Revisiting the economics of inclusionary zoning

Posted January 01, 2016

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SGS Economics and Planning Ultimo Sydney Inclusionary Zoning

Paper by Dr Marcus Spiller and Mitra Anderson-Oliver.

This paper begins with the questions of what might be the readily defensible domain of planning regulation and whether the mandatory provision of affordable housing falls within this scope. The discussion then turns to the standard economic tests of whether Inclusionary Zoning is warranted in terms of allocative efficiency.

Inclusionary Zoning generally refers to statutory planning controls requiring development proponents to incorporate certain facilities or features on their site, or pay a cash-in-lieu contribution for this obligation to be discharged off-site. Traditionally, inclusionary provisions were applied to car parking requirements and open space contributions. More recently, requirements to incorporate a certain proportion of affordable housing in a development project, or make a cash contribution for an equivalent quantum and standard of affordable housing to be provided elsewhere in the neighbourhood in question, have been contemplated and, in some cases, implemented, in Australian town planning practice.

The longest running Inclusionary Zoning scheme in Australia applies in Sydney’s Ultimo Pyrmont urban redevelopment precinct. This former industrial/port district in the inner city was the subject of a State and Commonwealth ‘Building Better Cities’ initiative in the early 90s, under which a targeted amount of affordable housing would be maintained in the neighbourhood as it transformed into an otherwise exclusive area for well-remunerated ‘knowledge workers’. A special purpose, not for dividend company – City West Housing Ltd – was created by the State Government to own, operate and, where necessary, build the targeted affordable housing. The requisite housing was to be procured via a one-off Better Cities capital grant from the Commonwealth, an agreed proportion of the value of State Government land sales in the precinct and the proceeds, both cash and in-kind, from the Inclusionary Zoning scheme applying in the area.

Resistance to Inclusionary Zoning

Notwithstanding this long standing (and seemingly successful) NSW experience with mandatory Inclusionary Zoning on private land, there continues to be deep-seated resistance to this planning mechanism in most Australian jurisdictions. This is particularly so in Victoria, which is a focus of this paper.

Several factors appear to lie behind this resistance. Some critics of Inclusionary Zoning see it as a ‘lazy’ public policy response to the affordable housing crisis, arguing that we should be looking first to address the inefficiencies in the permit approval process, and create greater certainty for developers – thereby reducing costs – before adding another layer of complexity to the planning system. Others make the point that the provision of non-market or subsidised housing has traditionally been part of the national tax transfer system and should remain that way. Development industry lobbyists, like the Property Council of Australia rest their opposition on two points; that Inclusionary Zoning is an unfair implicit tax on one group in the housing market to assist another, and Inclusionary Zoning can only ever produce a trickle of affordable housing versus the scale of unmet need. Still, others see Inclusionary Zoning as an unwarranted, unjustifiable and objectionable curtailment of private development rights.

Purpose of this paper

This paper revisits the public policy merits of Inclusionary Zoning. In doing so, a conservative perspective is taken on both the arguable scope of planning regulation and the appropriate application of economic principles in appraising net community benefit. Even within this narrow frame, the paper finds that adoption of Ultimo-Pyrmont style Inclusionary Zoning in Melbourne (and, indeed, elsewhere) has considerable prima facie merit.

The substantive paper begins with the questions of what might be the readily defensible domain of planning regulation and whether the mandatory provision of affordable housing falls within this scope. The discussion then turns to the standard economic tests of whether Inclusionary Zoning is warranted in terms of allocative efficiency. However, before setting off on this discussion, some commentary on an additional economic perspective on Inclusionary Zoning is warranted. This relates to Inclusionary Zoning as a legitimate exercise in value capture by government.

Key points

  • Inclusionary Zoning requires the incorporation of a certain proportion of permanently affordable housing in all development projects within an area.
  • If the developer cannot physically provide the affordable housing on site, they can make an equivalent cash payment instead so that the required number of units can be supplied elsewhere in the neighbourhood.
  • The affordable housing generated by Inclusionary Zoning is transferred to a not for profit, Government registered, Housing Association.
  • The housing is retained in perpetuity for rental to lower-income households, including key workers.
  • Inclusionary Zoning is not a tax on development.
  • Like parking requirements, open space contributions, solar access standards and heritage controls, they are sensible planning requirement to ensure successive development projects contribute to a sustainable city.
  • Eight years ago, the Inner Metropolitan Action Plan (IMAP) Councils (Melbourne, Stonnington, Port Phillip and Yarra) proposed an Inclusionary Zoning plan for their region, modelled on the successful Inclusionary Zoning scheme which has been operating in Sydney’s Ultimo Pyrmont area for about 20 years.
  • The IMAP plan targeted the retention of at least 6 per cent of the region’s housing stock as permanently affordable rental accommodation for low and very low-income people. IMAP’s plan also assumed that only half the required funds would be generated by Inclusionary Zoning, with the other half coming from State Government.
  • The cash in lieu rate for developers under IMAP’s plan would have been around $30 per square metre of floor area.
  • By way of example, the recently sold CUB site on Swanston Street's which has approval for a 72 level tower would have generated an Inclusionary Zoning cash-in-lieu contribution of around $1.8 million. With matching contributions from State Government, this would have secured more than 10 permanently affordable housing units for the inner city.
  • Studies by independent property analysts have shown that Inclusionary Zoning cash in lieu rates of around $30 per square metre would have negligible impacts on the viability and pricing of development projects.
  • Economic studies also show that schemes like that proposed by IMAP in 2007 are likely to deliver a benefit-cost ratio of better than 7 to 1. The benefits lie in the retained social mix in historically diverse neighbourhoods and the avoidance of wasted human capital when lower-income groups are locked out of jobs-rich inner city areas.

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