RDP 2020-04: The Apartment Shortage Appendix B: Comparison to Residual Land Valuations

Our estimates of the effect of height restrictions closely correspond to ‘site values’ or ‘residual land valuations’ that are part of everyday conversation among real estate developers. Indeed, components of our estimates are derived from the detailed valuations that are prepared for decision-making and sales within the industry. The typical site valuation represents what a plot of land would sell for prior to building. It is calculated as expected sales minus construction and related costs like those shown in Table 3. Site values are routinely quoted and compared on a ‘per-apartment’ basis, reflecting that the overall value tends to increase proportionately to the number of apartments allowed to be built. Like our estimate of the effect of building restrictions, it can be interpreted as the scarcity rent that accrues to landowners.

Our estimate of the effect of building restrictions is conceptually different in that it represents the increase in value that would arise if an extra apartment were allowed to be built. This is calculated in the same way as site valuations except we use marginal cost instead of average cost. As indicated by Table 3, this difference lowers our estimates of the effect of building restrictions relative to site valuations by $24,000 (Sydney), $38,000 (Melbourne) and $29,000 (Brisbane).

The main practical difference is that site valuations are often quoted at an earlier stage of development than our estimates. Our estimates implicitly assume that a development approval and building permit have been granted and ask what would be the change in value if a slightly larger project had been approved. In contrast, site valuations often precede development approval, when considerable uncertainty and delays are in prospect. At this earlier stage, higher margins and lower site values are appropriate.

Knight Frank is one of Australia's largest property consultancies. Their ‘Australian Residential Development Review’ regularly reports representative valuations for high-density sites, defined as sites with more than 4 storeys and 25 apartments.^[17] These estimates are based on industry consultation and expert judgement. Table B1 shows their indicative estimates as of June 2019 (Ciesielski 2019). The site valuations for Sydney are lower than our estimates of the effect of building restrictions, whereas for Melbourne and Brisbane they are higher. Some of these differences can be attributed to differences in geographic scope (Knight Frank exclude the CBD) and the difference between average and marginal cost. Most of the differences seem to reflect the earlier stage of valuation noted above. This is especially so for Sydney, where delays and uncertainties about gaining development approval seem to be highest (NSW Productivity Commission 2019, p 126). The estimates are partly of interest for providing an independent crosscheck on our data. Differences of timing and definition make precise comparisons difficult, but the qualitative message is the same. The estimates are also of interest as providing an indication that building restrictions may be binding in other cities. Note, however, that high-density apartments (more than four storeys) represent a very small share of the housing stock in most of these other cities.

Footnote

We are indebted to Michelle Ciesielski of Knight Frank for discussions about these data. [17]