Council development fees

February 18th, 2013 at 10:00 am by David Farrar

Hamish Rutherford at Stuff reports:

Council development levies are pushing builders towards constructing bigger, less affordable homes because of the one-size-fits-all approach of councils, Housing Minister Nick Smith says. …

Developers were being charged “exactly the same whether you’re building $700,000, six-bedroom homes, or whether you’re trying to build an economic, two-bedroom home for a retired couple”, he said.

“That incentivises the developers to build large, expensive homes, rather than providing houses of the more affordable range.”

A flat development fee will of course incentivise larger houses. But the fee should reflect the cost.

The review would consider whether the Government should force councils to charge levies proportionate to the size of the homes being built, with Dr Smith claiming “logically” a large home would place more strain on sewerage, water and stormwater services than a smaller home.

The sensible thing would be a mixture of a flat fee and a size fee.

“The reason that development levies are interesting is that they have risen [in cost] by more than any other component in the whole picture, 360 per cent in a decade is much too much.”

Outrageous.

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32 Responses to “Council development fees”

  1. Redbaiter (8,327 comments) says:

    If incentivation is the issue, shouldn’t Smith be arguing for the abolishment of “development levies” altogether.

    Are not the costs associated with larger homes recovered in higher rates?

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  2. hj (6,852 comments) says:

    The fee should reflect the infrastructure requirements but they shouldn’t be loaded on to ratepayers as they are an industry cost for the benefit of the construction industry. I say that given that 80% net population growth over the last twenty years or so has been from off shore and population growth is government policy.
    http://www.treasury.govt.nz/downloads/pdfs/mi-jarrett-comm.pdf

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  3. hj (6,852 comments) says:

    Are not the costs associated with larger homes recovered in higher rates?

    Bloody unlikely:
    http://www.businessinsider.com/suburban-america-ponzi-scheme-case-study-2011-10?op=1

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  4. hj (6,852 comments) says:

    Hugh Pavletich propses infrastructure funding by municipal bonds (however) there’s a catch:

    Proceed with caution before you buy munis with references to “structured,” or “appropriation,” along with any bonds issued by states in fiscal trouble like Illinois or California.
    “If the issue is not backed by the full faith and credit of a sound issuer or a substantial revenue source, there is a risk that the bond may not be paid off at its due date,” the Richelsons warn.
    http://www.reuters.com/article/2013/01/18/us-column-wasik-munis-idUSBRE9

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  5. Fentex (918 comments) says:

    I read somewhere (I do not recall where) recently that the reason council fees have risen swiftly in recent times is a change to having infrastructure costs placed where they are incurred.

    If that’s true then I shouldn’t think people who have often championed the concept of user pays ought find it outrageous.

    A commenter on the topic at NotPC gives some interesting figures from their experience as a developer using a $419,000 home construction in example. It doesn’t seem to me there’s a great percentage of their costs made up of beauracracy.

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  6. hj (6,852 comments) says:

    In the past we developed infrastructure for genuine growth in productivity as when more and more land was broken in for farming and the hill country was brought into production by top dressing etc. Now it is driven on promises of people with ideas, connections and “services” (mostly real estate to wealthy bolt holers).

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  7. swan (659 comments) says:

    If we have appropriate pricing for council infrastructure provision, we wouldn’t need ridiculous development levies. A development levy is like a supermarket company going around a new suburb asking the residents to chip in a few thousand dollars each for the new Countdown building.

    Right now watercare is not allowed to make a profit by law. If you cant make a profit, you cant easily include the cost of capital into the price.

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  8. Yogibear (360 comments) says:

    So Smith is going to shake the magical money tree and somehow find a way to reduce development costs without shifting those costs to ratepayers, road users and taxpayers?

    The fundamental flaw in the logic is Smith confuses size of dwelling with occupancy rate of dwelling. I can pretty much see a current scenario where occupancy rate under current development rules of a 4 brm/2bathroom “mansion” is 3-4 people. You’d probably get that same occupancy rate with a 2-3brm 1 bathroom “affordable” house.

    If this is the case – tell me how the road, water, lighting and other communal infrastructure costs differ past the front gate?

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  9. Manolo (13,517 comments) says:

    I doubt the incompetent Smith will produce anything at all, other than taxes (leading proponent of the ETS).
    Four and a bit years later we’re still waiting for the privatisation of ACC, once his domain.

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  10. hj (6,852 comments) says:

    “Land Supply, Land Supply” He Cried:

    I process satellite-generated data on terrain elevation and presence of water bodies
    to precisely estimate the amount of developable land in US metro areas. The data shows
    that residential development is effectively curtailed by the presence of steep-sloped
    terrain. I also find that most areas in which housing supply is regarded as inelastic are
    severely land-constrained by their geography. Econometrically, supply elasticities can
    be well-characterized as functions of both physical and regulatory constraints, which
    in turn are endogenous to prices and demographic growth. Geography is a key factor
    in the contemporaneous urban development of the United States.

    Empirically, most areas that are widely regarded as supply-inelastic were found, in fact,
    to be severely land-constrained by their geography. Deploying a new comprehensive survey
    on residential land use regulations, I found that highly-regulated areas tend to also be geo-
    graphically constrained. More generally, I found recent housing price and population growth
    to be predictive of more restrictive residential land regulations. The results point to the
    endogeneity of land use controls with respect to the housing market equilibrium.
    Hence I next estimated a model where regulations are both causes and consequences
    of housing supply inelasticity. Housing demand, construction, and regulations are all de-
    termined endogenously. Housing supply elasticities were found to be well-characterized as
    functions of both physical and regulatory land constraints, which in turn are endogenous to
    prices and past growth.
    Geography was shown to be one of the most important determinants of housing supply
    inelasticity: directly, via reductions in the amount of land availability, and indirectly, via
    increased land values and higher incentives for anti-growth regulations. The results in the
    paper demonstrate that geography is a key factor in the contemporaneous urban development
    of the United States, and help us understand why robust national demographic growth and
    increased urbanization has translated mostly into higher housing prices in San Diego, New
    York, Boston, and LA, but into rapidly growing populations in Atlanta, Phoenix, Houston,
    and Charlotte.
    The Geographic Determinants of Housing Supply
    Albert Saiz∗
    (Forthcoming: Quarterly Journal of Economics)
    January 5, 2010
    http://real.wharton.upenn.edu/~saiz/GEOGRAPHIC%20DETERMINANTS.pdf

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  11. Yogibear (360 comments) says:

    The other flaw in the logic as reported in the Stuff article is section size.

    Unless the developer is a screaming idiot there is no way the 6 bedroom home is on the same section as the 2 bedroom home for the retired couple. In fact, if you get a good design and the right zoning, you can easily fit between 2 and 4 dwellings on that 6 bedroom home site.

    The economics of intensification from a developer perspective are far better than building detatched “mansions.”

    On the right site in Auckland right now, I can by a detatched, non-protected, poor condition house in in the Mt Eden, outer Epsom area for a shade over $1million (and pay well over council valuation). I can bowl the house and put 3-4 townhouses on it and break even on the development somewhere mid-way through townhouse 2.

    Under this scenario, I’ve taken the same site and almost certainly increased its occupancy by a significantly higher percentage than I’ve increased the total living sqm (working rule of thumb would be the single story house occupies 50% of the site, 3 townhouses around 120-150% of the site @2-3 stories).

    Any equitable and incentive-neutral system would have to take account, not only of dwelling size, but also section size.

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  12. Graeme Edgeler (3,280 comments) says:

    The review would consider whether the Government should force councils to charge levies proportionate to the size of the homes being built, with Dr Smith claiming “logically” a large home would place more strain on sewerage, water and stormwater services than a smaller home.

    That’s irrelevant. The major costs are involved in getting the pipes to the driveway. It doesn’t matter how big the House is.

    The *ongoing* costs from higher use of sewerage and water services will be met with higher rates and water charges.

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  13. simonway (381 comments) says:

    “Outrageous”? Like Fentex, I also recently read that the reason for the increase was that councils had started charging the true cost of building the associated infrastructure, rather than forcing ratepayers to subsidise private development. Is that outrageous?

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  14. hmmokrightitis (1,585 comments) says:

    “Outrageous”#2…

    So, user pays is now ‘outrageous’? Really? Maybe the ratepayer should absorb the cost, rather than the developer who is making a profit.

    Yup, socialism by stealth. Nice.

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  15. campit (467 comments) says:

    More Council bashing.

    Meanwhile, the Herald calls for the removal of interest deductibility for investment properties, in response to this opinion piece.

    If the removal of interest deductions discouraged residential property investment, lowered prices for first-home seekers and forced established home-owners to look for more productive uses of their savings, the country could be better off socially and economically.

    I’d be interested in seeing some evidence that “the country could be better off socially and economically”, however it is apparent from the opinion piece that property investors have a big tax advantage over family home buyers:

    Any investor in residential real estate, as of right under our existing tax laws, can deduct against their rental income the costs of rates, insurance and maintenance, plus all interest charges on their mortgages. This applies to all property whether it is residential, commercial, retail, industrial or farms.

    An investor has the huge advantage of being able to gear his or her portfolio to pay little tax on their investments and deliberately offset any further loss against other earned income.

    For many of these investors their sole purpose is to keep on buying more and more properties and mortgage gearing their property portfolio so they pay little, if any, tax. They are legitimately avoiding paying tax on their incomes. These investors own up to 45 per cent of the houses in New Zealand. There is little housing stock for families to buy and when it comes on the market it is expensive and the investor will always have the advantage.

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  16. gazzmaniac (2,307 comments) says:

    The major costs are involved in getting the pipes to the driveway. It doesn’t matter how big the House is.

    Quite right. I think the point needs to be made, however, that it doesn’t usually cost $20-50k per section to run said pipe, particularly if the new development is near to existing infrastructure. The problem should be solved by making the developer responsible for all new infrastructure required to hook into the existing infrastructure, and get the councils out of the equation.

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  17. gazzmaniac (2,307 comments) says:

    campit – an investment property should be treated exactly the same way as any other business.
    You will find that no bank will lend on less than 30% deposit for an investment property, whereas an owner occupier can get away with a 5-10% deposit – advantage to the owner occupier

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  18. James Stephenson (2,141 comments) says:

    I’d be interested in seeing some evidence that “the country could be better off socially and economically”,

    In a nutshell, “Property Investment” isn’t investment at all, it’s speculation. Borrowing money from overseas to sell buy and sell each others houses does the country no good at all.

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  19. Viking2 (11,368 comments) says:

    Redbaiter (1,992) Says:
    February 18th, 2013 at 10:11 am

    If incentivation is the issue, shouldn’t Smith be arguing for the abolishment of “development levies” altogether.

    Are not the costs associated with larger homes recovered in higher rates?

    Reddy
    Debatable, probably not, for a larger home has more bedrooms and toilets etc and thus more potential for more people. Now if we had a poll tax that taxed residents rather than the landowner we might make some progress.
    The residents would revolt against the councils and their wasteful spending and the landowner would pay for services provided to that piece of land rather than the good of the community.

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  20. swan (659 comments) says:

    “however it is apparent from the opinion piece that property investors have a big tax advantage over family home buyers:”

    No it isn’t. The writer is forgetting the other side of the equation. Home owners cant deduct expenses against rental income. They also dont have to pay tax on rental income. Because there is no rental income. If home owners had to pay tax on an imputed rental income whilst simutaneously not being able to claim interest costs, this would obviously be unfair. But that is not the situation.

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  21. Viking2 (11,368 comments) says:

    James Stephenson (1,296) Says:
    February 18th, 2013 at 12:48 pm

    I’d be interested in seeing some evidence that “the country could be better off socially and economically”,

    In a nutshell, “Property Investment” isn’t investment at all, it’s speculation. Borrowing money from overseas to sell buy and sell each others houses does the country no good at all.
    ————————
    Always the ignorant spout about things they know nothing about.

    So the fact that I have owned rental houses forever and that I bought them as exactly that, a long term investment, in your opinion disqualifies them from being an investment. So what about your Kiwisaver or your share portfolio then?

    Had you said that those that buy and sell properties are not making an investment then I would concour. They are either in the business of buying and selling properties and are there fore generating taxable income or are speculating. something that akin to gambling and again a taxable income..

    Go sort out .

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  22. gazzmaniac (2,307 comments) says:

    OK some quotes from that article that Campit linked to

    For many of these investors their sole purpose is to keep on buying more and more properties and mortgage gearing their property portfolio so they pay little, if any, tax.

    If somebody is paying little, if any, tax it means that they have little or no net income. It means that their investment is costing them money and it means that they will struggle to put food on the table. It is a poor business plan.

    An investor creates little if any wealth for New Zealand,

    And?

    , whereas the tenant paying rent must have a job or jobs to pay the rent and is actively contributing to the nation’s wealth or GDP.

    Not all jobs contribute to the wealth of the country either.

    Most investor owners care little for maintenance on their properties. Their whole purpose of ownership is capital gain.
    We see this in many of the old brick suburban shop buildings that are earthquake prone and owned by investors who care little for those working within these buildings or for maintenance on these buildings.

    1. Commercial property is not housing and commercial tenancy agreements are fundamentally different to residential tenancy agreements. For one, the shop owner, not the landlord, is responsible for much of the maintenance.
    2. Most investor owners do care about their properties. Their whole purpose is to make money, so it is in their interest to present a reasonable product to their customers. And if the building falls over due to lack of maintenance, it is the landlord who will lose the most, not the tenant.

    A family which does not own a home rightfully feels disenfranchised from society. They are the underprivileged, who feel that New Zealand is letting them down. Their only hope is to find relief in the successes of the All Blacks or the Silver Ferns – or to move to Australia, where housing is more affordable and incomes are higher.

    1. When I was renting, I didn’t feel disenfranchised from society, or underprivileged.
    2. Housing is dearer in Australia than in New Zealand. You can’t buy a house in Sydney for less than $1Million, and even in outer suburbs they are $8-900k. Gold Coast is about the same price as Auckland.

    From annual rental received, say $32,000, the investor can deduct rates, insurance and maintenance, as well as all interest costs on the mortgage, virtually eliminating any tax on income received.

    That is because they are business costs. By the time this is all added up, there will be a small surplus or a deficit. Housing isn’t as good an investment as it is made out to be.

    Not a bad investment considering such a small deposit and capital gains of at least 6 per cent to 8 per cent a year – say $36,000 to $48,000 a year, tax free.

    Which suburbs have returned a capital gain of 6-8% year on year in the last five years?

    There isn’t one point in that editorial that can’t be disproved. Sorry Alan Dudson, fail for you, but A+ for effort.

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  23. hj (6,852 comments) says:

    Roads are made, streets are made, services are improved, electric light turns night
    into day, water is brought from reservoirs a hundred miles off in the mountains —
    and all the while the landlord sits still. Every one of those improvements is effected
    by the labour and cost of other people and the taxpayers. To not one of those
    improvements does the land monopolist, as a land monopolist, contribute, and yet by
    every one of them the value of his land is enhanced. He renders no service to the
    community, he contributes nothing to the general welfare, he contributes nothing to
    the process from which his own enrichment is derived. (Winston Churchill, 1909,
    quoted by Barker 2003, p. 116).

    Land tax: options for reform
    By Iain McLean
    http://www.nuff.ox.ac.uk/politics/papers/…/McLean%20Land%20tax.pdf

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  24. gazzmaniac (2,307 comments) says:

    Actually, a land owner does contribute. Just like everyone else.

    He contributes through taxation and his rates, which he is required to pay on any net rents and also for his other income.

    The roads are paid for by excise tax every time he fills his vehicle with fuel, which is approximately in proportion to the amount he uses the roads.
    The electric light is paid for by the person who uses it, the tenant of the property, and rightly so.
    The water is paid for by the landlord, in the form of rates.

    Why do you think it’s a good idea to impose an additional tax on people who already aren’t making money out of their investments?

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  25. hj (6,852 comments) says:

    “Everyone else” doesn’t get the tax free capital gain which he can realise when he sells a property as required.

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  26. hj (6,852 comments) says:

    ““The deal of the decade comes along once a week!” says de Roos. “If you believe that, you will find deal after deal after deal.” But you will only amass money, he says, when you come from an abundance consciousness instead of a poverty consciousness; when you tell yourself, “I am a magnet for money!”

    Tonight, a pumped de Roos tells his audience that he wants people to invest in property and write to him 12 months down the track and tell him they’ve “made one million or three million, or you’ve got 16 properties, or we’re taking six months off because our cash flow now exceeds our outflow!” He says, “I don’t know any other activity where the rewards are so huge. If you want to invest a million dollars in the sharemarket, you need a million dollars. If you want to invest a million in real estate, you only need $100,000.”

    You can buy one property, get it revalued, use the equity to buy another property and then buy another and another. “And you do it all with OPM. Other people’s money. OPM. It’s like being high on drugs!” What’s more, the wonder of depreciation claims on the building and contents means “the government subsidises your investment! It’s delightful!””
    http://www.listener.co.nz/uncategorized/house-of-the-rising-sum/

    Living off other people’s labour while pouring scorn on “bludgers”.

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  27. gazzmaniac (2,307 comments) says:

    “Everyone else” also doesn’t risk his capital on an investment that is not guaranteed to increase in value.

    I don’t know who de Roos is, and I’m not going to pay for a subscription to the Listener to find out, but I think he is leading people astray by saying it’s that simple to make money using other people’s money. It’s certainly not as risk free as he makes out.

    Those “seminars” are no more than a sales pitch by snake oil salesmen, and the days of those big capital gains are gone.

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  28. gazzmaniac (2,307 comments) says:

    Oh yeah hj, I can vote your comments down as easily as you can vote mine down.

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  29. hj (6,852 comments) says:

    “Those “seminars” are no more than a sales pitch by snake oil salesmen, and the days of those big capital gains are gone.”
    …..
    but buyers are having to pay those inflated prices and government policies encourage wealthy buyers from overseas to keep them up. Auckland is predicted to… “blah, blah…” It’s like a rigged election…. It is written.

    “Creating wealth, security and financial freedom is often an investor’s ultimate goal. 90% of millionaires get there by investing in real-estate”
    New Zealand has strong population growth due to its progressive immigration policy and birth rates. Many parts of the country are experiencing housing shortages translating into strong tenant demand and price growth. This trend is expected to continue with recent population projections by the New Zealand Department of Statistics forecasting up to 64% growth over the next 17 years. Auckland city is predicted to almost double its population in the next 40 years. For property investors, this represents outstanding potential growth in demand and return on investment. New Zealand’s property prices are also relatively undervalued compared to its closest neighbour Australia.
    http://www.nzps.com/

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  30. hj (6,852 comments) says:

    National is the property investors bitch.

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  31. Davo36 (35 comments) says:

    I despair that on an issue as simple as this, so much utter rubbish can be spouted.

    Prior to 2005 these fees didn’t exist. When Auckland City Council (as it was then) brought in development contributions, they were $2500 per house. That fee alone is now over $25,000.

    Now developers pay it, but the home buyer effectively pays for it because it just gets added into the price. So the council are taking money out of home buyers (including those who are not well off) pockets, not rich developers.

    And do we really believe that money gets spent on infrastructure? Or hiring another planner? Or funding a “fact finding” trip to Europe? Or perhaps Len’s 6th spin doctor?

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  32. gazzmaniac (2,307 comments) says:

    If the development fees were only $2500 then I don’t think we’d be having this discussion.

    90% of millionaires get there by investing in real-estate

    A million dollars doesn’t buy much realestate – a big family home plus a unit for rental. Not everyone is going to buy a rental property, but one or two is a reasonable investment. It’s not like they’re owning whole cities.

    Of course population growth is an opportunity for property investors. It’s an opportunity for car importers and food growers too, since those people will want cars and food as well.

    Australia has a capital gains tax, so your CGT idea won’t change anything.

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