Rezoning of land in rural Australia is proving to have significant implications for developers and investors who are looking to capitalise on its increased value.
In March of 2018 the Reserve Bank of Australia released a report diving into the effect rezoning has on land value and final housing prices.
Zoning regulations have been shown to add between $150,000 to $500,000 to new homes in Australia’s bigger capital cities. RBA researchers, Ross Kendall and Peter Tulip, point out however that the reason the land increases in value is due to ‘administrative scarcity’ rather than physical scarcity.
Using an average Sydney house valued at $1.16 million in 2016, as an example, the report illustrates this reasoning.
The property is broken into values of $395,000 for the house and $765,000 for the land. Buyers in this time however, valued Sydney property at $400sqm, which equates to $489,500 less than the market value for the land.
Why the dramatic difference? Well, Mr Kendall and Mr Tulip say the “difference represents what home owners need to pay for the right to have a dwelling at that location, or the cost of 'administrative scarcity',
"The academic literature refers to this difference as the 'zoning tax' because the wedge between prices and costs is induced by government-determined scarcity.
"We, however, use the less-loaded term 'zoning effect', which avoids implying that government revenue is involved."
Referencing a real-life case example, the report discusses the effect of rezoning on a 363 Ha site in Wyndam Vale (40km west of Melbourne) which saw an increase in land value from $120 million to $400 million following its rezoning from rural to residential.
Tens of millions of dollars to be found
This effect has also been recently experienced by Peter and Sandra Carpenter in Melbourne’s south east.
The Carpenters bought the 100 Ha Cranbourne South farm, known as Brompton Lodge, in 1974 for $73,500. In 2012, the family pushed, and were ultimately successful in the inclusion of the egg farm within Melbourne's urban growth boundary.
This inclusion, and the 2016 approval of the Brompton Lodge Precinct Structure Plan, added tens of millions of dollars to the site's value.
In January of this year, the Carpenter’s sold their farm to developer Wolfdene, for $55 million. They are currently pursuing VicRoads in the Supreme Court for a further $25 million of ‘loss of market value’. This loss, they argue, is due to a 10 Ha overlay strip that VicRoads plans to use for potential widening of the Western Port Highway.