Posted on June 28, 2023 by Samantha Hainke, Liam Mulligan and Megan Hawley 16

Lack of Supply of Social and Affordable Housing in NSW: Reforms to Planning Laws and Strategies

Over the past month, there has been significant discussion on potential reforms that may best respond to the continuing issue of the lack of affordable housing in NSW, and the further projected demand for housing across the next 5 to 10 years. 

With a commitment to well-built, and well-designed suburbs, the NSW Government has announced its focus to drive housing supply through collaboration with all levels of government, government agencies, communities and the private sector by “removing the red tape” that slows processes down for getting people into their homes.  

In late May 2023, the NSW Productivity Commission released a report addressing the issue of a lack of affordable housing in NSW property and a lack of supply in rental markets, and proposed several benefits of adjusting f NSW planning strategies towards high density living in place people want to live.  

NSW Productivity Commission Report 

The the NSW Productivity Commission report – Building More Homes Where People Want to Live (Report) – found that there is an urgent need to address these issues and to plan for an anticipated growth in housing demand across NSW, but particularly in metropolitan Sydney. The report notes recent estimates from the NSW Department of Planning and Environment to the effect that approximately 900,000 additional dwellings will be required to meet demand across NSW by 2041.

Housing supply

Housing supply affects housing affordability as well as overall household costs. Traditionally, NSW has lagged in providing housing supply – the Report notes that since 1992, NSW has built only six dwellings per 1,000 residents on average, fewer than Queensland and Victoria, which each averaged about 8-9 dwellings per 1,000 residents across the same period.

The profound increase in rental prices across NSW has made the strain on housing supply apparent. The Commission found that the best way to lower prices is to increase supply – current estimates (on which the Commission relied) suggest that a 10% increase in national supply, would have the effect of cutting the cost of housing by 25%.

The Report also found that the constraints in supply have been exacerbated by social and economic factors, including increases in population, rising incomes, and changing housing preferences. In short, the Report found that there is a lack of housing – particularly affordable housing – in the areas where people most want to live. 

The Report found that the areas of greatest demand were the eastern suburbs, and north shore of Sydney, closely followed by suburbs in the inner city and inner west. The solution proposed by the Commission is to build more dwellings in theses locations. In particular, the Commission recommends:

• raising average apartment heights in suburbs close to the CBD (and to employment zones);
• allowing more development around transport hubs so as to leverage existing infrastructure capacity; and
• encouraging townhouses and other medium-density development, and allowing more dual-occupancy uses such as granny flats where increased density is not an option.

In order to improve affordability overall, the Report proposes the need for a coordinated response, and to increase housing supply at ‘a city, state, and national level’. The National Housing Accord, announced by the Commonwealth Government,  has set a target to build one million homes between 2024 and 2029 in desirable locations, and is committed to working with local governments to make supply more receptive to demands.

Building where people want to live

The Report proposes that building homes in well-located, existing suburbs would best address the currently unmet demand for housing, due to peoples’ willingness to sacrifice living space for locational benefits and amenities, including access to public transport and schools.

Building new dwellings in typically expensive areas that effect the widespread affordability of housing is referred to as “filtering”.  The Report concludes that “downward filtering” occurs where housing supply responds to demand, resulting in high-income earners vacating high-quality houses allowing middle-income earners to occupy previously high-income households at a reduced amount. Theoretically, this continues to filter through the various income brackets until it reaches the base of the income distribution. The Report cites some evidence (principally from overseas) of this phenomenon occurring (although none in the particular context of the Sydney housing market).

The logic of filtering assumes that families who may wish to live in a particular area will prioritise the particular location where they buy, rather than focusing on the availability of new housing (and consequently living in areas further away from Sydney CBD or most desirable suburbs). This typically occurs in areas that lack available new housing, as trends found in the Report show that higher-income households tend to outbid middle and lower income families for existing and older dwellings.

Accordingly, a primary consideration in planning for building new housing is to consider the locations with the greatest unmet demand. Perhaps remarkably, the Commission projects that it is the supply of new housing in highly desirable areas such as the Eastern suburbs and the north shore of Sydney which is likely to have the greatest impact on increasing housing affordability across NSW more generally.

Increasing Density

When considering increasing the supply of housing, the Report concludes that there are two general approaches that NSW could take:

• prioritising freestanding houses further away from the city; or
• adjusting the current housing strategy to focus on infill, and high-density housing in desirable locations.

The Report outlines what the Commission considers to be several reasons in favour of increasing infill and high-density living, such as:

• making better use of Sydney’s expensive, well-located land;
• taking advantage of the existing infrastructure capacity;
• involving fewer coordination and financial challenges between local and state governments;
• improving access to services, facilities and social and cultural amenities; and
• allowing Sydney to expand with a minimum impact on the environment, by sacrificing less land to housing, and lowering transport pollution.

The Commission’s proposal to use high-value land more intensively and efficiently demonstrates a substantial change in the position previously held, and long standing attitude and planning strategy of prioritising freestanding houses. 

Reforms to Planning Laws Announced by the NSW Government 

Since the Report’s release, the NSW government has issued a number of media releases announcing further measures to encourage housing development. 

New Planning Rules for More Affordable Housing 

On Friday 15 June 2023, after receiving a projected housing construction shortfall of 134,000 dwellings over 5 years, the NSW Government announced that housing developments with a capital investment value (CIV) over $75 million, which allocate a minimum of 15% of the total gross floor area to affordable housing will gain access to:

• the State Significant Development (SSD) planning approval pathway; and 
• a 30% floor space ratio boost, and a height bonus of 30% above  the maximum height provided for in the relevant local environment plan. 

Proposals through the SSD pathway are assessed by the Department of Planning and Environment rather than by local councils and determined by the Minister or the Independent Planning Commission (IPC).  The Government claims that use of the SSD pathway will allow for a faster, more predictable approval pathway. It is not entirely clear that this will in fact be the case. SSD applications require the applicant to prepare an Environmental Impact Statement (EIS) in line with the Department’s Specific Environmental Assessment Requirements (SEARs). This is a significant undertaking.   

Once the DA is lodged, the “deemed refusal” period is also longer for SSD than for other types of development, at 90 days. This means that applicants will need to wait longer before commencing any appeal to the Land and Environment Court. However, in any such appeal the Minister, or the IPC, will be the respondent and the appeal would be conducted by the Department, rather than by local councils. It may be that removal of local councils from the assessment, determination, and appeal process is one aim of the reform.

In line with the National Housing Accord which requires States and Territories to fast-track zoning, planning and land releases for social and affordable housing, the NSW Government has emphasised its commitment to:

• undertaking a state wide audit to identify public land that can be re-zoned for social and affordable housing use;
• incentivising the inclusion of a social and affordable house component to developments on private land; and 
• providing further housing supply reforms focused on driving supply.

Further Planning Reforms to Deliver Social and Affordable Housing  

Shortly thereafter, on Monday 19 June 2023, the NSW Government announced further reforms to NSW planning laws to focus State-owned corporations on addressing NSW’s housing crisis by building more affordable housing faster. These reforms include:

• expanding the existing SSD approval pathway for the NSW Land and Housing Corporation (LAHC) and the Aboriginal Housing Office (AHO) for projects with more than 75 homes or more than $30 million CIVt;
• providing Landcom with the same SSD approval pathway afforded to LAHC and AHO, where any project contains at least 50% affordable housing;
• implementing changes to the types of affordable housing development which LAHC and AHO can carry out without development consent, increasing from 60 dwellings and 2 storeys  to 75 dwellings and 3 storeys; 
• granting Landcom the same ability to carry out affordable housing developments of up to 75 dwellings without consent provided the development is 100% affordable housing; and
• social and affordable housing providers will be exempt from State infrastructure contributions. 

It was stated that these reforms are to take effect later in the year.

Final Thoughts 

It is yet to be determined if the NSW Government will look towards the planning strategy reforms proposed by the  NSW Productivity Commission which may allow for high density living within suburbs close to the CBD and metropolitan Sydney.

However, the NSW Government has demonstrated its focus on implementing changes to planning laws to facilitate the construction and development of affordable housing. Due to the NSW Government’s commitment to responding to the housing supply demand, further reforms could be expected in the upcoming months.  

The Report can be found here.

The Media Release dated 15 June 2023 can be found here. 

The Media Release dated 19 June 2023 can be found here. 

If you have any questions about this article, please leave a comment below or contact Megan Hawley on 02 8235 9703 or Liam Mulligan on 02 8235 9715.