Housing and land: central or local?

Local government has traditionally been responsible for managing housing and land supply in their jurisdictions. However, some of that responsibility has now shifted to central government, through the National Policy Statements on Urban Development (NPS-UD) and Highly Productive Land (NPS-HPL), which provide central government direction to local councils regarding housing supply and rezoning.

But is centralisation the right approach here? This presentation outlines an economic framework for assessing whether functions are best allocated to central or local government, by considering the economic benefits and costs. Local government has the benefit of being responsive to the circumstances of the local community. However, local government may overlook wider public benefits and costs falling outside their jurisdiction.

This framework is then applied to the NPS-UD and NPS-HPL. For the NPS-UD, there are some wider benefits of expanding the housing supply, such as limiting unmet housing needs and homelessness, but many of the costs and benefits are local. This implies local control over housing would be preferable. However, one rationale for central government direction is to better align the incentives of councils with the housing supply-side. Nonetheless, a better way of doing this would be to allow councils to share in the benefits of development, and not just incur the costs, while still allowing councils to tailor their housing solutions to local needs.

For the NPS-HPL, the benefits and costs of managing highly productive land are likely to be localised. This implies the case for central government direction is weak. The NPS-HPL therefore imposes costs on councils and requires them to take a one-size-fits-all approach to land management in their jurisdiction.