By Aaron Gadiel, Partner

The NSW Government has published a proposal to dramatically expand the scope of the ‘SEPP 70’ across Sydney.  This paves the way for either the compulsory acquisition of a portion of new housing stock (or the payment of cash to avoid that acquisition) in six additional local government areas.

What is SEPP 70?

State Environmental Planning Policy No 70—Affordable Housing (Revised Schemes) (SEPP 70) was introduced by the then Labor Government in 2002.

It did two things:

• it formally identified ‘a need’ for ‘affordable housing’ in what is now the City of Sydney, the former Leichardt Council area and the City of Willoughby; and
• it inserted ‘affordable housing’ schemes for the Ultimo-Pyrmont Precinct, Willoughby and Green Square into environmental planning instruments.

This action was taken by the then Labor Government following an embarrassing defeat in the Land and Environment Court in the year 2000.

In Meriton Apartments v Minister for Urban Affairs and Planning [2000] NSWLEC 20, Meriton had challenged the legal validity of the Green Square ‘affordable housing’ scheme.  The then South Sydney Council had adopted provisions into its local environmental plan:

• The provisions created a concept of ‘affordable housing’.
• The provisions required that an applicant for development consent make a contribution for ‘affordable housing’.
• ‘Affordable housing’ consisted of residential accommodation which must be assigned to a nominated housing authority by permanent reservation or transfer of title, or a cash contribution.
• The affordable housing was to be solely used by households of low-to-moderate income.
• The contributions were to be assessed as floor space (or a monetary contribution in lieu of floor space).
• The making of the contribution was to be required as a condition of development consent.

The Land and Environment Court ruled that the scheme was unlawful.  The Court said that:

• The Environmental Planning and Assessment Act 1979 (the EP&A Act) contained no express provisions permitting the acquisition of property without compensation.
• The conditions envisaged by the local environmental plan were an unauthorised interference with proprietary rights and were unreasonable.

The Government responded to this judgment by pushing a new law through parliament which retrospectively approved various existing ‘affordable housing’ schemes.  A legislative framework was also set up to allow new ‘affordable housing’ schemes to be created.  That is, the EP&A Act was expressly changed so that the law now authorises the acquisition of property without compensation for the purposes of ‘affordable housing’.

This is where SEPP 70 came in.

In order for the provisions allowing new ‘affordable housing’ schemes to be applied, two key things must happen:

• a state environmental planning policy must identify that there is a need for ‘affordable housing’ within a given area; and
• any development consent condition requiring an ‘affordable housing’ contribution must be authorised by a local environmental plan or state environmental planning policy (and must be in accordance with a scheme set out in such a document).

SEPP 70 is the relevant ‘state environmental planning policy’.  (Part 3 of the State Environmental Planning Policy (Affordable Rental Housing) 2009 also plays a limited role in relation to buildings that were low-rental residential premises in January 2000.)

There are three well-known affordable housing schemes operating under SEPP 70.  These apply in:

• the Ultimo-Pyrmont Precinct;
• Willoughby City; and
• Green Square.

Until now state governments have not agreed to any extension of SEPP 70 (following its creation in 2002).  The situation has now plainly changed.

The Government’s proposal

The Government is proposing to identify six additional local government areas (including former areas) as being in need of ‘affordable housing’.  These are:

• Randwick City Council;
• the balance of Inner West Council (ie the former Ashfield and Marrickville local government areas);
• Northern Beaches Council;
• City of Ryde Council; and
• City of Canada Bay.

This means that the proportion of Sydney’s inner area that is susceptible to ‘affordable housing’ schemes under SEPP 70 will more-or-less double from 33 per cent to 67 per cent.

The proportion of Sydney’s middle ring that is susceptible to such schemes will increase from 5 per cent to 20 per cent.

The Government has invited submissions on this proposal — submissions must be lodged by 31 January 2018.

The Department of Planning and Environment’s acceptance that these areas are in need of ‘affordable housing’ is based on various studies commissioned by the relevant local councils.

Given the depth of affordability concerns in Sydney, it seems likely that any local council in the inner and middle ring suburbs could — if it wanted to —  satisfy the Department’s new threshold  for identification under SEPP 70.  This suggests that further proposals (beyond these local government areas) for the extension of SEPP 70 might be anticipated.

What is the practical effect of identification of these additional areas in SEPP 70?

The extension of SEPP 70 will not have an immediate consequence.

However, it would represent a ‘green light’ for local councils in those areas to submit planning proposals to amend their local environmental plans.  These proposals would seek to establish specific ‘affordable housing’ schemes.

The planning proposals will need to be approved by either:

• the Greater Sydney Commission; or
• (when new legislation recently passed through Parliament commences) the Planning Minister,

before any local environmental plan can be changed.

Essentially, if SEPP 70 is amended to apply to a local government area, landowners and developers should expect that an ‘affordable housing’ scheme will follow in due course.

What can an ‘affordable housing’ scheme do?

An ‘affordable housing’ scheme allows development consent conditions to be imposed requiring, either:

• the dedication of part of the development site (or other land of the applicant) free of cost to be used for the purpose of providing ‘affordable housing’; or
• the payment of a monetary contribution to be used for the purpose of providing ‘affordable housing’.

or both.

An example of how a new scheme might work is set out in the Inner West Council’s Affordable Housing Policy dated November 2016.  The policy provides for a 15 per cent ‘Affordable Housing Contribution’ within new release areas, brownfield and infill sites, and major private and public redevelopments.  The policy is directed at developments that meet a threshold of 20 units or 1,700 square metres in gross floor area.

It is important to understand that the proposed ‘15 per cent’ is not a proportion of development profits.  It is 15 per cent of gross floor area of the development.  So essentially, what is taxed under such a scheme is the gross revenue of the development, rather than the net revenue (as might occur in more conventional taxation schemes).

What is ‘affordable housing’ under SEPP 70?

The reason that this article puts quotation marks around ‘affordable housing’ each time that it is mentioned, is that the SEPP 70 definition of ‘affordable housing’ does not align with the normal use of the phrase in everyday speech.

Most people think of ‘affordable housing’ as housing they can afford to buy or rent.  Generally speaking, people will find housing they regard as affordable by making compromises on location, size, outlook, and the age of the premises.  Most householders do not currently expect to find ‘affordable’ housing by approaching a non-profit or government institution.

SEPP 70 takes a different approach.  It is founded on the principle that the housing is only ‘affordable housing’ if it is housing ‘for’ any household whose income is anywhere up to 120 per cent of the median household income for the Greater Sydney (ie up to $109,200 according to 2016 census data).

The government’s ‘frequently asked questions’ document says that ‘affordable housing’ is necessary ‘for the workers on low incomes who keep Sydney and NSW operating and it is also a pathway out of social housing’.  However, there is no actual proposal (in the exhibition document) to lower the income thresholds.  Clearly households that earn, say, $100,000 (above the Sydney median household income of $91,000) would not be regarded by most people as ‘low income’ households.

Schemes under SEPP 70 generally only look to provide rental housing (rather than owner-occupied housing).  Additionally, there is generally a requirement that that housing be institutional (in the sense that it must be managed by registered housing organisations, rather than traditional ‘mum and dad’ property investors).

How does the government justify the proposal?

The government justifies the proposal by saying that ‘affordable rental housing underpins economic productivity’.  However, it is presumably is a reference to affordable rental housing as understood in everyday speech rather than ‘affordable housing’ under a typical SEPP 70 scheme.

SEPP 70 has produced, to date, very modest dwelling numbers and has not yet made any significant contribution to the supply of affordable rental housing in Sydney.  It seems that the Department of Planning and Environment has formed the view that this is because the scheme is not extensive enough.

The government says that any proposed ‘affordable housing’ scheme will ‘need to demonstrate that the proposed affordable housing contributions rate will not impact on supply of general housing’.  It does not say whether impacts on the price of such general housing is acceptable.

Normal economics would tend to suggest that if, say, 15 per cent of a product must be given away by its manufacturer for free (to a public authority or a housing organisation) the remaining 85 per cent of the product will have to be sold at a higher price.   This will only impact on supply if the purchasers of the product (general housing) are unable to pay the higher price.

Next steps

The process is likely to unfold in this way:

• The government will need to make a final decision on the amendment of SEPP 70 following the close of submissions on 31 January 2018.
• Local councils will then submit their ‘affordable housing’ schemes to the Greater Sydney Commission/Department of Planning and Environment for a ‘gateway determination’. It can be expected that those individual schemes (if initially approved) will then be publicly exhibited before they are finalised.