Make housing affordable and cut road congestion all at once? Here's a way

Two of the most pressing problems for Australian cities are housing affordability and traffic congestion. But there is an approach to both problems that could lead to significant improvements at low cost and relatively quickly. It involves developing transit-oriented centres in conjunction with inclusionary zoning.

This form of development gives priority to housing affordability and low car use. It does so by requiring a certain proportion of permanently affordable housing and dwellings without car parking, but with strong access to local facilities. Travel is mainly by walking and public transport.

At the same time, introducing a special rate on land, similar to existing council rates based on land values, and eliminating stamp duty on property transactions would make the market more efficient, reduce budget impacts and support infrastructure provision.

These measures will in no way completely solve our problems. But they would help increase Australia’s supply of affordable housing and reduce road congestion.

Why is a two-pronged approach needed?

A transit-oriented centre is relatively dense and primarily residential, with limits on parking.

Inclusionary zoning would require the provision of transit-oriented housing and good local infrastructure. To make a transit-oriented lifestyle possible, centres would have a range of facilities, like supermarkets, chemists and medical and childcare centres. Since these are essential for the system’s success, they are part of the local infrastructure.

The underpinning idea is to reallocate private spending on car travel to housing and a special rate for infrastructure.

Currently, the average car-dependent household’s transport costs total roughly A$20,000 a year. On the presumption that the equivalent transit cost would be about $10,000, the saving would be $10,000. This would be enough to service debt of about $330,000 (at 3% real interest).

The point of this rough calculation is to suggest that travel cost savings could be used to significantly increase our capacity to fund infrastructure and make housing more affordable.

Increasing dwelling densities and reducing the capital costs involved in providing parking and roads would also enhance affordability. Hence, in addition to increasing residents’ ability to pay for housing, there is scope for reducing the capital costs of housing. Restricting the demand for housing in centres to only transit-oriented households will reinforce lower land costs.

The parking restraint is not just to improve affordability. It also maximises the public benefit from reduced congestion by taking full advantage of a scarce resource, the transit-oriented centre.

Less road congestion is a public benefit arising from privately funded activities. Car use will detract from the social benefits.

How does this increase efficiency?

Market efficiency will be increased in two ways. First, eliminating stamp duty on property transactions and substituting a special rate on land would replace an inefficient tax with an efficient one.

Current arrangements are inefficient since stamp duty taxes new development, reducing the amount and increasing the cost. A special rate will share the tax and not disadvantage new development. Economists and developers have often supported this substitution.

The second way of increasing efficiency arises from prioritising development with wider social benefits, especially reduced road congestion. Currently, we do not have efficient pricing and subsidy mechanisms. Current arrangements tend to promote dispersed development and excessive car travel. Assisting transit-oriented centres would promote efficiency.

With a special rate, those benefiting from the infrastructure pay for it. Furthermore the proposed measures both create and capture benefits. Actually, some are not captured, and benefit wider society at no cost to them. Demands on state government budgets are reduced, while making implementation of centre infrastructure timely and effective.

Who gains and who loses?

An obvious question is: who would be disadvantaged? The main impact would be on landowners who lose potential windfall gains.

Developers would not be disadvantaged; the changes would not prevent them from being able to make acceptable profits. Obviously, the proposed measures would restrict some possibilities, but the market would adjust to new prices and developers would still be able to choose projects fitting their investment criteria.

While restrictions would apply, developers would gain benefits from increased densities, besides those from removing stamp duty.

The proposed measures do not disadvantage state government budgets. Reduced expenditures on housing and infrastructure that is financed by special rates would offset the loss of stamp duty.

We need to think about urban development in a new way. Transit-oriented centres can be seen as a form of infrastructure – since they are an essential part of an efficient system – similar to engineering infrastructure. The proposed approach would complement the provision of engineering infrastructure, by capturing benefits used in their financing.

A critic may say the proposed measures add regulation and complexity. But this regulation is strategic; it aligns developer and public interests.

Criticism about additional complexity would be valid if such measures were unnecessary. That would be the case if our current system were delivering good outcomes, or we had adequate resources to fund good outcomes without any reforms. But this is not so. The problem is complex, with no simple answers.

The measures outlined above are innovative, but all are practical in not requiring major legislation or funding commitments. They are advanced to promote thinking about what can be done to gain more resources and produce better urban outcomes. Also, readers are invited to contemplate whether it is moral to not innovate, and to continue gifting away potential resources, while producing inferior outcomes.

Acknowledgement: An earlier version of this piece was discussed with Professor Peter Phibbs and presented at a seminar he organised.