The Australian Government wants to build 1.2 million new well-located homes in just 5-years under the National Housing Accord. Two years in, it is already well off the pace. Just over 300,000 homes have been constructed, far fewer than the 420,000 required to keep up with the Accord’s target.
Partly this is due to factors such as high construction costs, rising interest rates, and labour shortages, which are largely beyond the control of governments in the short term.
But governments do have another, potentially more powerful lever in the form of zoning controls. In a new e61 working paper released this week, we study one of the first natural experiments on zoning reform in an Australian city. Where previous studies have largely relied on correlations between planning rules and housing outcomes, we study a zoning reform that applied in one council and not its neighbours. This means we can get closer to a true causal estimate.
What happens when a city relaxes its zoning rules?
We study a 2014 reform implemented by the City of Campbelltown, a middle-ring council in Adelaide’s east. The reform saw the council cut minimum lot sizes near town centres and transport corridors from 350 square metres to as low as 150 square metres for row dwellings and apartments. That meant that many blocks could now accommodate 2 or more times as many dwellings as they could before.
Following the reforms, some residents objected to the policy, citing concerns about loss of greenery, increases in traffic, and greater density. This led the council to lift the floor back to 250 square metres in 2019.
While this on-off structure may not be ideal from a policymaker’s perspective, as researchers it allowed us to observe the effect of the zoning reforms switch “on”, their effects accumulate, then switch back “off”.
Dwelling approvals rose and lot sizes fell
We find that building approvals rose by 67 per cent while the reforms were active, equivalent to roughly 270 additional approvals a year. This effect was driven entirely by increases in the type of houses the policy affected (attached townhouses and rowhouses). After the reversal, the effect faded back to statistical insignificance.
Lot sizes tell the same story. Approved subdivisions bunched at 350 square metres before the reform, the old regulatory floor. They shifted to between the new floor of 150 and 250 during the reform. Then after the reversal, lots bunched at the new floor of 250 square metres.
Looking across Adelaide, we find no evidence that these new homes in Campbelltown came at the cost of fewer homes being built elsewhere. Established local firms that were already producing medium-density housing were the primary builders of the new homes, with no evidence of capacity diversion either from their own activity or from neighbouring suburbs.
Finally, while concerns about amenity costs drove the reform’s reversal, we find no detectable deterioration across the outcomes we can measure, including traffic volumes, urban heat and crime. The complaint residents raised most often, on-street parking, is felt street by street and no data exist at that scale, so we can’t rule it out.
These results provide evidence that when zoning rules are changed to allow higher density housing, it leads to more housing being built.
There are also 2 broader lessons for housing policy that come from these reforms.
First, the biggest constraint on housing supply appears to be bans, not burdens.
Housing regulation comes in two broad forms. Some rules ban housing outright: minimum lot sizes, prohibitions on townhouses and apartments, density limits and restrictive zoning. Others impose burdens on projects that are already legal: approval timelines, application fees, documentation requirements and referrals.
Both increase the cost of building but do so by vastly different amounts.
Burdens have been estimated to be much less costly than bans. Administrative and planning costs are typically estimated at between $8,000 and $66,000 per dwelling. By contrast, estimates of the “zoning tax” – the gap between dwelling prices and construction costs created by restrictions on what can legally be built – range from around $460,000 to more than $660,000 per dwelling in Sydney, although estimates of the cost of zoning using different methods can vary widely.
The large new construction response we find in Campbelltown is instructive of the extent to which minimum lot sizes – a ban – were a binding constraint on housing supply. The reform removed that ban, while leaving the burdens, the planning process itself, largely unchanged.
None of the metrics governments often use to track planning burdens improved. Approval rates were already high – 84.8 per cent before the reform – and remained high afterwards at 87.7 per cent. Median approval times actually lengthened from 26 to 42 days as more and larger projects entered the system. A policymaker using these metrics as measures of success may conclude Campbelltown had done little to improve supply.
This highlights a common mistake in housing debates. Developers don’t submit applications for projects that planning rules prohibit. A council could ban almost all medium-density housing and still report a 95 per cent approval rate. High approval rates mostly tell us that developers understand the rules – not that the planning system is facilitating housing supply.
The second lesson is that housing reforms must go far enough to matter.
When the reform was overturned and lot sizes were lifted from 150 square metres to 250 square metres in 2019, construction returned to roughly its pre-reform level. This was despite the new limit still being substantially below the original 350 square metre minimum.
This suggests that the returns to relaxing minimum lot sizes are not linear. The chart below shows this pattern in action. Developers buy large blocks (the teal dots or ‘parent lots’) and divide them into smaller lots (the orange dots or ‘child lots’).
Crucially, houses on smaller lots don’t sell for much less than those on larger ones ($/sqm increases rapidly as lot size falls). Buyers appear to pay mostly for the dwelling and its location. That means that changing the number of homes that can be built on a block of land changes the economics of the development entirely.
Before the 2014 reforms, an 800 square metre site could support 2 dwellings under a 350 square metre minimum. In 2019 it could support 3 under a 250 square metre minimum, and between 2014 and 2019 it could support 5 under a 150 square metre minimum.
Based on observed sales prices, that means that total revenue increases from around $1.14 million pre-2014, to $1.58 million post-2019, and in between it was $2.40 million. The extra revenue from reducing the minimum from 250 to 150 square metres was around $820,000 – almost twice the gain from reducing it from 350 to 250 square metres.
The lesson is straightforward. Well-intentioned reforms can fail simply because they don’t go far enough to change the economics of development. Small regulatory relaxations often leave projects only marginally more profitable. Larger reforms can unlock entirely different forms of housing.
The broader implication is that governments should primarily judge planning reform by what the rules allow, not by how quickly councils process applications.
The share of residential land where medium-density housing is legal as-of-right is a far more informative measure of housing policy than approval rates or processing times.
Campbelltown shows that when the ban was lifted, more housing followed – even though approval times never improved. And when the ban was partially reinstated, the additional construction disappeared.
Matthew Maltman is a Senior Research Economist at the e61 institute. He previously worked at the Australian Productivity Commission, where he focused on various policy issues including education, public transport, and housing policy. He is passionate about housing affordability and writes on the impact of housing supply reforms globally. Matt holds a degree in Economics from the University of Western Australia, where he graduated with First Class Honours.
Theo is a Pre-doctorate Economist at the e61 Institute. He is currently conducting research on the NDIS. His past research has explored topics related to housing and other social policy issues. He holds a Bachelor of Advanced Finance and Economics with First Class Honours in Economics from the University of Queensland.