The economics of heritage laws and housing supply
- James Lesh
- 4 hours ago
- 5 min read
Dr Marcus Spiller (SGS Economics and Planning) and Dr James Lesh (Heritage Workshop)
Authored by economist Peter Tulip, the Centre for Independent Studies (CIS) has issued a policy paper arguing that State heritage legislation, particularly in NSW, is deeply flawed and puts ‘important obstacles in the way of housing supply and hence housing affordability’[1].
To develop its argument, the CIS uses a case study of a heritage listed house in the Sydney suburb of Gordon.
Citing market research on willingness to pay for heritage conservation, the CIS paper says that the heritage value offered by the Gordon home would be counted in ‘five figures’ at most. Meanwhile, it observes that if the same house were to be free of heritage restrictions and therefore available for apartment development, it would be worth around $10.0 million. This is a $6 million premium on the going price for a heritage listed property at around $4 million.
CIS argues that heritage listing of buildings like that on the Gordon site is difficult, if not impossible, to justify in economic terms; a cost of $6 million is incurred by the owners of the listed property, but the value of the retained heritage would be less than $100,000. The paper goes on to say that if heritage controls were subject to proper cost benefit analysis, we would likely have far fewer heritage controls and greater capacity for housing supply.
The CIS paper appears to conflate distributional effects with impacts on the overall welfare of Sydneysiders. The apartments that would have otherwise been built on the heritage-listed site in Gordon will not be lost to the Sydney housing market altogether. A developer deterred by the heritage listing would, presumably, default to their next best option. This could be a heritage-free site in the same locale. The premium price they would have paid to the owners of the Gordon site will now be paid, in large part, to the owners of an alternative site. The heritage listing has financially disadvantaged one party but advantaged another.
This is a distributional effect. Of greater interest in policy development is whether the NSW / Sydney community as a whole is better or worse off as a result of the heritage laws. Working this out is the territory of cost benefit analysis.
The alternative site to which the developer resorts may offer fewer amenities and therefore lower achievable prices for newly built apartments. Accordingly, the maximum price the developer would be prepared to pay for the property would be lower compared to the hypothetical Gordon site, let’s say $9 million instead of $10 million. The net welfare cost for the Sydney community — lost housing utility — would therefore be $1 million, not $6 million.
Well-located urban land is, of course, scarce. A reduction in capacity for infill in places like Gordon because of heritage listing might, in the fullness of time, manifest in a need to replace the lost dwellings via further expansion on Sydney’s urban fringe. As well as foregoing housing utility, this would mean additional costs for the NSW community, given that it is generally more expensive to accommodate a dwelling in a greenfield suburb than in an infill location. But this additional infrastructure cost would itself be counted in five figures on a per dwelling basis and may never be incurred, assuming that ample capacity for apartments is built into planning schemes in infill areas.
The CIS’s back of the envelope assessment therefore likely provides an order of magnitude overestimate of the costs associated with heritage listing.
At the same time, it probably underestimates the benefits of heritage listing. Firstly, as crucial as household willingness to pay is to assessing these benefits, it is not the whole story. Heritage assets have cultural and educational value, which is intergenerational. Historic England, a UK public body, quantifies this contribution through its Heritage Counts data series. Australia would be well-advised to start recording the value of heritage in this systematic and evidence-based way[2].
Secondly, catchment definition will have a major impact on heritage valuation based on willingness to pay surveys. CIS reports that preference modelling undertaken by CAPPRE in 2025 finds that households in NSW are, on average, willing to pay $46 per year to conserve a portfolio of 500 locally significant, pre-WW2 dwellings, even if this portfolio of heritage assets is located hundreds of kilometres away[3]. This is the equivalent of a one-off payment of $920 (capitalised at 5%). If this were applied to all households in Gordon, it would amount to a willingness to pay of the order of $3.0 million. Our notional heritage listed site in that suburb would unlikely attract this valuation by itself. But in heritage matters, it is often the array or package of buildings that people value.
Other market research cited by CIS was undertaken by Survey Engine in conjunction with SGS Economics and Planning Pty Ltd in 2017[4]. The Survey Engine results also show that while there is a degree of distance decay in willingness to pay, people value heritage, whether it is on their doorstep or well beyond. That is, they value its existence, whether they ‘use’ it or not. On this basis, both the CAPPRE and Survey Engine results could be applied to catchments much broader than just the host suburb.
In summary, there could well be welfare costs with heritage controls, related to foregone housing utility and, potentially, additional or earlier infrastructure outlays on the urban fringe. But, contrary to the contention in the CIS paper, it is not obvious before the fact that these costs would be greater than the value of retained heritage in places like Gordon.
CIS appropriately calls for proper cost benefit analysis to determine whether or not heritage controls are economically warranted. But their scoping of such an analysis is open to challenge.
Loss of heritage values is an externality in the market process. People’s welfare is diminished to greater or lesser degrees depending on personal preferences when heritage is destroyed. This cost is not factored into the developer’s financial equation. Nor is it factored into the decision-making of apartment buyers. If externalities are not corrected, market transactions will not deliver the best welfare outcome for the resources available to the community.
Externalities can be managed by regulation, such as, in this case, heritage controls. Or they can be managed by bringing the effects in question into market transactions by assigning property rights. CIS suggests that if the community were required to compensate the owners of heritage listed properties for their foregone land value, efficient market choices would be made about what to protect and what not to protect. Only those buildings and streets would be protected where the community’s willingness to pay for heritage retention is more than enough to compensate the affected landowners.
However, under Australian planning laws, development rights are reserved by the State. They do not attach to land ownership. With this assignment of property rights, the reverse of the market scenario offered by CIS would apply. Development proponents would have to compensate adversely affected community members for the heritage value they would have otherwise enjoyed. A developer would only proceed with the purchase of a site if they could recoup their costs — including compensation for lost heritage — and generate their required return. If they cannot achieve this, they would default to their next best option, which may be a comparable site that is not heritage listed.
While market solutions such as this should be considered, the costs of administration, transactions and litigation may outweigh the anticipated gain in welfare efficiency. Sometimes, after proper cost benefit analysis, simple regulation is the best answer.
[2] See also Heritage Council of Victoria, Valuing Victoria’s Heritage, https://heritagecouncil.vic.gov.au/research-guidance/reports/valuing-victorias-heritage.
[3] Fifer, S. (2025) The Value of Historic Cultural Heritage: Insights from Discrete Choice Experiments in New South Wales, Australia, Presentation to Economic Society of Australia (NSW) Cost Benefit Analysis Forum September 2025, published by Community and Patient Preference Research (CaPPRe) https://esansw.org.au/407/images/C1._Valuing_Cultural_Heritage_-_Simon_Fifer.pdf
[4] SGS Economics & Planning Pty Ltd and Survey Engine (2018) The Value of Heritage: Summary Report; Consultancy commissioned by the (then) Victoria Department of Environment, Land, Water and Planning https://assets.heritagecouncil.vic.gov.au/assets/Valuing_Victorias_Heritage_Summary_Report-compressed.pdf
