RBA RESEARCH SHOWS DRAMATIC EFFECT OF ZONING RULES ON SYDNEY HOUSE PRICES
Zoning rules account for 73 per cent of the cost of land in Sydney according to new research from the Reserve Bank of Australia, pushing the average price of a detached home from $671,000 to $1.16 million. The study – The Effect of Zoning on Housing Prices – examined the country’s zoning restrictions including minimum lot sizes, maximum building heights and planning approval processes.
The RBA research refers to the impact of zoning restrictions as the “zoning effect” or the price a developer would be willing to pay for permission to build a house on a given plot of land if the rules allowed. The research showed zoning restrictions added nearly $490,000 to the average price of a detached home in Sydney in 2016. This figure was $324,000 in Melbourne, $159,000 in Brisbane and $206,000 in Perth.
Apartments have also been affected. In Sydney, the zoning effect added about $400,000 to the price of an average apartment in 2016. Within Sydney, the zoning effect is largest in northern councils such as Willoughby and the Northern Beaches. While zoning rules do play an important role in managing the character of towns and cities, these costs need to be examined in light of Australia’s housing affordability crisis. Zoning restrictions, along with the country’s rising population and tax incentives for investors, are a contributing factor to the surge in house prices.The research authors said that large increases in values as a result of zoning changes are inconsistent with the view that a physical shortage of land itself is the main cause of high land values and housing prices.
They added that physical land costs are higher in Australian cities (particularly in Sydney) than overseas, so even if zoning restrictions were relaxed, housing in Australia would remain expensive relative to cities where zoning is permissive and land is less physically scarce. They warn further likely increases in housing demand will bind existing zoning restrictions “more tightly” and continue putting upward pressure on prices. Policy changes that make zoning restrictions less binding, whether directly, such as increasing building height limits, or indirectly, via reducing underlying demand for land in areas where restrictions are binding, could reduce this upward pressure on housing prices.
MOODY’S TIPS “CORRECTION” IN SYDNEY (BUT NOT FOR LONG!)
There’s been plenty of talk about the correction in Australia’s housing markets and latest data CoreLogic-Moody’s Analytics Australia Home Value Index Forecast shows prices in Sydney have fallen 1.7 per cent this year, continuing the modest reversal that began late last year. It’s safe to say that Sydney’s housing market has had a stellar run. House prices rose 12.8 per cent in 2017, and combined, prices for houses and apartments in Sydney grew by around 80 per cent from the start of 2013 through to late 2017.
Moody’s expects house prices across greater Sydney to fall by 4.2 per cent in 2018. It’s forecasting a correction across NSW but says performances will vary depending on the different types of dwelling as well as the geographic location.
“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values. However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”
Moody’s expects the largest declines will occur in regions close to the city centre.
“House values in the City and Inner South region are forecast to fall by 10.1 per cent in 2018 to be the worst performing Statistical Areas in Sydney,” the group says. Conversely, Moody’s expects apartment prices to hold up better in the years ahead despite strong growth in new supply. “Apartments are expected to also slow but not as sharply with a 0.3% expansion expected in 2018, down from the 9.8% growth in 2017,” it says, adding that apartment prices are less volatile than those for houses from a historical perspective.