Jul 9, 2023Liked 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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I agree that it is more than just a buffer stock to adjust to market conditions. I think the planning system is its own game now, which is why the buffer stock is so large. It's all about "I wonder if this project would be possible" and seeing if it is, and adds some value.

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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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On your first point, not really. Because planning approvals generate immediate economic gains through their effect on the value of property. They are worth investing in as their own project. Sure, making approvals faster and cheaper might to a smaller buffer stock being held, but not a faster output from that buffer stock.

On your second point, I think you agree with me after considering in more detail.

On your third point, it doesn't need to be a given that development ready land rises in value. Only that it is a better alternative than taking on the extra risk now of developing in current market conditions. It's all relative.

I notice that your are trying to reason from a position of there being already some close limit on developable land. We are far from that. Even in Hong Kong, where that argument might be plausible, the government there has pushed development ready land into private hands to try and speed up development and all they got were bigger privately owned buffer stocks.

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Joel, I would question your assumption that "it is relatively more difficult to obtain planning approval".

I have worked as a town planner for 30 years in both the State and Local Government level within the Queensland Planning System. During that time, I have noted the gradual evolution of the way this planning system is regulated from fairly restrictive to now very permissive. The last planning scheme I worked on there was a deliberate attempt to make every likely development foreseen by its zoning to be either self-assessable or code assessable, which in the game is referred to "tick and flick" - comply with the code and you will have a GUARANTEED approval within 30 days. Hardly onerous, restrictive, or difficult!

The situation may be different in other States, but given we all tend to be lemmings I would find it difficult to believe that it that difficult in other States (although NSW does, from afar, appear to be a different beast).

The difficulty, in my experience, appears to be when developers submit proposals that do not comply with what the planning scheme clearly allows (and it is all set out there in black and white for all to see). In these instances, of course the LG is not going to wave the proposal through - it is obliged by law to fully assess the application and its potential (unforeseen) impacts. A LG has an obligation to its wider community that it is not willingly imposing harm or worsening through approving any such applications WITHOUT firstly making a proper assessment.

Again in my experience, in these situation the first thing that happens is that additional information is required. A good developer would foresee and even consult with the LP PRIOR to lodging a DA and duly submit such additional information. But in 90% of the cases this is not the case, so Council have to go through and state what it wants and then it up to the developer to submit the required information. The funny thing is, by legislation, we have set timeframes for our required actions, but proponents do not have any statutory timeframes for responding. They can sit on the information request for however they like and even when they respond it is often inadequate in terms of providing sufficient information on which to make informed decisions. This is a subtly that is not distinguished by the raw data reporting of planning delays.

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Thanks Neil, this is really useful perspective.

I think part of the current debate is around what the planning scheme should allow - so while it may be frustrating for you that planners are trying to push for more than what is allowed, in some cases there's an argument that what is allowed should change. But I think this is more an argument for mass upzoning rather than spot-decisions.

I'm thinking of Canberra here - most of the ACT only allows single-occupancy dwellings with minimum parking requirements. There's a campaign to change it so that the default/minimum is RZ2 instead of RZ2, which would allow duplexes and dual-occupancies.

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Planning is often held captive to its past history. Canberra was developed as the "Bush Capital" and many Canberians have grown accustomed to large block set in a bush surrounding. Thus, it then becomes a harder political and physical development constraint to turn around. There are a few suburbs in Canberra (Belconnen and Gungahlin) where density is being pumped up and they struck me as quite vibrant places.

I don't know if you ever watch those YouTube segments on American cities and it sounds the same thing - the single detached dwelling is MANDATED in a good part of each city, so even townhouses are prohibited in these areas.

Maybe Queensland is far more progressive than what I think. Zoning is irrelevant in terms you apply for the specific form of development (i.e. not a rezoning) and each application is assessed on its merits. Of course you will generate a higher level of assessment and you will have to jump through more hoops, but TECHNICALLY by the nature of the legislation, very few select (State imposed) things are prohibited (i.e. the Council can automatically refuse the application without an assessment). So in theory you can developed an high rise apartment in a low density residential zone. I am not saying it will be easy or approved, but technically it is possible. Certainly if you have a 20m frontage in a low density suburb, subdivsion into 2 lots with townhouses is a given (code assessable).

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I question your assumptions related to developers not 'making as much money'. There is a common assumption about developers being greedy which this leans on. It may well be the case that developers don't build because they don't want to make a loss. This isn't really greed - the company would go out of business if it built continually at a loss. In the short term developers take on a lot of risk and many I'm sure frequently make losses, but need to ensure profitability in the long term. So developing is inherently risky and requires long term investments - both unattractive to investors without a premium. If stockmarkets return 8% or whatever it is, developers would not attract any equity investment at all without being able to get a higher return than this. With more research or a credible source we could understand what the numbers are in reality, but the assumption that construction doesn't happen because developers want 'even bigger super profits' is flawed.

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Joel, I will also like to reply to your two other points.

Point 2. Do you sell to a ROI or to market price point? In other words if an equivalent housing product was selling for a higher price point than your expected ROI price point - are you really saying you would sell for the lower price point? You would be a rare species if you sold to the lower price point. So what you are postulating here is all theoretical. I recall walking around a proposed new greenfield site with the in-house economist employed by the major developer and there was no talk of cost of land development + ROI - it was all this is the average price point in nearby areas and that was the house and land package price point they would sell to. If they could make some further saving along the way - then that was icing on the cake - a fatter profit.

Point 3. Again, this varies between States, but in Queensland under our Infrastructure Charging regime, part of this process required each LG to ensure we had zoned and available land supply for at least 5 years at any one time for both single and multiple dwelling housing options. So there is never a shortage of available land or land capable of more intense development. I am sure developers would like these opportunities to be in other places, (i.e. middle ring established suburbs) and I wouldn't disagree with this. But this then boils down to other considerations (land acquisition costs, infrastructure capacity, increased service demands and political opposition). We could go down the Singapore model of compulsory acquisitions by a government development corporation at below market costs and then re-build them with much more intense density and we could really ramp up supply. But can you see that happening and would you like it happening in your suburb?

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Thanks Neil. For point 2, Cameron has previously described a model whereby developers look at what the market can pay, they think about their margin and costs, and then the residual is what they are willing to pay for the land. It makes sense to me that the amount that a developer is willing to pay for land is influenced by the potential profit they imagine. But maybe once they have land it's a different story - of course then they want to maximise profit over time, not just achieve some minimum ROI and call it a day.

For 3 - I think it's a bit beyond the scope of this piece but your point that planning approval is in undesirable spots (urban fringe) is sort of exactly the point! Certainly there's a generation of younger renters who want to be able to buy a place in the middle ring but can't do so, and if more townhouses/mid-rise apartments were being built, then they could do so. The fact of political opposition isn't a given and this issue is political precisely because there are different interest groups wanting different outcomes! If existing owners in desirable suburbs don't want more people living there that obviously affects the politics of the situation, but it isn't empirical evidence beyond that about the effect of housing or planning. I'd certainly love to see more people having the chance to live where they want, and I feel like the real issue here is whether it is planning laws that prevent that, or something else.

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I can only go by my experience and that is why I get a bit frustrated with the economic debates - it is all based on theoretical constructs that doesn't reflect what actually happens, or fails to address some of the underlying problems we current face with housing.

Cameron is doing a great job in trying to educate people that all this media messaging that supply and problems with the planning system is at fault (there are plenty of problems with the planning system, but zoning and land supply is not one of them - well at least not here in Queensland).

I have often said that there are hundreds of decisions that got us to our current predicament and it will take a hundred or more different decisions to get us out of it. But thus far, no attention or blame is being turned towards the withholding of supply by deliberate decisions by home-owners and developers. I can drive around part of my former LG and in Brisbane LGA and recognise site that had DA approvals over 10 years ago and yet they still sit undeveloped. We need a mechanism to get these development moving, or as I said earlier - you lose your development rights. We are slowly building up a monopoly power where certain larger development corporations have absolute control about the timing and release of urban development projects - that is not how a market based system is supposed to work.

In my own former LG we rezoned the shit out of the place, yet virtually all of this development potential remains unused, despite all this chatter about housing crisis. It is not boondocks territory being located 20-30 km from the Brisbane CBD (equivalent of Parramatta in Sydney). For whatever reason these are not being developed, where in economic theory they should be snapped up and developed as quickly as building supplies and tradies are available, but it is not happening!

Again I can only point to what is happening in Brisbane, but certainty the planning and development of the middle ring suburbs for townhouses/mid-rise apartments has already happened. No planning law has stopped this, although I do think the historical nature of previous development (narrow streets and inadequate infrastructure systems) has / will cause problems in these areas.

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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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