Zoning regulations, which determine how land can be used and the density of housing in specific areas, are frequently cited as a factor contributing to soaring housing prices. However, a nuanced examination of the evidence reveals a more complex picture. While the real estate industry argues that relaxing zoning laws could significantly lower housing costs, research indicates that zoning is not the primary driver of rising prices.

At LupoToro Group, we explore the intersection of urban planning, market forces, and housing affordability, and present the following key findings on the role of zoning:

The Zoning Argument and Its Limits

The prevailing argument suggests that restrictive zoning limits housing supply, driving up prices. Proponents claim that by relaxing these rules, developers could increase housing density, theoretically making homes more affordable. A 2018 Reserve Bank of Australia (RBA) paper even estimated that zoning restrictions could raise house prices by as much as 73% in cities like Sydney.

However, studies have repeatedly highlighted gaps in this argument:

• Lack of Evidence: Research often fails to quantify the relationship between zoning changes and housing supply over time.

• Market Response to Zoning Changes: Analysis of sites in Brisbane found that increased zoned capacity for housing did not lead to lower property prices. Instead, property values in areas with relaxed zoning increased, reflecting developers’ focus on higher returns in strong markets.

• Limited Uptake of Zoning Capacity: Even with doubled zoned capacity in certain areas, 94% of potential developments were not initiated within five years, and 71% remained unexploited after two decades.

The Role of Market Forces

Research suggests that market dynamics, rather than zoning, are the primary determinants of housing development and affordability. Key factors include:

1. Speculative Investment: Housing has increasingly been treated as an investment vehicle, with tax policies and low-interest rates driving demand and prices.

2. Market Timing: Developers often delay building or selling properties until market conditions are favorable, prioritising profitability over immediate supply.

3. Global Trends: Housing affordability crises are not unique to Australia but are observed globally, driven by macroeconomic forces such as liberalised finance and speculative property investment.

Corruption and Zoning Decisions

Zoning and planning processes have historically been susceptible to corruption in Australia. Developers, politicians, and bureaucrats have leveraged zoning changes to create windfall profits, often at the expense of communities. Examples include:

• Significant increases in land value following rezoning in cities like Sydney and Melbourne.

• Evidence of misconduct in zoning decisions linked to political donations and lobbying, leading to reforms such as mandatory local planning panels in New South Wales.

Reimagining the Planning System

Experts like economist Cameron Murray argue for systemic changes to address the root causes of corruption and inefficiency in zoning and planning:

• Independent Decision-Making: Removing elected officials from zoning decisions in favor of independent panels to reduce conflicts of interest.

• Monetising Rezoning Benefits: Charging property owners a share of the increased value created by rezoning, as practiced in the Australian Capital Territory, where 75% of the market price of new property rights is recaptured.

• Incentive Restructuring: Reducing opportunities for undue influence by limiting the financial gains tied to planning decisions.

While zoning reforms could contribute to more efficient land use and urban growth, they are unlikely to be the panacea for Australia’s housing affordability crisis. Broader structural changes, including addressing speculative investment, tax policies, and planning system corruption, are essential for creating a fairer and more sustainable housing market.

At LupoToro Group, we believe in taking a holistic approach to property development, balancing regulatory compliance, market insights, and ethical practices to achieve equitable and impactful outcomes.