Jumping the urban growth boundary

Australia’s state and local governments rely on a variety of regulatory devices to limit suburban growth. One measure that has been implemented in all of Australia’s major cities and some towns (many within the past decade) is the Urban Growth Boundary or UGB.

 A UGB is a form of large-scale zoning whereby the government effectively draws a ring around a city/town and outlaws urban development outside of this ring. The resulting UGB thereby prevents conversion of rural land that would otherwise occur. Advocates of UGBs argue that they create more efficient and compact cities by preventing urban sprawl, thereby saving on infrastructure costs and protecting the environment. 

However, as I will show you by way of example, UGBs actually exacerbate sprawl whilst also helping to push-up the cost of land.

Taking the second point first – the cost of land – UGBs create an artificial scarcity of land by significantly reducing the level of contestability and competition in the land market. Faced with a reduced level of competition, land owners that are lucky enough to be located within the UGB are naturally encouraged to withhold land from the market in order to reap excess capital gains as the land market tightens. The inevitable result is higher land and house prices. Meanwhile, unlucky landowners located outside of the UGB are only able to receive rural value for their property, since it is banned from development.

International evidence on the impact of UGBs is conclusive. For example, in Portland, Oregon and Auckland, New Zealand, the differences in values between undeveloped land just metres from each other but across the UGB have been estimated at 10 times or more. Without a UGB, these values would be similar if not the same.

I haven’t yet found data for Australia comparing land values on either side of an UGB. However, as shown by the below charts, the appreciation of greenfield land prices in Australia has been significant due to artificial regulatory constraints. Put simply, land prices have been rising whilst block sizes have been shrinking.

The astonishingly high price of greenfield land in Australia has also been confirmed by RP Data (see below table).

A 2008 speech by the RBA’s Anthony Richards provides a good explanation of the detrimental impact that Australia’s restrictive urban planning/zoning systems have had on land/house prices.

In principle, the price of housing there [on the urban fringe] should be close to its marginal cost, determined as the sum of the cost of new housing construction, land development costs, and the cost of raw land. And in the absence of any restrictions on supply, the price of raw land on the fringes should be tied reasonably closely to its value in alternative uses, such as agriculture. So unless there has been a marked increase in the value of this land when used for other purposes, the availability of additional land towards the edges of our cities should have limited increases in the cost of housing there…

 …Australian land prices are quite high. For example, contacts in Dallas and Atlanta suggest that prices for new developments on the fringes of those cities can start around US$50,000 or less, for lot sizes that are typically several times the size of Australian blocks. Admittedly neither of these cities is coastal, but nor are they small: both are larger than Sydney and Melbourne, with Greater Atlanta having a population of 5.3 million and Dallas-Fort Worth with around 6 million people…

There are no doubt a number of factors that could be contributing to the observed level of land prices… One factor that has been widely mentioned is the existence of various constraints on land development, including growth corridors and boundaries. Another factor that has been mentioned is the existence of a range of government charges, including developer levies or infrastructure charges. More broadly, concerns have also been expressed that zoning policies and building approval processes have hampered in-fill development closer to the city centres.

Both economic theory and international evidence suggest that housing prices can be boosted by land usage policies (which can create artificial scarcity of residential-zoned land), problems with the complexity of the development process (which creates rents), and the fees and charges imposed on development. Accordingly, the fact that higher prices for housing have not resulted in a more significant supply response could be a reflection of various supply-side costs that have represented a wedge in the cost of bringing new housing to market…

On the first point, UGBs typically exacerbate urban sprawl because they encourage ‘leap-frogging’ of development to cheaper and less restrictive jurisdictions and into neighbouring towns. Put simply, UGBs are simply too crude a tool and ignore the economic behaviour of real people.

To highlight this point, consider the following extracts from an Age article, Melbourne Jumps its Urban Growth Boundary, published last year in reference to Melbourne’s UGB (established in 2002). I have added some google sattelite maps for context.

Developers are building large suburban-style estates as close as three kilometres to the boundary, marketing to metropolitan commuters while avoiding the infrastructure levy.

Meanwhile, thousands of housing blocks in regional towns are being sold as an alternative to the city’s high land prices, from Drouin in Gippsland to Wallan on the Northern Highway and Bacchus Marsh in the west. It is a span of more than 150 kilometres from east to west, a distance further than that from the CBD to Bendigo…

They include the 500-lot Jackson’s View estate in Drouin that is 40 kilometres outside the boundary and is being marketed as ”a hassle-free commute to Melbourne”…

About 21 per cent of Drouin’s current resident workers already travel to Melbourne for work, a recent Planning Department report found [map showing Drouin in relation to Melbourne below].

In Wallan, now just three kilometres outside the boundary that was extended in July, there are four new housing estates with plans for more than 5000 new homes in total. The developments are set to more than double the population of the town.

They include the 900-lot Spring Ridge and up to 3000-lot Wallara Waters, which are just ”a 45-minute train trip from the Melbourne CBD”, according to the developers [map showing Wallan in relation to Melbourne below].

Buyers are also leapfrogging the boundary in Moorabool Shire, where developer Devine is building a 1500-lot estate near Bacchus Marsh. It is about 10 kilometres from the extended boundary at Melton.

The shire’s chief executive officer, Rob Croxford, said the council was approving 100 new housing lots on average at its fortnightly meetings [map showing Bacchus Marsh in relation to Melbourne below]…

Macedon Ranges Residents Association secretary Christine Pruneau said such estates represented an uncontrolled expansion of Melbourne that made a mockery of the boundary…

Some shire councils were resisting unsuitable developments while others believed any growth was progress and were courting developers in order to collect more rates.

The Macedon Ranges Shire Council is seeking community feedback on its settlement strategy, which recommends dramatic increases in population for Gisborne and Riddells Creek, towns less than 10 kilometres beyond the extended boundary at Sunbury [map showing Gisborne in relation to Melbourne below].

ABS data released in March showed the fastest-growing local government areas in Victoria were overwhelmingly located just inside or outside the boundary of metropolitan Melbourne.

Meanwhile, another recent article in the Age entitled Pushing the boundary highlights some of the adverse impacts arising from Melbourne’s UGB and related planning tools, including higher land prices and increased speculative activity.

Supply and demand are quoted often in the debate over the cost of housing in Melbourne. Even with a surging population, surely expanding the urban area by 43,600 hectares would alleviate the problem and contain prices?

Yet land has never been more expensive. We have reached a defining moment. Research by the Oliver Hume Real Estate Group shows that for the first time in Melbourne’s growth areas, the price of land is higher than the building price. The median land price rose 6per cent from $212,750 at the end of the September quarter to $225,750 in the December quarter. The median cost of building a house was up from $216,097 to $218,825.

At the same time, the size of blocks is shrinking, down to 425 square metres in new projects. How can this be happening? Developers argue it is all about how much land is ready to build upon, having cleared the lengthy planning process through both local government and the state’s Growth Areas Authority. The authority produces precinct structure plans that are essentially master plans for communities — mapping out roads, schools, shopping centres, transport and the like. Witness the fanfare last month when the plans for two new suburbs, Greenvale North and Greenvale West, were released.

The original aim was an 18-month turnaround — but developers say the whole planning process can take between three and five years…

‘‘People say you extend the boundary today and sell it tomorrow. It just doesn’t work that way,’’ says the Urban Development Institute’s Tony de Domenico.

For all the complaints about delays in planning, the talk of land banking — developers sitting on land to maximise prices — persists. In Tarneit, an agent’s board spruiking a four-hectare lot states it plainly: ‘‘Investors take note: land banking opportunity.’’

Developers say it doesn’t happen: the aim is to get the land on the market as soon as possible. ‘‘Land banking doesn’t happen as much as people think,’’ says Andrew Sugiaputra, managing director of the Perth-based Golden Group that develops in Melbourne’s west. ‘‘Basically, we get product on the market as soon as we can … the faster we can get it to the market the more affordable it is for people, because we have less holding costs.’’

A rogue element has crept into the development scene that could also be pushing up prices. Industry insiders say self-styled middle men are approaching land-holders offering to get a certain price for their land, then attempting to sell it on to developers at a mark-up.

At the core of this whole debate is the concept of an urban growth boundary, and how it has been determined, with two revisions in less than a decade. Labor accepted the view put by developers that the boundary needed to expand to meet demand and keep housing affordable [referring to the June 2010 by the former State Labor Government to extend the UGB]…

Just to the north of Melbourne, between Kalkallo and Beveridge, sits Lockerbie station, 1121 hectares between the Hume Highway and the Melbourne-Sydney rail line. In July last year, it was brought inside the boundary, and by December, one of the nation’s biggest developers, Stockland, bought the land for a reported $300 million.

At a personal level, it was another case of the expanding boundary producing instant riches for the family that bought the bulk of the land in 1979 for $920,000. The family declined to discuss the sale.

For Stockland, the end land value will be about $4 billion, producing what will be Melbourne’s biggest urban development — a new suburb the size of Shepparton. The land will be acquired in staged parcels, with deferred payments, and will be brought to the market over the next 30 years. Yet Lockerbie’s inclusion in the boundary was no great surprise to close watchers of Melbourne’s development industry. In 2007, another developer, Delfin Lend Lease, lobbied the Brumby government to include Lockerbie in the boundary…

The new two-yearly review of the boundary will be conducted at arm’s length. [Planning Minister] Matthew Guy has left open the prospect that the boundary could be brought back in some circumstances if a case was made.

Nevertheless, speculators are trying to guess what might happen next, buying land relatively cheaply outside the boundary in the hope of seeing its value soar.

And it’s not just Melbourne experiencing these kinds of adverse outcomes in response to its UGB. It’s the same story in the other state capitals. Take Adelaide, which established a UGB of its own in 2002 (note from the above RP Data land values table that Adelaide now ties Sydney from the most expensive land per square metre!). A 2005 paper from Policy Exchange explains the outcome:

In the words of Kieron Barnes, senior planning officer at Adelaide Hills council, “The South Australia Labor government created an urban growth boundary around Adelaide three years ago [2002] with the intention to stop the sprawl and to consolidate the city. But you could have guessed what happened then: People decided to move behind the growth boundary to places like Mt Barker from which they then commute to work in Adelaide [map of Mt Barker in relation to Adelaide shown below]. I was actually lucky to have bought my house there just before the growth boundary was put in place because after it was introduced land prices in Mt Barker soared.” How did the state planners respond? “Well, now they have created more growth boundaries around the smaller cities as well to stop this kind of leapfrogging.”

Talking about his own personal house preference, he admits that he likes having a large house and does not mind commuting to work by car. Asked whether that was not actually contradicting planners’ beliefs in consolidation and promoting public transport, he smiles: “It’s difficult for planners not to behave hypocritically when it comes to personal choices. Many I know live in big houses on large parcels of land with two cars that are not necessarily environmentally or economically efficient.”

Well at least Mr Barnes is honest. But it does raise the question: with UGBs significantly forcing-up the cost of land/housing, whilst failing to achieve their stated aim – more compact and efficient cities – why are Australia’s governments persisting with these and related growth management tools? Isn’t it time that our governments looked to the planning systems of other jurisdictions with a proven track record of achieving both housing affordability and stability (e.g. Texas and Germany)?

Cheers Leith

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