Rezoning Windfalls

Sharing the value of planning giveaways
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Most of us feel that it is intuitively fair to reward enterprise and effort.

Yet, we are giving away a fortune in development rights through rezoning to lucky landowners.

A Planning Minister’s pen tick can be worth millions of dollars.

Our economy is a reflection of our combined enterprise and effort. When the government builds new roads or train lines, when people open businesses, when we work, create and grow things it flows through to the demand for and price of land.

When the economy is growing, our cities and regions often grow too. We need to allow for higher density buildings and more shops and factories.

The planning system regulates where that growth happens. Planning rules manage conflict; rationalise land use; coordinate public investment; generate synergistic exchanges by enabling industry clusters. When they get it right, planners increase the liveability and spatial equity of our cities and regions.

Land-use zones and overlays are among the instruments used to achieve these objectives.

New zoning permissions often flow through to higher land prices.

For example, when industrial land is rezoned to enable commercial or residential uses, the market value of that land often increases. This is because the range of activities permitted in that location expands, resulting in increased profitability. The price of a parcel of land reflects its ‘highest and best’ economic use: the most profitable and intense use permitted by planning and demanded by the market.

The differential between the market price of land prior to rezoning and the price after rezoning is a windfall gain; a form of economic rent. The beneficiary is the landholder who now has permission to build high-rise apartments where there was once a mechanic’s shop.

It is very clearly public interest planning decisions and luck rather than enterprise or effort that bring about rezoning windfall gains, but as a landholder you can make your own luck. Massaging relationships, pressuring or bribing officials are just some of the ways in which landholders secure favourable planning outcomes, especially rezonings.

Victoria’s most infamous recent examples include Fishermans Bend, Ventnor (Phillip Island) and Casey Council, currently under investigation by Victoria’s Independent Broad-Based Anti-Corruption Commision (IBAC).
This kind of corruption has a corrosive effect on democracy that is not limited to trust in the planning system, as demonstrated in the NSW ICAC hearings which resulted in the resignation of ten MPs.

Rezoning windfalls have been described as a ‘honeypot’ for landowners seeking to capitalise on land use changes.

Putting a price on new development permissions can remove the ‘honeypot’.

If the public captures a portion of the rezoning windfall, we can use the revenue to fund public services. This public investment in turn supports private sector development activity, feeding a virtuous cycle of urban development.

For example, new transport access that reduces commuting times or opens up job-rich areas increases the value of land near stations. With more demand for housing and shops near stations, it makes sense to rezone for higher density uses. Intensified development entails further public investment in infrastructure and government services (such as parks and school teachers). Higher value activity on land, means higher land tax revenues, and around it goes.

Our recent report, The Transit Transformation Australia Needs, highlights the potential of “value capture” to fund critical infrastructure.

If we don’t share the rezoning windfalls, leaving the entire uplift for the lucky landowner, we need to raise taxes elsewhere or make do with fewer schools, train stations, nurses and parks.

 

More on Rezoning Windfalls

Will taxing rezoning windfalls push up house prices? The property industry says that taxing rezoning windfalls will increase the cost of housing because the tax will be passed on. They also say that in response to the new tax developers will shut up shop, reducing the number of new lots and houses that are available to buy.

We unpack some of the frequently asked questions

 

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New research report

The Rezoning Honeypot – Evidence from Fishermans Bend by Emily Sims & Jesse Hermans