The Efficient Property Markets Hypothesis: Why Feasible Zoned Housing Capacity Is an Illusion
A persistent idea in planning and housing policy debates is this: Cities need enough sites that are zoned for housing and financially feasible today to build many new homes for decades into the future.
How many is enough? Who knows.
In New Zealand, councils are required to estimate feasible zoned housing capacity. This has led to arguments about whether the current zoned capacity for triple or quadruple the number of homes is enough. In Canada and many parts of the United States, similar debates are playing out.
In Victoria, Australia, councils are required to “ensure sufficient realisable capacity” exists in their planning schemes, while in New South Wales, councils “need to identify the theoretical development capacity in their existing land use controls” and take into account “the feasibility of development and likely take up rates of the capacity identified.”
The Grattan Institute released a report last year arguing that:
The federal government should ask the Productivity Commission to regularly assess the performance of state and territory land-use planning systems, including through regular assessments of commercially feasible capacity for new homes.
The idea that feasible zoned housing capacity is both extremely important and easy to identify is embedded in many administrative processes around the world.
But it is not. This whole exercise is seriously flawed.
Why?
Because it ignores basic economics and hence fails the efficient property markets hypothesis test. Since all the gains to future development are priced in today, there should be no excess returns to development. Finding feasible housing capacity is equivalent to finding excess returns in the share markets—essentially impossible on average.
Let’s dig in to see why in more detail.
I highly recommend a paid subscription—it also gets you a big discount on my upcoming in-person workshop in Brisbane on the 9th and 10th of June.
Tickets here, and a PDF event flyer with full details is downloadable below.
The efficient property markets hypothesis test
Feasible housing capacity is usually taken to mean that the returns on today’s costs from development today exceed the cost and risk of development today.
In practice, this is measured by examining sites across a city or region and estimating the potential revenue from developing each site to the highest density allowed under zoning rules.
