Jul 9Liked by Cameron Murray

Good article.

I understand you write these things from an economic perspective, but I tend to view these things from my own town planning perspective.

So for me, the big thing that jumps out for me is this notion that the developer needs a buffer. Sure I get they will always want some spare capacity up their sleeves.

But my query is - how much spare capacity does each developer need? There must come a point where you could have a hundred or more developers (big and small) all operating within the one market who could potential stockpile thousands of approved dwellings and with the way the law is applied by the courts these days, these approvals can and do remain valid for decades.

I think it was in the mid 90's that the Queensland Government radically changed the compensation provision to an approach of "use it or lose it". If Council downgraded your existing zoning to no longer allow a historical DA that it no longer wanted or supported - then you had 4 years to put in an application to do the approval - if not then you no longer have compensation rights for lost "property rights". It was farcical that prior to this, Councils were shit scarred of down zoning areas based on development approvals that related back over 50 years ago, purely because they would have been exposed, under the laws of that time, to compensation claims for a loss of development rights.

The same thing should be applied to DA that have not been enacted within 4 years - use it or lose it. The legislation needs to be amended to make clear to the courts that the current interpretation / rules that it has applied to when a DA is still valid or not is now much narrower.

DA have now evolved to be a tradable commodity that once gained, can be held, traded and on-sold numerous times, without ever lifting a actual finger to commence or progress the actual development. This has all been aided and abetted by legislation.

It is not the silver bullet, but it will force developers to stop speculation / stockpiling and bring more dwellings onto the market, or at least on-sell the property so someone else can actually do it.

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Great article - also worth mentioning the way developers calculate demand for multi-res projects (Highest and Best Use Analyses) is **incredibly** conservative in order to take on as little risk as possible. Basically these use the following information to determine whether a project has sufficient demand:

- A detailed review of settled market transtions to provide trend analysis with rates of sales

- A high level review of the active supply of apartments and townhouses within the catchment with a focus on price points and total volume of sales

- A review of the future pipeline supply of apartments

- Population demand assessment

This in no way factors in the quality of building, any views it might or might not have or the desirability of the specific site within its context - it's incredibly abstract.

Makes you think about what all the developers did before all this economic data was available - they just put their finger in the air and took a risk. This also speaks to something that is really pervasive across heavily financialised countries like Australia - risk aversion is everything and everywhere.

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I want to query this a bit. In the model you describe, we have this entity sitting on a stock of planning approvals, and their decision to seek building approval and actually construct homes is actually much more about market conditions than anything else. IE they don't want to build because they won't make as much money compared to not building.

I think there are a couple of other ways of thinking about this, and I'd be interested in your thoughts.

Firstly, if it is relatively more difficult to obtain planning approval, that's going to make me hoard my existing approvals more and be cagier about beginning construction. If it becomes easier to secure planning approvals, then I'm less worried about running out of buffer, and so I'm more willing to convert planning approvals into building approvals. This suggests that reducing the costs of planning processes could lead to more constructions.

Secondly, I may not want to construct and sell under current market conditions because I won't make as much money. But if getting to the 'building approval' stage was less costly - eg if planning processes cost me less in time and money - then I might be willing to sell at a lower price and make an equivalent ROI. However, I don't think this takes into account your 'future options' point that I might still prefer later to make even more money. (considering the ROI from just sitting and waiting).

But I guess there is a third thing - is it a given that development-ready land rises in value over time? Sure, this happens in our current context. But in theory planning reform could make development-ready land more abundant, and thus its value could be reducing or at least the same over time. Does it not stand to reason that an increasing rate of supply of development-ready land would reduce the potential profits from delaying construction, and thus lead to a greater flow rate of new homes?

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Excellent and succinct article. Slightly tangential, but worth point out the planning approvals are about the location of new developments (i.e. zoning question) whereas building approvals are about safety (i.e. building won't fall down, meets fire/cyclone standards etc.). Neither is about achieving the right quantity of housing to meet 'demand'. We have moved on from purely free-market philosophy in many areas, but the housing/property sector is late to this party. With 40+ years of free-market policy in housing (investment based on profitability), should be surprised that housing is not meeting community needs?

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This article does not differentiate between the 2 types of stock - land and units. For land, I don't think there is any doubt that developers are drip feeding lots on to the market to keep prices high. Small to medium sized land developers are few and far between, because they have been excluded from the market by the withdrawal of credit from the banks. Large developers doing large master-planned subdivisions predominate. The speed at which new land owners are proceeding to build is extraordinary. They waste no time. So claims of land owners dragging their feet I think are not correct. For units, small to medium developers are not serviced by the banks. To operate, they syndicate equity. So, at first base, which is entrance to market, we have a lot less developers than we did before. But moving on to the construction of units, we see significant risks for the developer. We see development approval risk - which takes a long time. It has probably never been longer. Obtaining planning approval, and engineering approval, takes time. Numbers in feasibility studies are not static. Generally, they grow the more time rolls on. What were once considered viable projects (planned on the basis of the land purchase price) can become non-viable. Construction cost risk has not abated. And we still see credit risk. Banks want to see significant pre-sales before they will fund construction. Like any business, developers are motivated not just by profit - but also avoiding going broke. So I am not surprised to see that developers do hold town planning approvals for units, but won't act on them because, for example, construction costs have gone up to such an extent that the project is non-viable, or that pre-sales cannot be obtained at a level that ensures the feasibility is achievable. Pre-sales must surely be harder with rising interest rates.

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I still need to read the rest but yes, this was what I was going to say:

"though sometimes building companies also act as a developer"

especially in rural areas. There are also certain demographics that get planning approval for one thing and intend to do another, just so they can get started on their personal projects on the same land.

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You’ve noted the “natural speed limit” or when vendors & developers find an intrinsic floor without any collusion. This makes intuitive sense.

But are there situations where some are incentivised to cheat on, and sell below this oligopolistic price floor?

Or does that only happen in falling markets or during recessions, like Ireland after 2008?

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