Wednesday, October 21, 2009

My economic philosophy of town planning

At the most broad level, the rationale for regulating land use is to minimise negative externalities to neighbouring owners of immobile property assets. This is why even ancient civilisations had strict rules attached to land.

Modern planning continues this tradition. There are few, if any, countries in the world that fail to regulate land uses (maybe the Vatican?) due to town planning’s success in addressing this fundamental externality problem. By regulating land use you can exclude development that will produce impacts such as noise, pollution, traffic, over-shadowing, and other externalities on other land owners. Protecting land rights, and subsequently land values, is essential to a functioning market economy.

This most basic principle is probably forgotten by many 21st century planners. It is one of my reasons for objecting to the proposed South Brisbane / West End plan. Allowing 30 storey developments creates severe externalities in terms of traffic, overshadowing, and use of public space such as parks. Another reason is based on the following second principle.

The second principle links planning and the property market and might be described as flows: the market is the engine and the brakes, while planning is the steering wheel. Development of property is simply one type of capital investment which is driven by broad economic conditions. Planning controls can therefore do little to influence the rate (speed) of development, but have much control on the physical location (direction) of development. While highly successful plans may eliminate some costs and risks associated with investment in property, this elimination of market friction will have only a minor impact on the overall rate of development.

Consider the following situation. The town of Rockhampton rezones the whole city to allow for 20 storey high rise buildings. Will a change to the town plan alone actually generate investment and population growth in Rockhampton? Will we see Rockhampton transform to a densely populated metropolis because the town plan allows it? I would answer these questions in the negative. 

A third principle is that each time planning changes the rights of land owners it chooses winners and losers. Winners are often more easily identified. Those properties where rights to develop have been extended, or those that benefit from restrictions on the use of neighbouring properties, are generally clear beneficiaries in terms of impacts on land value. Losers are often properties that have had restrictions placed on their rights. But many other losers are hard to identify.

Remembering that the growth in demand for ‘space’ occurs at a rate determined broad economic factors external to the plan, allowing an increased density of development to occur in one area may siphon off demand that would have allowed profitable development elsewhere.

This elsewhere can be broad and include many individual parcels of land. A simple example of a remote loser might be Springfield – from the Metroplex development on the former Wacol Army Barracks. If the planning scheme allows Metroplex to go ahead and develop a business park, it will siphon demand for office space in the western corridor away from the Springfield CBD, slowing the rate at which Springfield can profitably develop office space. This effect might flow on to the Ipswich CBD, and other business parks in the Southern and Western corridors.

To reduce politicisation of selecting winners and losers, a plan should be amended infrequently; lest its changes become a continuous stream of political gifts to winners.

So there you have and economist’s view on planning philosophy. At its core, planning should reduce negative externalities. It selects where developments of different types may occur, if in fact the market desires them, and finally, each time a plan is changed it selects winners and losers. Therefore changes should be infrequent. In light of the current practice in Brisbane and South East Queensland, I would suggest that plans (local and regional) last a minimum of 10 years.  There is more to come on how planning may provide fore more organic growth, even in light of the projected rapid population growth in Australia.


  1. hmmm - low business tax fuelled QLD growth during the Beattie years. As Brisbane becomes a more expensive place to live i.e. infrastructure, slow planning approvals etc, you could argue less growth will occur because people won't migrate or move somewhere else....

    a horribly worded previous sentence, but in essence I agree with no politicising approvals, but I do believe planning can effect growth rates.

  2. I agree that as the relative benefits for businesses locating in Brisbane decline, growth will slow.

    But I think your point actually shows that regulation of land is simply a steering mechanism, rather than a driver of growth. If the relative merits of Brisbane disappear, people and businesses will go elsewhere. If we broaden our scope to Australia, we can say that Brisbane’s planning regulations steered growth towards Brisbane, at the expense of other cities.