Mandatory Policies Overview

The resources and guidance in the Affordable Housing National Leading Practice Guide and Tool Kit is not designed to be relied upon. Users of the guide should consider the individual circumstances of each project or policy, use other resources and take independent advice.

Introduction to mandatory inclusionary affordable housing policies

Mandatory inclusionary housing policies require developers to include or contribute to affordable housing as a condition of development approval. Policies may be site-specific, area-based or more broadly applied across a jurisdiction or local area. Mandatory contributions may be negotiated or determined as a fixed rate or threshold.

Threshold approach

In this approach, a threshold is set as a trigger. All new development above the threshold will be required to provide affordable housing. The amount of affordable housing to be provided is often determined using a percentage or proportion of the total number of dwelling units. The proportion of affordable housing to be provided by developments above the threshold is based on a housing needs assessment or a legislated target for the provision of affordable housing.

Examples of thresholds include those:

• for developments over a certain size (for example, 10 units or 1 hectare) to include a percentage as affordable housing
• for developments over a certain size to offer a percentage of housing for purchase by affordable housing providers at a fixed price. This would need to be sold to not for profit housing providers whose constitutions ensure they provide affordable housing in perpetuity or with  conditions attached to ensure that the housing remained affordable for the long term and to discourage opportunistic involvement in affordable housing.

Negotiated arrangements

In this approach, the development assessment process includes a negotiated arrangement, which secures an affordable housing outcome. Commonly this agreement is between the developer and council or state government.

Examples of incentives used in negotiated arrangements for the provision of affordable housing:

• reservation of infrastructure capacity for affordable housing
• concession in fees or charges
• pre-purchase commitments (such as for social housing)
• assistance with financing costs
• promotional or marketing assistance.

Mandatory approaches may also have an ‘in lieu’ contribution system that provides an option for the provision of or contribution to affordable housing outside of the specific development area.

Examples of ‘in lieu’ contribution systems are:

• offsite contribution—provision of the mandated affordable housing requirement off-site
• payment in lieu—financial contribution instead of the mandated affordable housing requirement on-site.

Use of mandatory inclusionary housing policies in Australia is limited. Inclusionary schemes operate in the urban renewal areas of Green Square and Pyrmont, Ultimo, in central Sydney, and in Willoughby, in Sydney’s north. Although some local government areas have attempted to use the ‘impact fee’ approach in the past by requiring developers to contribute to affordable housing as part of their broader impact fee or infrastructure contribution payments, challenges to the legal validity of these approaches mean that none of these schemes persist today.

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To see example of mandatory policies click on the link below

What is this measure likely to achieve?

Once the mandatory framework is established, over time and through market changes, the local or regional affordable housing program will grow. Mandatory approaches provide good protection against future market inflation, because as prices and market activities escalate, the proportion of development reserved for affordable housing remains constant, with new affordable housing achieved during an escalating market when access to housing would be particularly difficult for low income earners and affordable housing providers.

The scale of impact of this measure may be more significant over time than during the initial years of its implementation. The proportion of development required for the contribution cannot be so excessive as to deter development, indirectly exacerbating house prices by aggravating the supply shortage. If mandatory requirements are fixed rather than negotiated it may be necessary to set the percentage requirement at a level lower than that able to be absorbed by some sites. Yet if the percentage requirement is low—for instance, one percent—the market impact of the requirement will be minimal but the development will need to include a yield of 100 units to achieve a single unit for the affordable housing program. On the other hand, if cash payments are the most common form of contribution, the problem of accessing land for affordable housing development remains difficult in a ‘bullish’ market.

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Advantages

Mandatory approaches are fundamental in establishing or renewing high value areas to ensure for social mix and maintain accommodation for workers and seniors, even as property values increase.

• Mandatory approaches offer certainty, and are able to be calculated in advance when land is purchased. This means that the affordable housing contribution results in lower land prices, rather than higher housing costs.
• Mandatory requirements can avoid the need for extensive negotiation processes. Even when the contribution is negotiated, the mandatory framework can provide a stronger and clearer basis for negotiation.
• Mandatory approaches are transparent and fair because they apply to all specified development within a site, area or zone.
• International evidence shows that mandatory requirements become accepted by developers following their implementation.
• Mandatory approaches are most effective in a high-value market, where it is hardest to access affordable housing opportunities on the open market. In other words, mandatory requirements are most effective in circumstances where there is a real shortage of affordable housing opportunities and it would otherwise be most difficult to secure or develop new affordable housing supply.
• Mandatory approaches can effectively support other government investment or incentives for affordable housing—making capital funds for housing assistance go further or combining requirements with financial incentives for affordable housing development in the private sector.

Disadvantages

• State and territorial planning legislation is likely to need amendment to support and enable the use of these approaches at local or regional level.
• It can be difficult to determine the correct contribution amount, particularly when this is to be set as a fixed percentage.
• Mandatory inclusionary policies are likely to require significant policy and political effort in the short term for limited overall gain in terms of new affordable housing creation.
• Mandatory approaches are most valuable in high-cost housing markets and less valuable in lower-cost markets.
• The approach depends on a level of development activity (because contributions depend on development taking place) but the contribution requirement could be seen to deter some development activity, having the perverse effect of no affordable housing contribution and a further contraction in supply.
• There is a perception that the requirement could be passed onto the individual home buyer, although in reality the impact of the requirement on overall prices depends on the characteristics of the market.

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Where will this measure have the greatest impact?

The scale of impact of mandatory approaches will be high, especially over time and in relatively buoyant market circumstances. The proportion of affordable housing secured may be greater if options requiring smaller absolute contributions from developers are pursued, such as fixed term rental arrangements. At the lowest end of the market where the margin between housing production costs and the market price is smallest, mandatory contributions might impact on house prices or deter development in this sector. Unless the approach is introduced with significant lead time to ensure the planning burden is absorbed by lower land values, it may be desirable to use other planning mechanisms to generate lower-cost market housing. An alternative would be to mandate affordable housing but as an option that can be taken up by affordable housing providers by way of sub-market sales, as in the model now being used in Ireland.

How to use this measure

1. Identify sites for potential increased residential density.
2. Determine likely value of increased development opportunity and likely development viability of proposed affordable housing contribution.
3. Introduce requirement at time of rezoning/change to planning scheme but foreshadow well in advance.
4. In major, high value areas, a set amount provided on site will yield the highest value for affordable housing.  In middle and outer areas, housing at set price points for affordable home purchase, may represent the best outcome.

To see example of mandatory policies click on the link below

Click on the link below to determine whether this planning mechanism is recommended for your environment

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