The affordable housing beacon we sailed past

Posted April 27, 2021

SGS Economics and Planning Marcus Spiller Affordable Housing
First published in The Sourceable.

Australia has an excellent example of an inclusionary zoning scheme that delivered affordable housing for 25 years, but we've missed opportunities to replicate it.

This year, Australia’s first foray into ‘inclusionary zoning’ celebrates its 25th anniversary. The City West Affordable Housing Scheme, applied initially in Sydney’s Ultimo Pyrmont regeneration precinct and subsequently extended to cover Green Square, has generated almost 900 fully funded social housing units so far. It is well ahead of schedule in meeting the targets set for the program on its inception, producing around 80 additional units each year.

The City West scheme has quietly and efficiently accumulated a vital stock of social housing in otherwise fully gentrified neighbourhoods. Meanwhile, policy elsewhere in metropolitan Sydney, NSW, indeed, the rest of the country seems to have descended into a never ending debate about the pros and cons of mandatory affordable housing requirements in the development approval process.

The City West experience should have long since resolved this debate. But policy obfuscation and procrastination has meant that we’ve presided over a generational construction boom which has generated barely a trickle of affordable housing via the planning system. Together with the Commonwealth’s virtual withdrawal of capital funding for social housing, the legacy for our now transformed cities is one of division and inefficiency.

— Marcus Spiller

The beauty of the City West Scheme lies in four factors – simplicity, non-negotiability, universality and low transaction costs.

The Scheme mandates the transfer of social housing at zero consideration based on a fixed ratio of total floorspace. Proponents of residential development in Ultimo Pyrmont must provide social housing at the rate of 0.8% of total floorspace, while non-residential development attracts a contribution obligation of 1.1% of floorspace. Where contributions of finished units are not practical or desirable, proponents pay a pre-notified cash in lieu rate per square metre of floorspace.

Units and/or cash are transferred to City West Housing – a not for profit business specifically set up by the State Government to provide affordable housing in Ultimo Pyrmont and now Green Square.

Proponents know from the outset what the cost of their affordable housing contribution will be. There is no negotiation involved, other than on design details and the logistics of transfers. This pre-discoverability mitigates risk in the DA stage, providing proponents in these precincts with an advantage over those in other areas where affordable housing contributions are expected but not defined.

The scheme applies to all development in the precincts – residential, commercial, retail and industrial. This recognizes that permanent social housing forms part of the essential infrastructure of a neighbourhood, underpinning the functionality and sustainability of all community and business transactions in an area.

The modest mandated contribution rates in City West further recognize that the development process should only be part of the affordable housing supply solution, befitting the role of social housing in place making. The Commonwealth and States/Territories must also contribute capital, reflecting the poverty alleviation and labour market functions of social housing.

Why hasn't the City West model been recognised as the gold standard?

Given its proven worth, it is interesting to ponder why the City West model has not been recognized as the gold standard in inclusionary zoning, worthy of replication across all Australian towns and cities.

A concern at the time of the scheme’s inception and regularly raised ever since is that mandated affordable contributions would load the costs of the many in the development area (home buyers) to fund affordability for the few.

First principles analysis should tell us that developers are not in a cost plus business. They cannot unilaterally set prices to, amongst other things, recover the cost of an affordable housing ‘impost’. In any case, the 25 year City West experiment demonstrates beyond doubt that the ‘tax the many to help the few’ argument is wrong. Apartment prices in Pyrmont are entirely in line with those in similar precincts in inner city Sydney. Certainly, these prices today reflect a raft of factors – interest rates, the tax treatment of housing, relative investment returns, supply and demand conditions and consumer confidence to name a few – which have precious little to do with the construction cost of the units in question and whether they attracted a mandatory inclusionary zoning requirement.

Another often repeated concern with inclusionary zoning is that it will spur ‘capital flight’, that is, developers will give areas affected by mandatory affordable housing requirements a wide berth in favour of other opportunities. Again, the City West program shows that this concern is without foundation. Development opportunities in Ultimo and Pyrmont were snapped up with gusto. Today, Pyrmont is one of the most densely populated and sought after neighbourhoods in the inner urban region.

Pre notified inclusionary zoning requirements, and other scheduled development contributions for that matter, cannot be construed as a tax on development returns. The cost of these requirements is passed back to the seller of the development site with the developer retaining their full margin for profit and risk. In fact, to the extent that development contributions are part of a carefully thought through plan for a sustainable neighbourhood which is well serviced with infrastructure – including affordable housing – these provisions can act as a magnet for investment rather than deterring development activity. This certainly appears to have been the case in City West.

Investment would be stymied if the inclusionary zoning requirement pushed the residual value of development sites below the next best use of the land for the owners. This is hardly a prospect when the next best return is low rent industrial or warehousing. It is even less of a prospect at the modest inclusionary rates applicable in City West.

The City West program has shown that inclusionary zoning is, in the words of economists, ‘non-distortive’. We got the value adding development activity we would have got in the absence of these housing requirements albeit that non-value adding land owners would have received a little less for their properties.

Well done City West on your first 25 years! Policy makers have much to gain by following the trail you have blazed.

— Marcus Spiller

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