Why we need to fight for inclusionary zoning in Victoria

It was an unedifying spectacle: the Urban Development Institute of Australia, Housing Industry Association and Property Council banding together to scream blue murder over the Victorian government’s proposal this year to introduce a social housing levy. Pitched at 1.75 per cent of the value of new residential developments over three dwellings, the levy was to feed into an $800 million annual state fund to build community housing.

This variation on inclusionary zoning, as it is often known, is standard fare in the UK, Canada and the US as well as many European and Scandinavian countries. It ordinarily involves property developers in a defined area selling a per centage of new dwellings at cost to the local city or non-profit housing association, or providing cash-in-lieu for social housing construction elsewhere. The per centage usually ranges from 5 to 20, with Copenhagen recently negotiating 25 per cent on a large waterfront development site. In contexts where property prices are rising rapidly, this kind of corporate contribution is unremarkable.

Equitable planning advocates in Australia have long been arguing for inclusionary zoning, and large developers have agreed for years that it’s a fair call: as long as it is introduced with adequate notice and equal application to all developers, they’ve said they can build the cost into their calculations. Melbourne property prices increased by 20 per cent in 2021. in Sydney by 26.7 per cent. Across the country, housing prices last year rose at around ten times the pace of wages. There has rarely been a more necessary or opportune time to introduce inclusionary zoning: a 1.75 per cent levy on residential developers would be well out-weighed by the returns on new construction.

But something unexpected happened in the preparation of the government’s proposal. Had the levy been introduced on its own merits, in the clear context of the above, the property development industry would have been hard-pressed to form a response that didn’t come across as straight-out selfish (not that this would have stopped it). For unknown reasons however, the levy was linked to planning reforms that would ‘streamline’ development approvals, without detailing how they would do so. This gave the industry ammunition: if streamlining could benefit the industry and Victoria’s economic development in general, why shouldn’t it happen anyway?

Off the property lobby groups went, full of indignation. They were being blackmailed, forced to pay for reforms to a system littered with obstructions. They would take the planning reforms thank you, but pass the cost onto consumers: the Urban Development Institute, the Housing Industry Association and the Property Council were unanimous in their assertion that house prices would increase by precisely the amount of the levy. Had their members carried through with this threat irrespective of the actual economics of the new developments, they would have been making a case for referral to the Australian Competition and Consumer Commission. But this didn’t seem to matter.

The property peaks were drawing from the big lobby playbook—modelled by the fossil fuel industry in response to climate mitigation strategies, the mining industry in response to the proposed mineral resources rent, the clubs and gaming industries in response to attempts to minimise gambling harm. Confect shock and outrage at the slightest imposition on profits, fan the small elements of truth, and chances of success are pretty good because the precedents are strong and there’s always backing from the Murdochracy. The Liberal party played along, too, with state opposition leader Mathew Guy declaring ‘we will fight this crushing new tax tooth and nail, on behalf of all Victorians seeking to enter the housing market or buy a new home’. It worked.


Trade-offs in planning

Planning trade-offs are routine internationally, but they almost always involve offers clearly above and beyond the standard. For instance in Canadian cities, building heights can be increased from a basic starting point in return for social good provision, such as a childcare centre or public realm beautification, over that which is normally required. The key test is that the outcome brings ‘net community benefit’—whatever loss of amenity incurred is more than off-set by the social good. German cities also allow planning variations if the building contains additional features in the public interest. These are not always uncontroversial, but there is common understanding on all sides that the terms of the trade-off are departures from the standard.

The problem in Victoria is that planning standards are so variable that ‘above and beyond’ doesn’t mean much. The planning system still carries the after-effects of the Kennett government’s overhaul in the 1990s. Based on then-Minister for Planning Rob Maclellan’s rejection of the planning scheme’s ‘silly rules’, local councils were told to nominate ‘preferred’ standards in place of firm height and setback controls. Development applications began immediately to exceed these standards and councils that tried to maintain them were overridden on appeal to the Victorian Civil and Administrative Tribunal, as preferred limits were (and still are) essentially unenforceable. The Bracks government in the 2000s attempted to remedy this by introducing mandatory maximums, set at some fixed point above the preferred standards, but these were often contradicted by strategic policy—for example consolidation policy in areas well-serviced by public transport—and insufficiently supported in law. In central and inner-city areas, maximum limits became in effect the new negotiating starting point, and while councils struggled to define and receive approval for their new standards, developers became accustomed to extracting height and yield increases without giving anything in return.

In subsequent years, developers acquired a reputation for seizing every possibility for increasing profits. Ambit claims became common, on the expectation that a compromise achieved at appeal would still deliver more than the local regulations allowed. Third-party (resident) objection and appeal rights, which had been restricted under Kennett, were restored by Bracks and used at every provocation, delaying the approvals process, encouraging local councillors to intervene in the interests of local character and amenity, and putting councils in such invidious positions that they often chose to not make a decision and let VCAT take the blame.

So the streets of Australia’s cities have become battlegrounds. Local residents fiercely protect area heights in particular. If developers can’t secure an increase, many build slap up against every height, setback and side boundary to produce the ubiquitous grey boxes that darken the city and suburbs, adding fuel to the fire of resident pushback. As the boxes comply with the planning scheme, VCAT has no option but to approve them. Property prices have come to be determined by the potential maximum yield within the maximum parameters. The combination of mandatory limits, where they apply, and the resulting cost of developable land make it almost impossible for those who wish to build differently—that is, at lower than ‘highest and best’ use—to do so and make any profit at all.

The notion of trade-offs in Victoria therefore remains vexed. Streamlined planning approvals are regarded by developers and their peak groups—the current crop having cut their teeth in the Kennett and post-Kennett era—as their right, an insult that they should have to concede anything in return. Where councils do allow standards to be exceeded, to encourage more sensitive design, residents are understandably wary. It is probable that the proposed steamlining included renewed restrictions on residents’ rights. The reaction in those quarters had barely been considered (let alone in the context of new social housing as the trade-off, which would be variously received across the Melbourne suburbs) when the entire proposal was withdrawn.


The implications of the government backdown

As with the attempts mentioned above by federal Labor governments to introduce progressive public policies, the party strategists stepped in and ordered the Victorian government’s proposal down before more ‘electoral damage’ was done. Treasurer Tim Pallas went further to reassure the property lobby that a social housing levy would not be reintroduced if Labor were re-elected in November. Not only did the government’s capitulation give strength to its opponents and leave it in a weaker position than had it not introduced the proposal, but a good planning strategy was all but wiped from the table.

What this sorry shambles shows is that ‘planning’—the almost quaint idea that development should be guided in the interests of community benefit—has been subsumed into the practice of building. Efforts at good planning are now repeatedly and successfully portrayed as illegitimate interventions into market operations.

It is no coincidence that Australia’s rich list is made up of miners, media magnates and property developers. Massive profits are delivered to developers with their tightly held expectation of 20 per cent return on investment, which contributes in itself to the nation’s disproportionately high property prices. In Europe, a 10 to 15 per cent profit is standard—along with general respect for heritage controls, local form and regulatory standards. Northern European developers don’t have a culture of gaming the system, and tend to consider themselves part of the societies in which they operate, in stark contrast with global, transnational companies, especially those spawned in Australia.

It is worth noting, too, that industry responses in Australia to government proposals that would redistribute wealth no longer include threats of going elsewhere, as they did last century. Conditions here are now so favourable, obviously to miners but also to property developers, that it is apparent that no other stable economy would deliver the profits received in Australia. 

In this, perhaps, is the key. The crisis in affordable housing is so dire, and levels of inequality so stark, that the current situation is unsustainable. A restructuring of this country’s reliance on digging up and building on land, and to more equally distributing the extraordinary gains from these activities, would have popular support if handled well. The electoral consequences of greater taxation of super-rich miners and developers would be positive for the initiating governments if they could put these policies in context, explain them clearly, and be prepared to counter the Murdoch-media hysteria. There are many other sources of communication and information dissemination that could be persuaded of the merits of the argument. But this would also require dealing with nuance with the relevant industries that, in the property sector at least, are not always the united blocs their lobby groups would have us believe.


Not all developers

Yes, it’s true. Some developers are as appalled at the cynical, venal element of their industry as those who have to live with their products. Melbourne has large developers able and willing to wear the cost of inclusionary zoning, and a growing number of small ‘niche’ developers who want to build with high social and environmental standards, including exceptional design elements and affordable housing components. But the small developers say such sensitive work in the current environment is almost impossible. To start with, they are bidding for land against developers that will pay much more, if the price point has not already been set by the calculation of maximum yield at minimal quality.

Small developers have completely different development economics to the larger companies that say the cost of inclusionary zoning can be built into their equations without a significant reduction in return. The claims to this effect were made by directors and senior managers of Grocon and the Becton Corporation, and relied on the ‘level playing field’ established through equal application to all developers. They explained that the added cost would decrease what they were willing to pay for land, and, as they are usually the highest bidders, this would drive the price down. Niche developers respond that the field is not level for them, as they cannot compete with those prepared to build boundary to boundary as cheaply as possible. It is also true that larger developers are buying different tracts of land, with fewer competitors in a different process often with government support; and that the economies of scale enable easier absorption of additional costs.

The property development sector has burgeoned in the past few decades, since the stock market crash of the late 1980s sent mobile capital into the built environment, and it is clear that there is a much greater range of developers than there once was. The property peaks, unsurprisingly, represent ordinary middle-sized companies, although the extent to which their members share their uncompromising view is hard to know. The outliers at both ends of the spectrum are not so opposed to inclusionary zoning.

Large and small developers and other players in the sector are now arguing for differentiation in policy approach. Some suggest a sliding scale, saying three-dwelling developments are too small to absorb the additional cost. They say a fairer model would start with multi-unit developments of ten or more attracting a housing contribution or cash-in-lieu payment of 1 per cent, increasing to 5 per cent for developments over fifty units and 10 per cent for those over one hundred. They agree that big new greenfield and greyfield estates should as a matter of course contain significant social housing commitments (20 to 30 per cent).

Others propose a lower flat-rate levy that would apply more widely and be triggered by all planning approvals—residential, commercial, industrial, special use—exempting only those that are as-of-right and don’t need a planning permit. Another approach, a transaction tax of the order of 0.1 per cent of sale price, is already part of a national voluntary scheme. Of course, the mandatory version of this—state collection of stamp duties on property sales—has for too long has been kept out of the conversation on social housing funding. The Victorian state revenue office raised $6.4 billion in stamp duty in 2020-21—the second highest year on record, beaten only in 2017-18. Recent data suggest the property market is well on its way back to pre-lockdown levels. At least part of this pool should already be dedicated to social housing, given the obvious nexus between the increase in property prices and government revenue, and decreasing housing affordability.


Will inclusionary zoning get another chance?

The only constructive suggestion from the UDIA, HIA and PC was for social housing to be funded by as broad-based a tax as possible—that is, income tax, which is ultimately quite correct. But the vicious politicisation of income tax increases, which precipitates precisely the kind of campaign this lobby has just used to great effect, renders the suggestion disingenuous. Rather, it seems not unreasonable to ask those already raking in the greatest returns to contribute most to the alleviation of inequality—especially when the extraction of profit from land contributes directly to the situation in the first place.

The property development peaks are not representing those small and large developers that want to build responsibly, and they are doing no favours to others among their members who wish to be part of the society in which they operate. Perhaps these developers could themselves stand up and ensure their sector makes a positive contribution to discussions about this most essential of issues. But the state too should actually deal with all the groups with a stake in this issue—including not only the property peaks but individual developers at different scales, social housing advocates, the government’s own public housing department and non-profit community housing providers, as well as the various resident organisations. The more recent efforts by the Victorian Greens to resurrect the social housing levy reinforce the issue’s persistence.

Inclusionary zoning is an effective planning tool used around the world to deliver social good. It is widely considered part and parcel of the right to develop land and assumes the cooperation of developers. Those who portray the social housing levy as a burden simply do not understand, or refuse to accept the object of good planning. Change is necessary and it will not be easy, but the least this and any future government can do is give another of the many variations of inclusionary zoning a serious go.


Kate Shaw

Dr Kate Shaw is a critical urban geographer at the University of Melbourne.

More by Kate Shaw ›

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  1. One only has to look at the investment portfolios of politicians (available to the public) to see who’s being looked after.
    Most politicians, both federal and state, own several properties and reap huge rewards from an open slather system.
    Same old, same old. The rich grow richer, the poor end in the ditches.

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