Friday, March 16, 2018 

JAMES MATHAIS           

The golden rule of real estate - location -
is being distorted by local governments

Forget negative gearing and supply-side factors. The Reserve bank of Australia has identified, in a recent and mostly overlooked report, a new cause of our high real estate prices: local government zoning, or as the report calls it, "administrative scarcity".


"We estimate that zoning restrictions raised the average price of detached houses, relative to supply costs, by 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth," the report says. "As a share of the total price, these contributions are 42 per cent (Sydney), 41 per cent (Melbourne), 29 per cent (Brisbane) and 35 per cent (Perth)."


Through this we see examples of just how large the effect of zoning on house prices can be. Take for example a property 40km west of Melbourne, a 363ha site that increased in value from $120 million to $400 million after being re-zoned from rural to residential. Essentially a flick of a pen produced a 333 per cent increase overnight. Nice if you can get it.The RBA says such large increases in value 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". Rather, they are the result of a high "shadow price" caused by "government permission to build dwellings".

The zoning tax inflicted by government controls is evident not just to the RBA. A 2016 report into this found that by rezoning a property from detached housing to medium-density housing (5-10 storeys) would on average increase the land value by 167 per cent overnight.

Zoning is an intervention by state and federal governments into what is a very competitive market. Minimum lot sizes, building heights and density rates are necessary to ensure the basic characteristics of a neighbourhood, but we should never forget they also distort the ability of the free market to determine the appetite to invest in and build property. Government stamp duty already inhibits our ability to trade property freely. The consequence of "administrative scarcity" needs to be addressed.

"If housing demand continues to grow, as seems likely, then existing zoning restrictions will bind more tightly and place continuing upward pressure on housing prices," the RBA says.

Policy changes that make zoning restrictions less binding, whether directly (e.g. increasing building height limits) or indirectly, via reducing underlying demand for land in areas where restrictions are binding (e.g. improving transport infrastructure), could reduce this upward pressure on housing prices."


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Barton, ACT, 2600 


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2019 by Menzies Research Centre