Discretion, Uncertainty and Time

The problem of measuring planning constraint is a particular challenge in jurisdictions where planning decisions involve a determination based on ‘merit’, and the exercise of discretion, rather than compliance with a zone or development code. In these contexts, proxy indicators of planning system constraint, such as the time taken to issue a planning permit (Ball 2010), and developer perceptions of the likelihood of gaining approval (Monk et al. 1996), have been used. Residential approval and refusal rates, and rates of planning appeals, might also be indicators of a responsive or sluggish planning system (Hui and Ho 2003). Such measures have become a focus for government reviews of planning system performance in relation to housing supply and affordability, particularly in the UK (Barker 2008), and, increasingly, in Australia, where local authorities are accountable for decision times and rates of residential development approval (Local Government and Planning Ministers’ Council 2011).

Further, planning system delay—often associated with the need to exhibit or refer a proposal to certain groups, or indecision within elected authorities—is often nominated by housing developers as a key factor undermining new housing supply. Since all planning decision processes take time (and housing itself takes a considerable period of time to produce), this issue is one of the key factors affecting the inherent ‘stickiness’ (inelasticity) of housing supply responses to changes in demand. Lengthy decision processes also add costs to the development process, although these costs can also in theory be passed back to the landholder, when they are accounted for in feasibility analysis. However, as noted earlier, and industry complaints about procedural delays notwithstanding, the release of sites and dwellings to market will also follow a particular timeframe, calculated to optimise revenue.

Related to time is the issue of ‘complexity’—that is, the extent to which the regulatory framework represents a straightforward path with clear requirements able to be factored into land acquisition decisions— or contains complex and ambiguous rules and processes for applicants to follow. Determining the relative complexity of planning regulations is a matter for subjective judgement, however. For instance, plan ‘templates’ for adoption by local authorities are used in some jurisdictions to promote standardisation, but the burden of needing to call up consistent regulations defined for many different scenarios can result in more complex planning instruments than a tailored local plan might otherwise present. Alternatively, it may be that some developers are more likely to operate within local areas where they are familiar with the planning requirements, so regulatory complexity in this scenario might not deter or even slow development in practice.

‘Certainty’ is another concept which is often thought to support development, but can mean different things to different groups. Local residents seek certainty about what types of development are likely to occur in their locality, which can imply very stringent and restrictive planning instruments, for example the ‘exclusionary zoning’ often criticised in US suburban areas (Pendall 2000). Rigid regulatory frameworks can have house price effects by reducing the amount of development permitted within an area (a supply constraint) as well as increasing perceived amenity associated with the preservation of existing character (a demand effect). Further, it is clearly important for developers to be able to predict what types of development will and will not be permitted before deciding whether to acquire a particular site, and the price that should be paid. At the same time, if additional—unexpected uses—are permitted by the planning authority once the site has been acquired by the developer, total development profits will increase, so developers will also argue for a flexible planning system as well.

Sometimes, for reasons explained earlier, rates of approval/refusal by planning authorities are used to infer the relative degrees of certainty and restrictiveness within a local planning system. Decision times are sometimes also used as a measure of the ‘responsiveness’ of the planning system and the extent to which planning processes are restricting new housing supply. However, care must be taken in interpreting both of these indicators, since they are highly contingent on the scope of the planning regulatory framework itself, as well as the state of the market. For instance, a planning system characterised by a high degree of planning regulation— that is, one which requires planning permission for most activities— should be characterised by high rates of planning approval and rapid timeframes, since the majority of proposals will have minor impacts. By contrast, a looser regulatory regime requiring planning scrutiny of significant and more complex projects only should be associated with more refusals overall, and lengthier decision times, as the potential impacts are considered and mitigated where possible through the planning process.

There is evidence that the success/approval rate of applications is inversely proportional to the state of the market—in a buoyant market developers make more speculative ‘non-conforming’ applications, which are more likely to be refused but still have some chance of success (Bramley 1998; Hilber and Vermeulen 2010). This is also more likely in a context where the planning and policy framework is out-of-date or unclear. Similarly, faster approvals (measured by decision times and approval ratios) could mean a highly efficient local authority able to facilitate fast and appropriate planning permissions, but this might not necessarily translate into housing completions or to net additions to the overall dwelling supply, due to other market factors. Equally, faster approvals might reflect fewer applications, lower planning standards, and/or poorer development outcomes in turn, leading to lower prices within a particular area due to compromised amenity.

A number of studies have pointed to the tendency for private housing developers to pace the speed at which homes are completed and offered to market, despite buoyant conditions (Adams et al. 2009; Guthrie 2010). The value of waiting to develop housing at some point in the future, rather than immediately capitalising on market opportunity, is increased under conditions of market uncertainty.

Some studies have investigated how the value of waiting, or of options to develop, interact with development regulations (Cunningham 2007, Turnbull 2005) (Cunningham, 2007; Turnbull, 2005). By reducing uncertainty, some planning restrictions may even have the perverse and unintended effect of stimulating development:

“It is shown that the initiation of height restrictions, perhaps for the purpose of limiting growth in an area, may lead to an increase in building activity in the area because of the consequent decrease in uncertainty regarding the optimal height of the buildings.” (Titman 1985 p. 506)

In effect, the land use regulation reduces the ‘option’ value of the land by clarifying its development potential, and in so doing lowers the hurdle for development to proceed in the current market cycle. However, the opposite can also be true. Where planning controls over-allocate development opportunity relative to market viability, the option of waiting to develop is likely to be more valuable than moving forward with a smaller scheme:

“If there is a lot of uncertainty about future real estate prices, then the option to select the type of building in the future is relatively more valuable than the option of developing it now. This makes the decision to develop the land at the current time relatively less attractive.” (Titman 1985, p. 506)

Particular regulatory levers or settings might have unrecognised impacts on the timing of supply decisions. For instance, although conventional wisdom suggests that housing production will be less responsive under uncertain planning regimes, others argue that this uncertainty may prompt larger developers to ‘warehouse’ sites with planning permission so they are ready to increase production at the optimum point in the market cycle (McLaughlin 2014). This would imply a counter-intuitive outcome in which developers were able to be more rather than less responsive to changes in market demand[1]. It might also be theorised that the market for sites with planning approval would be stronger in jurisdictions where planning approval itself is regarded to be in short supply. Such practices may be more prevalent under conditions of uncertainty, suggesting that certain attributes of planning systems might affect different types of firms in different ways (Leishman 2015).

  • [1] In some jurisdictions this is not a costless process—in the UK, requests to renew planning permission attracts a fee and requires a supporting application scheme prepared by consultants. Howeverin other nations—such as Australia—a development is said to ‘commence’ with almost any action(including demolition or clearing of vegetation), and the simple act of commencement preservesthe permission, with no capacity to oblige developers to complete.
 
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