Development Levies and Housing Affordability

I worry when Nick Smith decides he's going to fix something. He has a happy knack of deciding to fix things that are not broken - maybe they need a bit of a tidy-up - but he really gets stuck in, ideological boots and all...

Now it's developer levies. Close to my heart. A rational policy if ever there was one. Thankfully, even the NBR (well - it's comments section), contains some sanity, in response to Nick Smith's burblings:

 The high cost of horizontal infrastructure development and redevelopment must be met in proportion to the size of the section/development.....

 The days of councils "inadvertantly subsidising" developments because they haven't costed the full cost of providing those services are hopefully long over. 

User pays.... And with improved water standards, roading, drainage, footpaths etc.... These don't come cheap.... 

And nor should they be subsidised by ratepayers for developers/purchasers of these properties

You want it... You pay it's full cost. 

See more here.

Introduction

Nick Smith's been all over the media complaining about Development Levies. That they are a factor in making housing unaffordable. That development levies might even get on-charged to the new home owner (shock, horror, scandal, probe)..... That's what they are for Nick! The idea is that the user pays for the marginal cost of additional infrastructure the new house needs.....

This saga is going to run and run. First of all it was the councils that were to blame because they would not free up land at the urban boundary. The argument against that - that I used and so did many others - was that land price alone is not what makes housing affordable or not. You can see my posting about this here . It raises questions about the narrow focus of the Productivity Commission on what makes housing affordable (or not). It discusses what gives land value, and also discusses the true costs of accommodation (not just the house).

In this posting I explore another aspect - and that is the tendency to build McMansions.

I don't think it will be until interest rates go through the roof, or a sensible capital gains tax regime is introduced, that New Zealand will see the housing bubble pop.

The Government Report on Developer Levies

Thankfully, the Dept of Internal Affairs report (dated Feb 2013, submissions due 15th March 2013) contains some quite sensible stuff. However, you can sense Government's ideological approach from the issues that listed in the report:

The Impact on Housing Affordability:
• issue 1: high development contribution charges can raise the purchase price of land and housing;
• issue 2: the timing of development contribution payments can increase the price of sections and houses; and
• issue 3: lack of incentives within the current development contributions system for smaller or more affordable housing.

Variability and Inconsistency:
• issue 4: variability and inconsistency in the use of development contributions means charges are unpredictable and raises questions around fairness and transparency;
• issue 5: an unclear purpose, fragmented structure and unclear wording, combined with a lack of up to date guidance may be contributing to variable and inconsistent territorial authority use of development contributions; and
• issue 6: the ability to use development contributions to help recoup costs of meeting increased demands on infrastructure is not consistent across all providers of infrastructure.

Fairness and Equity:
• issue 7: the types of infrastructure for which development contributions are charged, and the way in which charges are apportioned can be unfair and create inequities through not properly recognising benefits to the wider community; and
• Issue 8: aggregation of developments of different sizes, characteristics and locations in development contribution policies does not reflect the actual demand on services and can result in inequities through under or over charging.

Complexity and Efficiency:
• issue 9: the amount of detail and effort put into development contribution policies can result in increased complexity and reduced transparency without a commensurate increase in accuracy and fairness of outcome.

Dispute Resolution:
• issue 10: current challenge and dispute resolution mechanisms are expensive and time consuming, or lack transparency.

Issues 1 and 2 are obvious, and basically what the the development regime system was put in place to achieve. Before 2002, I saw, as a councillor, that existing ratepayers were subsidising new housing developments in Albany and other parts of North Shore City to an alarming and unfair degree. "Intergenerational equity" was the catch-phrase used by those supporting the status quo.

Issue 3 is interesting. If a smaller home has one toilet (say), or parking for only one car (say), then it would be reasonable to argue that its development levy should be smaller than for another "housing unit" that had 3 ensuite toilets and garaging for 3 cars. That would be progress. Finally there would be an incentive to build smaller homes - apartments

Issues 4 to 6 appear to call for a bit of a tidy-up in the legislation.

Issue 7 is interesting. In my experience, Councils always undercharge the true cost of infrastructure provision to developments. The reason for this was an inbuilt conservatism, and fear of litigation (though I know very well that NSCC's decision to allocate the full 100% busway cost to new development was successfully appealed in the High Court - but that was an exception - not the rule). The approach adopted by Councils was like: "get an estimate for new infrastructure costs, then halve it, then everybody will be happy...". The thing was of course that meant about half the cost of infrastructure needed for development or subdivision - was socialised. Allocated to other ratepayers by default. That still means that the developer, and the new home owners would have their infrastructure costs subsidised. If anything, I would argue that developers and new home owners are routinely subsidised by existing ratepayers. That's what needs to be fixed.

There are useful appendicees in the report, comparing development levy regimes in Australia, parts of the US and Canada. But it is notoriously difficult to do this. For example, Australian state government provides water and wastewater services in Queensland (it's not provided by local government), aspects of state education are provided by local government in the USA, and so on. Comparisons become useful when they are analysed by service type (eg water, wastewater, stormwater, roading, public transport), and even then it is difficult because a water poor area (eg Melbourne) has different challenges and risks to Auckland (a relatively water rich area).

In terms of housing affordability, the most interesting appendix to look at is Appendix D. This shows that New South Wales and the United Kingdom both collect development levies to fund the construction of affordable housing - which is considered in these jurisdictions to be social infrastructure. In past years New Zealand took a similar approach and invested substantially in council housing and state housing - recognising that "social" housing is a social imperative and an unavoidable necessity. That the market cannot and will not meet that need.

McMansions

And for the last bit of this posting, I would like to share this last bit of research.

This is a picture of part of the Great American Dream. The McMansion. Whole suburbs are taken up with them. Many bedrooms. Ensuite bathrooms. Garaging for many cars. There's quite a few now in New Zealand too. An extension of the quarter acre pavlova paradise idea.

This graph (from Tommy's Wellington Real Estate website) shows the effect of this trend in New Zealand. He explains: "The average floor area of a house in New Zealand, is 149 square metres. This has increased over time, with houses built recently being over 50% larger than houses built in 1900. Based on the decade built, houses had an average floor area of just under 132 square metres in 1900, while houses built since 2010 are on average 205 square metres...."

This graph is self-explanatory, and agrees with Tommy's house size for 2010. I imagine that New Zealand more or less fits with Australia. You can readily see how average size reduces with density, and also where home sizes - even those that are detached - are smaller, and less inclined to the McMansion style.

This graph shows what is beginning to happen in  the USA, and what needs to happen here in New Zealand. Average home areas are falling - and presumably home build costs are falling too. The McMansion era is coming to an end. For all sorts of good economic reasons I suspect. And the same thing needs to be accelerated here in New Zealand. Please, Nick Smith, no more fiddling with developer levies to make speculative McMansion building more lucrative for get-rich-quick developers. Time for a more responsible approach.

This graph is based on a survey of what Americans now say (in 2010) their ideal home size would be. Sure there are plenty who want a big house, but there's a lot want a house between 800 and 2000 square feet in area.

If Government wanted to incentivise the construction of smaller, less McMansionish homes in Auckland, it could do a lot with development levies by linking them to the number of bathrooms and the number of garages proposed in a housing unit.