worker elite. They too promote inner-urban infill development, higher core and middle-ring densities, and public amenities associated with TOD. While the Big Project coalition is mostly driven by finances, cultural-lifestyle factors loom large for knowledge-welfare types. Hence their demands for more housing near “consumer city” localities crammed with trendy bars, pubs, nightclubs, restaurants, cafes, art galleries, theaters, museums and cinemas. This plays into “creative-class” perspectives on economic growth and an aversion to suburbanization as “unsustainable”. Some of them are supply-solution sceptics, leaning toward demand-management, and most are aggressive critics of tax concessions. They urge more social housing schemes and regulatory responses, such as mandating a portion of affordable units in new housing developments (inclusionary zoning), which Big Project lobbies like the Property Council and Committee for Sydney oppose (with good reason, as the evidence suggests IZ reduces supply and raises prices).  

Third, fringe or greenfield detached house builders, the mass of low-to-middle income industrial or routine service workers, low-level government employees, and marginal small traders or microbusinesses. This economically diverse population is concentrated in industries like retail, wholesale, logistics, transport, distribution, manufacturing, construction and trades. They are particularly sensitive to input costs, including the impact of high land values on commercial rents. Many rely on real estate as security for financing. In contrast to firms and professionals in advanced services, the worker-trader class gravitates to homes, offices and plant in peripheral, low cost, auto-oriented regions like Greater Western Sydney.

There is some overlap between the groups, of course. Elements of the Big Projects coalition, architects, urban planners, sustainability consultants, engineers, cross-over to the knowledge-welfare elite. Apartment developers routinely deploy creative-class and green arguments for proposals which are integrated into broader densification-TOD zoning and infrastructure arrangements. Those themes end up shaping state government planning blueprints like A Plan for Growing Sydney, not to mention the federal government's Smart Cities Plan.

Past affordability eruptions were blown off course by the tax issue, unsurprising given most media pundits belong to the knowledge-welfare stratum. The drumbeat of calls for the reform of negative gearing and CGT concessions culminated in Labor adopting it as policy for this year’s federal election. The move was presented as a housing affordability package, a way to sideline investors and help owner-occupiers or first home buyers. Unfortunately the evidence doesn’t bear this up. Labor was urged on by think tanks like Grattan Institute and McKell Institute, prominent knowledge-welfare voices. Yet according to their own estimates, prices would fall by a measly 2 and 0.49 per cent respectively. For the opposite purpose of showing that Labor would “crash” the housing market, Treasurer Scott Morrison seized on an assessment that values would drop by “up to 4 per cent”.

Considering that Sydney prices have escalated by a staggering 64 per cent since 2012 – and according to one forecast, are set to rise 16 per cent in 2017 – the focus on tax reform is a distraction. Economists ranging from right-leaning Judith Sloan to left-leaning Stephen Koukoulas maintain that if there are any tax impacts at all, they are secondary to supply constraints rather than vice versa.

Retreat from the fringe

Most of the Big Projects coalition and worker-trader class subscribe to a supply-solution in principle. But there are differences on what this means in practice. The previous state government’s metropolitan plan allocated 70 per cent of new housing to infill-brownfield sites and 30 per cent to greenfield developments, with a patchy record of implementation. While an explicit numerical apportionment was dropped from A Plan For Growing Sydney, the strategy aims to engineer a similar outcome by concentrating new housing in 14 Priority Growth Areas and Precincts. Only 5 of them contain substantial greenfield potential.

Growth Areas inside established built-up localities are Rhodes East, St Leonards and Crows Nest, Greater Parramatta to Olympic Peninsula, Sydney Metro Northwest, Sydenham to Bankstown Corridor, Western Sydney Employment Area, Epping and Macquarie Park, Arncliffe and Banksia, and Ingleside Precinct. The outer, peripheral areas with most capacity for new land release or greenfield development are North West Growth Area, South West Growth Area, Greater Macarthur Growth Area, Western Sydney Growth Area and Wilton New Town, which lie within 7 Local Government Areas (LGAs), Blacktown, The Hills, Camden, Campbelltown, Liverpool, Penrith and Wollondilly Shire.

Under A Plan for Growing Sydney, the authorities are planning for an additional 1.6 million people and 664,000 dwellings across the Sydney metropolitan region by 2031. According to NSW Department of Planning “state and local government area household and implied dwelling projections” to 2031, Blacktown LGA will have 48,300 new dwellings, The Hills LGA 28,650, Camden LGA 38,250, Campbelltown LGA 19,450, Liverpool LGA 32,400, Penrith LGA 20,900 and Wilton New Town, in Wollondilly Shire, 16,000 dwellings. In other words, these fringe priority areas are to accommodate an additional 203,950 dwellings, or around 30 per cent of the extra 664,000 dwellings across metropolitan Sydney.

Of course, not all construction in the 7 peripheral LGAs will be on new land, so the share of total dwellings on greenfield sites will be even lower. The Urban Development Institute of Australia (UDIA) estimates that Sydney greenfield lot production is running at 11,600 a year and will reach 12,355 a year in 2017/18. If achieved, that translates to 185,325 or 27 per cent of the 2031 metropolitan dwelling forecast (equating a fringe lot to a single dwelling). 

This month, the Department of Planning released accelerated forecasts totaling 184,300 new houses and apartments across the 33 metropolitan LGAs by 2021. Of these, 8,350 are assigned to The Hills LGA, 13,600 to Blacktown LGA, 11,800 to Camden LGA, 6,700 to Campbelltown LGA, 8,050 to Liverpool LGA, 6,600 to Penrith LGA and 1,450 to Wollondilly Shire. Together, these represent 30 per cent of the metropolitan total. Large increases are channeled into established areas, including 21,450 in Parramatta LGA, 18,250 in Sydney LGA (covering the CBD and surrounds), 12,200 in Canterbury-Bankstown LGA and 10,000 in Bayside LGA.

On the release of these figures, NSW Planning Minister Rob Stokes boasted “we are getting the balance better … getting over the greenfield issue was the biggest thing that needed to be done”. The targets were to be fleshed out in Draft District Plans administered by the government’s new, unelected, planning politburo, the Greater Sydney Commission (GSC), with power to override elected LGA councils.

Within days, however, the GSC announced its own strategy and targets, which differ from the Department’s. To confuse matters, the total housing target is distributed to 6 Districts across the city, Central, North, West Central, West, South West and South, rather that the Priority Growth Areas in A Plan For Growing Sydney. Based on a combined metropolitan total target of 725,000 dwellings for an additional 2 million people, each Draft District Plan nominates a 20 year target to 2036. The South West District contains 4 of the peripheral LGAs with most potential for greenfield construction, Camden, Campbelltown, Liverpool and Wollondilly. Its 20 year housing target is 143,000 dwellings, or 19 per cent of the metropolitan total. Of the other 3 LGAs with most greenfield potential, Penrith accounts for just part of West District’s target of 41,500 dwellings or 5 per cent of the metropolitan total, while Blacktown and The Hills are in West Central District, which is dominated by Parramatta LGA with minimal new land release capacity.

Since this means more high-rise densification inside established areas, the GSC is shaping up as the committee for managing Big Projects interests. Its Draft District Plans also mandate an “affordable rental housing target” of 5 to 10 per cent, inclusionary zoning, so knowledge-welfare priorities haven’t been ignored.

Higher the density, higher the prices

This suppression of greenfield development reflects a common view that location doesn’t condition the benefits of supply. For the purpose of easing pressure on prices, housing can just as effectively take the form of high-to-medium-rise towers in the CBD and inner-ring or dense precincts centered on suburban transport hubs. Indeed, the GSC allocates a hefty 21 per cent of the 2036 target to Central District. Yet the common assumption is contrary to a body of economic analysis on the land value impacts of urban containment. Citing Paul Cheshire and colleagues at the London School of Economics, commentator Phil Hayward gives a cogent account of this in his recent article, “The Myth of Affordable Intensification”.

Observing that Hong Kong is 2.5 times as built up as Manhattan but even more expensive per unit, Hayward explains that the more density that is allowed, the higher the average housing unit price becomes. Cheshire and colleagues, he notes, put this down to a “bidding-war” at the margins of each income-level cohort of society for “slightly more space”. The less average space available per household, the more intense is the bidding-war effect. “Site development potential” in an urban land market with a regulatory limit on land supply, writes Hayward, seems to capitalise instantly into site values. On the other hand, when the market allows people to consume as much space as they want, the bidding-war effect is absent. He goes on to present evidence from cities with differing land use planning policies.

Turning directly to their work, urban land economists like Cheshire and Alan Evans at the University of Reading consider housing “a complex good – indeed very complex – good consisting of many attributes bundled into one composite good”. The land base is a particularly important attribute. With rising population and incomes, restrictions on the quantity of land at the periphery ratchet up values across the whole urban region. As it happens, this is a precondition for the typical Big Projects business model. “Capital is substituted for land in the production of space, as land becomes more expensive”, writes Evans, and "an increase in the ratio of capital to land results in an increase in the density of development". The evidence that fixed urban growth boundaries put “upward pressure on land and thus house prices” is clear. While no such formal boundary is proposed for Sydney, delimited Priority Growth Areas and GSC Districts have more or less the same effect, operating as land value traps. Between 2009 and 2014, the Sydney median greenfield lot price ballooned from $269,000 to $339,750, reports the UDIA, even though lots released per annum rose from 2503 to 8597.

To subdue prices, Cheshire argues in a 2009 paper, it isn’t enough to rezone and release enough residential land to meet anticipated demand:

But household numbers – apart from being unreliable in their projection and so a poor tool for forecasting how many houses to build – would, even if known with perfect foresight, be only one factor in the relevant determinants of demand. If we are to provide stable prices for a given quality of housing and are to do so via a “planning” system rather than just by a regulated market … what we need to predict is the effective demand for housing and garden space given that it is the quantity of land that the system allocates. Then we have to allocate not just the quantity of land predicted as being compatible with price stability but more. Not all the land allocated as available for development will actually be developed. One rule of thumb suggested is that this implies allocating 40 per cent more land than the estimated demand indicates is needed ... the overwhelmingly more important driver of the demand for ‘housing’ [is] not household numbers: it [is] rising real incomes.

A similar approach is suggested by Professor Solly Angel of New York University, in his book Planet of Cities:

Data is not available to determine what range of city footprint ratios is common to cities with an unconstrained and responsive supply of urban land, adequate to ensure that housing remains affordable over time. It stands to reason that projected city footprint ratios in a city with unconstrained land supply should be higher than the minimum ratios observed in the global sample of cities [discussed earlier in the book]. If this were the case, then the areas planned for 20 to 30 years of urban expansion must be at least 50 per cent larger than the areas obtained by simply projecting populations and built-up area densities.

In Sydney’s case, the authorities aren’t just failing to supply a buffer of land above population and demand projections. Worse, their targets and greenfield-infill ratio are shaped by bureaucratic value judgements on where people should settle, rather than land market imperatives.

On top of this, proximity to amenities, like transport facilities, is another housing “attribute” which capitalises into higher prices. Advocates of transit-oriented-development demand more housing near public transport hubs or “better coordination of land use and transport infrastructure”, as they put it. The concept is popular amongst Big Projects and knowledge-welfare interests, if for different reasons, and features prominently in A Plan For Growing Sydney. But evidence from the US suggests that land values within 800 metres of mass transit can rise by as much as 120 per cent. This translates to property prices in localities adjacent to rail corridors increasing between 32 and 45 per cent. 

Opponents of unrestricted fringe development resort to a well-worn series of objections. Principally, they claim the housing will be “too far from jobs” or that savings on the purchase price would be cancelled out by “transport costs”. These assertions are founded on a persistent myth of monocentricity, an assumption that most jobs are concentrated in the metropolitan core. The following table is adapted from the Independent Public Inquiry, Long-Term Public Transport Plan For Sydney report, published in May 2010:

While the authors set out to prove that Sydney’s pattern of employment had features of centralisation, the table shows otherwise. Of the jobs supposedly in “centres”, 37.1 per cent were actually spread over 33 dispersed locations, only two of which had more that 2 per cent of the total – the CBD with 12 per cent and South Sydney with 2.5 per cent. The other 62.9 per cent of jobs were scattered randomly throughout the Greater Metropolitan Region. In this context, phrases like “we need to put houses near jobs” are meaningless.

Having investigated the question “do outer suburban workers have extra long commutes”, Alan Davies, who blogs for Crikey.com, found that “average commute times don’t vary a lot geographically within large [Australian] cities.” Urban planners underestimate the extent to which firms and workers co-locate for mutual advantage. Peter Gordon of the University of Southern California has researched commute times in American cities over decades. He reports a remarkable stability of travel times across inner and outer metropolitan sectors despite high population growth. Gordon observes "that many individual households and firms "co-locate" to reduce commute time and this spatial adjustment can be more easily made in dispersed metropolitan space". It’s no longer true to say cities are polycentric, he contends, since they are evolving “beyond polycentricity”.

One advocate of Sydney inner-ring densification, confronted on Twitter with the argument that this relies on price-hiking growth boundaries, responded that “relaxing floorspace regulations in an Alonso-type model will give the same [densification] effect, with infinite city size”. However, the Alonso model or bid rent theory incorporates a number of artificial assumptions, including monocentricity. Higher paying professional jobs which preoccupy the knowledge-welfare elite may locate closer to the core, on average, than lower paying jobs. But it’s lower paid workers who are most in need of inexpensive fringe housing. Recently, Grattan Institute’s John Daley expressed the conventional view, writing “it’s important that new supply is focused on the inner and middle rings – 2-20km out of the CBD – of our large cities … new developments on the edge tend to be a long way from where additional jobs are being created”. In other words, he propagates the myth of monocentricity and implies that worker-trader jobs don’t count.

NSW Treasurer Gladys Berejiklian has announced, with some fanfare, that “residential construction activity in NSW has hit an all-time high” and this "will improve housing affordability". But if that construction continues to be funneled into increasingly expensive sites, Sydneysiders won’t feel the benefit. Even more than now, their dream of home ownership will turn into a recurring nightmare.

An abridged version of this article was published in On Line Opinion, Australia's e-journal of social and political debate, and on the US site New Geography.

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