Running out of land!

Posted by on Mar 20, 2013 in Property | No Comments

The idea that we are running out of urban land is one of the great ‘urban’ myths of our industry.

Perceived scarcity of land arises for two reasons, maintenance of constrained supply through development controls and development industry practices, and artificially high estimates of demand which assume continuation of the status quo.

We have a widely accepted notion that every citizen has a right to access to certain service and amenities, irrespective of where they choose to locate. Infrastructure costs grow disproportionately as cities spread, so in order to make this outcome feasible, it is necessary to control the area in which people locate and this is done through land development controls. This constrains the supply of urban land creating artificial scarcity in the market.

However, it is the release of lots that is a major determinant of land supply and prices. Land banking is a common practice adopted by developers, whereby they accumulate land for development well before the date at which they intend to sub-divide and build. There are good commercial reasons why developers land bank, it ensures long-term supply there by stabilising revenue over time and it can limit competition in an area. This blog outlines the land supply of listed developers in Australia. These developers, which represent only a fraction of the development market hold a staggering average of 20.4 years land supply. http://www.macrobusiness.com.au/2013/03/prosper-responds-to-land-banking-developers/.

To the extent that Perth is running out of land, the shortage is a politically and financially driven one.

In addition to artificially constraining supply, there is an overwhelming tendency in the industry to inflate housing demand. In estimating underlying demand, the methodologies that are commonly applied are overly simplistic (for example taking the projected population and dividing it by the average persons per household) and often assume continuation of the status quo in terms of household formation and dwelling preference. In terms of effective demand, in Australia this is distorted by a taxation system that motivates housing investment, which further adds to the perception of a shortage.

The populist media, which regularly declares the exhaustion of urban land supplies, calls for zoning of additional urban land. But how do we reconcile unconstrained supply with the inalienable right to access services? Lifting development controls on land and allowing people to choose where they want to live means accepting that they need to pay full cost of their choices. I don’t think this is possible, and therefore I don’t believe this is the solution.

I believe a true solution to the problem of perceived land shortages requires:

  • A rational and transparent approach to the zoning of urban land to facilitate the efficient and effective delivery of key infrastructure
  • A simplified and more efficient planning system that removes the incentive to developers to land bank
  • A simplified tax system that doesn’t bias housing investment
  • Honest modeling of underlying demand

With these measures in place I think we could all live a life without fear… of running out of urban land.