This chapter of the thesis introduces and defines the subject topics of zoning and rezoning which embody the main themes of this dissertation. This opening chapter highlights the importance of land as an asset class and the financial imperatives involved in its zoning. There is also a detailed discussion of the rationale for zoning, the different types of zoning and some of the criticisms of conventional zoning. This chapter concludes by highlighting the main practical benefits of the research.
Land is arguably the world's most significant asset class. For centuries land represented the only true wealth of people: the crown, nobility and the landed gentry all derived their near-plenary power from land ownership, from what they could sow, reap, extract and harness. There were also the primary assets of livestock, cultivated crops, serfs and soldiers, all requiring land availability, in its various productive forms. Landed estates have generated through their siting, form, size and capacity to produce, feed and house, unrivalled income and power for their owners. Thus the long-established economic capacity of land to generate wealth and power is not only historic, it is logical.
For centuries, property represented the only means of production in kingdoms and territories and colonies for the oligarchic elite who owned the established and conquered realms and all upon them. People were born on the land, worked on the land, grew up on the land and died on the land but did not ever get to own any part of the asset.
It was not until the late 1700's that land became a tradeable commodity in Britain, Europe and the colonies and somewhat accessible to ordinary citizens. It was arguably the commercialisation of the steam engine and the advent of the railway that began to break the inextricable bond between work and property. As factories, located away from the traditional estates, began to produce goods and satisfy demand distally of the land, so too did workers have to travel to work for the first time. The peasants could now earn an income independent of their locational setting and with the inevitable development of towns and cities came further landuse change and new urban wealth. New settlement patterns of the workers were inevitable for the waves of rural dwellers who had come to reside nearer their employment in new anthropocentric settings at the outskirts of burgeoning towns and cities.
At the base of all wealth, whether industrial, feudal, regal or colonial however, remained the primary tangible ingredient: the land itself. Not surprisingly, this remains the case today. For example, a statistically significant proportion of Australia's top BRW 200 richest people in 2009 for instance, had acquired or significantly deepened their wealth through property-related activities. Property is primal, topping the list of the richest Australians by industry, making up 61 of the BRW Rich 200 (BRW Rich 200, 2009, p. 23). If mining, retail and rural activities are included in the land-related equation, then the significance of land as a prodigious wealth generator is accentuated even further. These four land-related sectors, if combined, make up a staggering 57% of Australia's wealthiest individuals (BRW Rich 200, 2009, p. 23). Indeed, most of the rag traders, media barons, technology moguls, retail and manufacturing tycoons on that list, all have substantial personal property interests, that are rarely held passively; this certainly includes three of the top ten richest men in Australia in that year (BRW Rich 2000, 2009, p. 83).
1.1 - Research Question
Although property in most western countries, especially Australia, remains as the single most important asset class and commodity, the machinations of its classification and zoning and rezoning, continue to be inordinately convoluted. Land's ability to appreciate or lose value, through zoning change, is even more complex and poorly understood. There currently exists no substantive research in Australia that shows how the rezoning of land affects its value. This is surprising considering that the value change due to zoning, is frequently shown to be such a large and significant multiplier of its original land value. The overall effect of rezoning land on profitability is generally very substantial. Zoning manifestations such as heritage overlays are also covered in this dissertation and are yet another way in which zoning interacts with land value. Similarly, no research has ever been formally conducted in this area in Australia using market transactional data. Accordingly, this thesis looks at the effect of rezoning on land value.
1.2 - Aims and Objectives of the Thesis
The primary raison d'être of this thesis is to explore the complex relationship that exists between the triumvirate of land, zoning and value - especially as connected with a change in land use. It is thus premised herein, that as zoning changes for a given parcel of land from one designation to another, that this is accompanied by a commensurate adjustment of its market value. This value change is observed to occur despite the fact that the land remains unchanged physically, locationally and topographically. Could value be created and destroyed by a simple stroke of a pen permitting a change in landuse? It does indeed. This treatise, in reaching its conclusions, reviews over 160 academic papers and 30 books relating to land and its history, use, zoning, value, economics, commoditisation and tradability. Through documented examples and data derived from actual rezonings, the thesis formulates an empirical measurement quantifying the value change due to zoning. The research and the examples used herein are all based in New South Wales, Australia, employing actual market data and transactions to postulate a theory of how zoning change creates and destroys value for landed property. The documented real examples of land parcels used, are all ones that have undergone an actual zoning change, or an effective change due to a formalised Development Approval or Major Project approval. They also traverse a number of different zones including Rural, Special Use, Retirement, Bulky Goods, Industrial and Residential, comparing their market value before and after the zoning change. Using real market data, an empirical formula is derived to connote the mechanism for value change of land in New South Wales. This potentially has direct applicability to other Australian states and other countries, where Euclidean or segregation zoning is used as a means of landuse control.
Thus this thesis reviews, in essence, the effects of planning regulation on land price as measured through real examples. It then establishes an empirical model to explain both the mechanism and quantum of value change in land value as measured by sales data. This is taken to be an accurate measure of value, namely the price at which a willing buyer and a willing seller have actually exchanged in an open market process. Where a transaction was not actually effected, valuations, as booked in formal records and highest offers that indicate market demand, are used to indicate value.
Using over 500 actual sales, the Heritage Conservation Area research analyses the average annualised unadjusted capital gain of detached dwellings inside two separate HCAs and compares these with properties outside the two Heritage Conservation Areas ("HCA") namely: North Randwick and West Kensington, both located in Sydney's eastern suburbs. The research documents the average capital gain over a 35 year period, comparing properties inside and outside both HCAs. The results are both numerically and graphically tabulated, drawing definitive conclusions on the effect of each HCA on home prices and land values over time. It also presents original research on how Heritage Conservation, an extension of zoning, affects the capital values of houses over time. It also presents original research on how Heritage Conservation, an extension of zoning, affects the capital values of houses over time.
1.3 - Rationale for Zoning and Landuse Segregation
As currently practised in Australia, zoning by its intrinsic nature, limits land, both as to its use and the intensity of that use.
Individual state planning systems all treat zoning in their regulatory regimes a little differently but the statutory intention is always the same: creating better amenity through the segregation of land uses. In the state of Victoria for instance, landuse zones are combined with planning overlays to account for the multiplicity of factors that impact on desirable urban outcomes in different locations.
Revell found that zoning, at its most basic origin, derived its legitimacy from its association with the traditional police-power goals of abating disease and preventing fires. Even though none of those involved in the zoning process itself, ever genuinely believed that they were deciding planning and zoning issues on the basis of public health criteria. Nonetheless, the nexus between public amenity and the intentional segregation of land uses, was always inextricably linked (1999, p. 136).
As is readily observable today, landuse regulations typically specify, for each defined zone, those activities that are permitted as a matter of right, as well as those which are "prohibited" under the zone. If listed as a permitted use, the landowner may only engage in this use with a Development Approval, usually issued by a local authority. Generally, any use not listed as "permitted", is "prohibited". An ordinance may also specifically prohibit a particular use in a district to avoid a finding that this use may be similar to a permitted use in the district.
Skosey (2006) points out that since the Euclid vs Ambler decision in 1926, almost every major city in both the USA and Australia, has adopted a zoning code. Such zones regulate landuse - including the type of permitted uses, number of lots and size and siting of structures, - and are now ubiquitous in Australia and widely accepted as the main regulating mechanism. In essence, such zoning dictates where people live, shop, recreate and work. It controls the look, size and type of housing and the location of schools, churches and retail stores. Zoning may also be used to stipulate the preservation of natural, scenic or environmental settings, directing infill patterns and mixed-use development to specific locations, and provide for additional public community assets. These, according to many, are all legitimate reasons justifying the adoption of landuse zoning in cities and towns (Metropolitan Planning Council Website, 2006).
It is fair to say also that many city planning pioneers, such as Chicago architect Daniel Burnham and landscape architect Frederick Law Olmsted, who at around 1910, both sought refuge in the power of compulsory acquisition or eminent domain, to create elegant boulevards, parks, and civic buildings. It was a requisite as these men felt, that they had to destroy before they could build. They had to be iconoclasts first and city makers second. So too had Baron Haussmann in the late nineteenth century, when asked to reorder Paris by Emperor Napoleon III. He required the Emperor's power of intervention and unquestionable acquisition, in order to remodel and showcase Paris' manicured civic beauty.
So it is hardly surprising perhaps that zoning won such widespread and immediate support from the public and their local government representatives. By 1926, the year of the Euclid decision, all but five of the US states had passed zoning enabling acts. By default, zoning took on its present function as a template for the creation of new urban districts. The purpose of such zoning was to stabilise existing areas to ensure that they did not change too rapidly over time.
For many other critics however, such draconian regulation of the built-form was undesirable, due to its inability to produce mixed uses and varied streetscapes but Crecine et al. (1967) were not of this view. They found that exclusive, segregated zones in municipalities, categorised according to use or height, were not overly restrictive and could easily be adapted to make provision for the accommodation of nonconforming structures and uses (p. 80).
According to Ross, most land uses in the urban property market, exert some harmful "spillover effects" on adjoining parcels. This frequently then makes the value of one parcel dependent upon the use made of neighbouring parcels. (1972, p. 336).
Euclidean zoning is certainly preferred by many municipalities in NSW because of its comparative efficacy, ease of implementation (having one set of explicit, prescriptive rules applied across each zone), long-established legal precedent, and familiarity to planners, architects and city-planning professionals. Euclidean zoning has also received prodigious criticism, however, for its lack of flexibility and institutionalisation of outdated planning theory. This criticism is probably true but, whether undeserved or accurate, difficult to assess, given the number of jurisdictions that have both used and continue to use Euclidean zoning as their zoning method of choice.
There is perhaps reasonable unanimity of view, in the literature examined herein, that laissez-faire, uncoordinated development would result in unacceptable civic outcomes with poor amenity as the inevitable result. Therefore some form of public control becomes necessary, even mandatory. This extends to the need for the control of urban development in cities and the great fear of continued sprawl which can destroy good farmland, exacerbate traffic gridlock and stretch cities outwards uneconomically and unsustainably. There is not the same degree of agreement however that zoning changes through intensification of landuse, are the best way of promoting desirable infill development or discouraging the voracious take-up of "greenfield" areas by expanding cities.
Traditional zoning is universally acknowledged though, as a reasonable vehicle for directing new jobs and housing to certain areas, especially to "brownfield" locations that have existing infrastructure to support them. Many do also view zoning as an efficient tool in directing the pattern of new development to the areas of a city that most need it and away from regions least able to accommodate certain uses. To its many advocates, Euclidean Zoning is the tool best-suited for encouraging greater density and greater diversity in our growing cities.
The most fundamental question arising from the zoning debate however, remains the efficacy of zoning in reaching its stated public amenity objectives. Are these easy to measure? Is zoning an ideal landuse mechanism as some claim or simply another contrived statutory tool obsessed with segregation rather than civic outcomes? The simple answer is that zoning certainly isn't ideal and has observably created a multitude of unintended urban consequences such as homogeneity, sprawl and car dependence. Given its ubiquity and pervasiveness of use in Australian cities however, it would be fair to assume that it is probably here to stay and that future landuse systems would probably be variations rather than total departures from the current segregational model.
1.4 - Zoning Definitions
1.41 - Dictionary Definitions
According to The Britannica Concise Encyclopaedia, zoning is defined as the "legislative method of controlling land use by regulating considerations such as the type of buildings that may be erected and population density". Britannica credits the German and Swedish cities with the first applied zoning regulation in the late 19th century, instituted to address urban congestion in their cities. Zoning ordinances in the US came into force at the beginning of the 20th century, motivated by the need to regulate the location of commercial and industrial activities. This was in 1916 when New York City adopted the first comprehensive zoning ordinance, in an attempt to protect amenity, namely light and air, as well as preserve property values. Zoning today is often used to maintain the character of a town and guard against adverse externalities.
The much- quoted Australian Macquarie Dictionary, defines a zone as "an area or stretch of land having a particular characteristic, purpose, or use or subject to particular restrictions". The Macquarie Dictionary elucidates that zoning consists of "dividing an area into zones or sections reserved for different purposes such as residence and business and manufacturing". It defines zoning as "a method by which physical planning regulates land use in the public interest, involving the allocation of land for primary purposes, such as residential, industrial", in a plan for future development, resulting in the segregation of land uses.
The Oxford English Dictionary defines a zone as "an area having particular characteristics or a particular use".
1.42 - Academic Definitions
It is of paramount importance in a zoning-related thesis such as this one, to define zoning precisely and to understand its function, types and delineations as well as the mechanisms and effects of such landuse mechanisms. There is a multiplicity of zoning types practised around the world but the predominant type used in Australia is segregational zoning or Euclidean Zoning. There are several definitions proffered below.
According to Richardson et al., "zoning is the division of a city or town by legislative regulation into districts and the prescription and application in each district of regulations having to do with structural and architectural designs of buildings and of regulations prescribing use to which buildings within designated districts may be put" (2002, p. 3). Richardson et al. believe that zoning controls, as we know them, began "when New York City enacted the first comprehensive zoning ordinance in the United States in 1916, the ordinance classified uses and created mapped zones for all uses with provisions for height, area and setback controls" (2002, p.3).
Sibley (1995) argued that zoning controls were an "enframement of everyday life with introduced sociospatial boundaries of exclusion and inclusion, codified in law" (Glesson & Low, 2000, p. 107)
1.43 - Council Definitions
Auckland City Council (2004) gives an even clearer definition of zoning. The Auckland City Council report defines zoning as "the basic technique for the control of land use in the District Plan, which groups together areas of similar character" (p.1). Thus zoning, according to Auckland Council, also "recognises the present day pattern of activities and allows for a range of future development opportunities, in keeping with the amenity and characteristics of the area" (2004, p. 1).
Zoning, according to Skosey (2006), can be broadly defined as the authority of government to enforce land uses and to control built form at specific locations (Metropolitan Planning Council Website, 2006).
Thus, there seems to be reasonable unanimity of view on the definition of zoning and what is understood generally by the definitional practice of zoning in Australia and the western hemisphere. It is also well established, through the above definitions, that traditional zoning involves a segregation of land uses such as residential, commercial and industrial, in order to guard each from harmful externalities.
1.5 - Rezoning and Spot Rezoning Defined
Rezoning is a term applied to the process whereby a parcel of land changes its landuse designation or zoning. This, in turn, changes its allowable and prohibited uses as well as its density, height limits and ultimately its value. In the state of New South Wales, a rezoning would necessitate an amendment to a statutory instrument, usually a Local Environmental Plan or LEP. The other way of commonly changing the ability of land to have new uses, is by ministerial fiat through Part 3(A) of the Act, where the Minister deems a project of "state or regional planning significance". This process does not change the zoning per se but does so in effect by allowing the major project on the land where ordinarily such uses would be wholly prohibited. In due course, it is common for the local authority to then amend the zoning designation in their next comprehensive LEP planning review to match what is being practiced in reality.
Thus all amendments to zoning ordinances are commonly called "rezonings". Rezonings that apply to specific parcels or certain lots should be distinguished from comprehensive rezonings that are periodically performed by local government bodies, although the statutory process is almost identical. Comprehensive rezonings typically involve a submission to the State of the entire municipality and a reworking of the entire zoning ordinance, rather than documentation for one or more specific sites.
The term "Spot Rezoning" is perhaps the most used and least understood term in zoning parlance. A "Spot Rezoning" is defined as the singling out of one parcel or "spot", for a different treatment from that accorded to similar surrounding land uses. Spot rezonings have become more common in NSW in the past ten years. They generally arise where a specific land parcel has clearly outlived its original use and or there is a compelling reason to affect landuse change that cannot await the longer-term statutory local government processes. This might typically be a landfill site that has totally filled or a large industrial pottery, ensconced in a residential setting or rural land that has excellent employment credentials. There are strong safeguards that operate also, usually in the form of S117 Ministerial Directives. These include a directive to limit the loss of employment land to other land uses such as residential. Also, rural land must be deemed agriculturally unsuitable or non-productive, prior to it's rezoning into other land uses.
The development of zoning as a legal tool for local government, created many other public benefits: real estate groups could now have statutory protection of property values; neighbourhood associations anxious to keep out undesirables also now possessed a sanctioned mechanism; planning enthusiasts eager to implement their ideas; municipal reformers ready to apply expertise to the great urban problems of cities; and local government officials interested in self promotion and increasing local power. For these reasons and because putting ordinances into practice required little public investment (unlike other planning measures that required costly compensation claims or compulsory acquisitions), zoning became a practice of choice across most of the USA and Australia in a very short period of time. It also created immediate visible benefits without requiring large financial outlays by local government.
There is, of course, absolutely no obligation or imperative for a planning authority to proceed with an amendment to effect a rezoning at the request of a landowner and thus the issue of all rezonings is still highly discretionary and subject to the proclivities and motivations of local government. Exceptions are of course, those matters that are considered of state significance or those of specific interest to the planning minister. The rezoning process can thus become highly political for these very reasons, especially for large projects that have sizeable perceived impacts and where intense local sentiment by community organisers and legal action designed to intimidate planning authorities or applicants can take place.
1.6 - Need for Rezoning Land
An essential question that must be asked in the course of this dissertation is a fundamental one: if zoning creates such great stability, is there a need to continually undergo further rezoning?
The answer is actually very simple. There is indeed. Our cities are not static landscape portraits in the NSW Art Gallery. They are dynamic living beings that are continuously changing and evolving with new needs and new requirements with every day and month that pass. We also all seem to live differently and are all aging and living longer. We have very different household structures to only fifty years ago. In only the last fifty years we can see so many changes to our populations and their living and working requirements. Married women now work; more men and women retire early. There is more need to recreate and to age in place. Affordability is at an all- time lows. Many more people have casual or part-time jobs or no jobs at all. Family size and structure is less nuclear and decidedly smaller. Employment and travel patterns have also all changed. All these are compelling reasons as to why a city must continually adapt to its citizens' changing needs. Thus ongoing demographic social and technological change to the populations of cities, have created an imperative for landuse change and rezoning in today's ever-changing urban landscapes. There are a million and one reasons why rezoning in the modern context is so necessary.
1.7 - Outcome of Thesis and Practical Benefits of the Research
There are many tangible practical benefits that may be derived from the research contained in this paper. These include the clarification of the current landuse processes; the value-benefits to landuse change and the response that rezoning allows to the ever-changing face of evolving cities, including Sydney. There is also an obvious benefit in deciphering the value-change equation in economic, land and project-feasibility terms, which is currently undocumented and still too complex to understand, in both zoning and land economic terms. This research attempts to explain the way zoning creates and destroys value as zoning change occurs. This research should be of benefit to developers, land owners, home owners, municipal councils, the Valuer-general's office, the state government, large property trusts as well as the crown itself.
1.80 - Conclusion
Thus after setting out the clear historical significance of land as an asset class and its true significance to everyday life as a tradeable commodity and source of wealth to all land owners and home owners today, this thesis attempts to explain the economic significance of zoning change. The main methodologies of the empirical research used in this thesis, as well as the heritage conservation area research conducted, have all been explained in this chapter. The main aim of this thesis is to review the effects of planning regulation on land prices as measured through real examples.
This chapter has sought to explain the importance of land as an asset class, as well as the changing requirements of cities, hence creating the need for constant change to a city's zones. In so doing, it is hoped to further outline the main aim of the research in the thesis, namely the quantification of value change attributable to zoning change with all of its manifestations including rezonings, major project, development approval and heritage conservation zoning overlays.
This chapter has also attempted to establish zoning's definition in the context of this thesis, as well as that of a rezoning, a spot rezoning and the overarching rationale for landuse regulation under existing landuse models. The various types of zoning have also been defined and described in some detail, including Euclidean Zoning, Performance Zoning, Incentive Zoning and others, in an attempt to demonstrate the various alternatives that are frequently discussed as viable substitutes to current Euclidean zoning practices. This chapter has gone a little further in summarising some of the more pertinent criticisms of segregational zoning, as currently practiced in Australia and the United States.
There has also been a detailed outline given of the methodologies of the empirical research used in this thesis, as well as that of the Heritage Conservation Area data and its diagrammatic and statistically-tabulated analyses.
As clearly outlined in this introductory note, this thesis will thoroughly review the effects of planning regulation on the price of landed realty in New South Wales, as empirically modelled, quantified and qualified through detailed market transactional data of examples that have undergone both an observable zoning and value changes.
1.90 - Next Chapters 2(A) and 2(B): The Literature Review
Now that zoning and rezoning have both been defined and zoning as a practice, in all of its forms, set out and outlined, it would be pertinent, prior to launching into this zoning thesis, to review the prevailing literature on the subject of zoning. To that end, the following chapter represents a comprehensive analysis and critique of over 160 academic papers and 30 books, all relating to zoning. The literature reviewed forms an integral part of the exercise of assessing the prevailing views which currently exist on this subject and several related topics including planning, land economics, history of land tenure, city making, value and others . It was indeed important at this juncture, to capture as much information as possible, no matter how disparate, from as many wide sources as possible, to have a proper understanding of as much of the existing thinking on the topic as possible. Due to the size of the literature review, it has been subdivided into two sections Chapter 2(A) and 2(B).
