It should come as no surprise that real estate kingpins buy political favors on a regular basis. In the US, large scale developers are typically significant donors to both political parties, even if they favor one to the other.
A study in Australia gives a more concrete estimate of the payoff from greasing political wheels. From the Guardian’s summmary:
Researchers have quantified the value of political connections to property developers in rezoning decisions worth “many billions of dollars” across Australia every year.
A new study, “Clean money in a dirty system”, which examined the record of Queensland’s Urban Land Development Authority (ULDA), found developers connected to networks containing politicians and bureaucrats were 19% more likely – and those at the centre of networks 44% more likely – to win favourable decisions than “outsiders”.
University of Queensland economics researchers Cameron Murray and Paul Frijters said outsiders could, however, buy their way into “the right club” by paying lobbyists such as former politicians, boosting their prospects by 37%.
As the overview by Cameron Murray explains, the study focused on land banking. If you’ve had any exposure to real estate, you’ll know that buying raw land for investment is speculative. It produced no income till it is developed, so the investor has his capital tied up. It’s very hard to get loans against raw land, so the speculator is either borrowing personally or making an all-equity play, which goes against the general rule of using other people’s money whenever possible. I don’t know about you, but I’ve met only a few people who’ve bought raw land to develop. One made over $100 million in Vegas before the bust. The other was $3 million in debt personally at the age of 30, and that was in the early 1990s, when $3 million was worth a lot more than it is now. One has to wonder if it makes sense to land bank at all if you haven’t bought a politician or two.
By Cameron Murray, a professional economist with a background in property development, environmental economics research and economic regulation. Cross posted from MacroBusinesss
Property development can be a dirty business, particularly when it comes to land-banking, which is the speciality of Australia’s largest developers.
Land-banking involves the speculative buying of large parcels of land that are currently unsuitable for development in the hope of future development potential. But hope alone is not a business strategy. How can land banking be so routinely successful for developers in Australia?
One argument is that successful land-banking comes from political favours in terms of rezoning and public provision of infrastructure. These favours provide substantial value gains to landowners at no cost to themselves. While in certain cases this account appears to have some merit, there has been no systematic evidence that rezoning favours the politically connected.
My new working paper, co-authored with Professor Paul Frijters, can be download here. In it we report a systematic and controlled study of the role of relationship networks in land rezoning decisions in Queensland.
The basic result is this: How well-connected you are determines how successful you will be in getting your land rezoned for higher value uses. In Queensland $410million worth of additional development rights were given to mates in just our sample of decisions.
In the study we use sample of planning decisions and landowners involving a total area of 12,676Ha, made by one State authority, the Urban Land Development Authority (ULDA), which took planning powers away from local councils with the intention to increase the scale and speed of development in the rezoned areas. Throughout its time the ULDA was no stranger to accusations of bias, with the Local Government Association of Queensland arguing the government is “playing politics and favouring developers.”
In order to establish how well-connected both rezoned and non-rezoned landowners were, we trawled through a wide range of data on political donations, lobbyists and their clients, industry groups memberships, politicians and their former employers, relationships of ULDA board members, and landowner’s corporate records, in order to construct a relationship network.
We also compiled historical sales data to estimate that this series of rezoning decisions increased the value of the rezoned land by $710 million.
Our main finding however, is that well-connected landowners owned 75% of the rezoned land, but only 12% of comparable land immediately outside the rezoning boundaries, indicating that these decisions were primarily driven by the relationship networks of the landowners, rather than any technical assessment of efficient and appropriate locations for urban expansion.
Political favours in the property industry were found to be much more about being part of the entrenched well-connected political class, whose tight-knit mutual relationships support implicit favouritism, than about visible activities such as making political donations.
These well-connected landowners made $410 million in profit from the rezoning decision, at the expense of the public at large who had the option to instead sell those additional development rights. The data tells the story that connected property developers bought land unsuitable for development on the urban fringe, then successfully lobbied State politicians and bureaucrats through their relationship networks to rezone areas where they had bought properties, wrong-footing both councils and other property developers. This process of influence took 7 years on average.
Scaling up our results suggests that the ‘back-scratching’ rezoning game has probably cost the general public many billions of dollars in Queensland in the last few decades.
We propose a number of technical solutions to this great game of political favouritism in land rezoning. The size of the gains to rezoning can be diminished by increasing land taxes. Development rights could instead be sold to land owners, perhaps through local auction processes, or the value gains recovered through a betterment tax. Even a local democratic system for voting on new areas for urban expansion would counterbalance vested interests with the interests of the public more broadly.
One unfortunate lesson however, is that the same relationship networks that allow favouritism to thrive in rezoning decisions will obstruct any systematic reform of rezoning processes.