The impact of development contributions on affordability depends on their size; on who ultimately bears the charges; and on the alternative ways in which infrastructure would be funded if there were no infrastructure charges.
Size of charges
Figure 8.3 illustrates the size of development contributions, by showing the mean, highest and lowest charges identified for each infrastructure category. It shows that the level of development contributions per housing unit varies widely both across infrastructure categories103 and between councils. More councils apply development contributions to fund water supply and waste-water services than any other type of infrastructure, and these categories attract the highest contributions. The share of development contributions in section prices varies considerably between regions (Box 8.2).
103 The authors also analysed the magnitude of development contributions across infrastructure categories for 42 local authorities, using data assembled
by the Department of Internal Affairs. The analysis is complicated by the range of charges that might apply to any single activity within a council. It is also partial to the extent that councils that charge low development contributions may charge high financial contributions, which were not analysed, and vice versa.
Figure 8.3 The range of development contributions in New Zealand (43 councils)
Source: Dwyer and Wilkinson (2011, pp.27-35). Notes:
1. The figures refer to charges made by different councils and are therefore not additive.
Box 8.2 Development contributions and section prices
Table 8.2 compares development contributions for ten council areas with median section prices. It omits financial contributions, and therefore underestimates the impact of combined infrastructure charges.
The fifth column in the table illustrates considerable variability in the share of development contributions in section prices, although charges above $20,000 per section are common. Table 8.2 Development contributions as a share of section prices
REINZ Region 2010 Median
Section Price City / District Contributions (GST Incl.)
Mean % Price
Auckland $516,000 Auckland City $17,225 3.3% Auckland $608,000 Rodney $23,260 3.8% Auckland $525,000 North Shore $25,097 4.8% Auckland $393,000 Waitakere $23,681 6.0% Auckland $408,000 Manukau $5,956 1.5% Auckland $368,000 Papakura $26,406 7.1% Auckland $461,000 Franklin $14,619 3.2% Canterbury/West Coast $312,000 Christchurch $10,888 3.5% Waikato-Bay of Plenty $322,750 Hamilton $21,124 6.5% Waikato-Bay of Plenty $322,750 Tauranga $31,229 9.7%
Incidence
How development contributions affect affordability depends on their incidence (that is, who ultimately bears them, which may be different from who initially pays them). Whether they will be passed forwards to homeowners or backwards to land owners “depends on the relative inelasticity of supply and demand: backwards if the supply of raw land is less elastic and forwards if the demand for serviced land is less elastic… [there is] growing consensus among economists that almost all of any developer contributions will be passed on to consumers in the long-run”104 (VCEC 2005b, p. 420). The Australian Productivity
Commission points out that if the value to homebuyers is roughly equal to the charge for the infrastructure, homebuyers would willingly bear this charge and the “implication is that such charges could, and would, be passed in full to the buyer” (Australian Productivity Commission 2004, p. 164).
Alternative funding sources
It is also important to consider what would happen if there were no development contributions and new infrastructure was funded in some other way. For example, infrastructure for a particular development might be funded by a general increase rates on a broader community. However:
…even if more of the cost of providing infrastructure to new developments were shifted onto the wider community, housing affordability might not be greatly enhanced. That is, the price of land in new housing developments would rise, meaning that the gains from lower infrastructure costs would be largely captured by the owners of raw land or by developers (Australian Productivity Commission 2004, p.165).
Another possibility is that councils might not be able to access alternative funding sources if there were no developer contributions. The Smart Growth Implementation Committee notes that in a number of growth areas, councils’ ‘debt envelopes’ are being pushed to their limit” (sub. DR90, p. 13). Tauranga City Council points out that:
…the effects on housing affordability of not having infrastructure charges might in some cases be significantly greater than the direct effect that infrastructure charges have on the cost of new dwellings. For example, reduced infrastructure investment might constrain land supply and push the cost of developable land and developed sections upwards. (sub. 19, p. 22)
The views in submissions
Given the complexities involved in assessing the incidence of development contributions, it is not surprising that submissions expressed a range of views about their impact on housing affordability – although the most common view (expressed largely by councils) was that the impacts would not be large (Box 8.3).
104 Some international research supports this view. Skidmore and Peddle (1998) found that infrastructure charges reduced the rate of development in 29
municipalities in Illinois by more than 25%. Ihlandfeldt and Shaughnessy (2004), based on a review of nine other papers and their own research, found that impact fees increased the price of new and existing homes in Florida, although with a larger impact on new housing. A review of US literature by Evans- Cowley and Lawhon (2003, p.358) concluded that impact fees increase house prices where there are no reasonable substitutes. The research also indicated that the cost of impact fees is pushed backwards to sellers of land where reasonable housing substitutes exist.
Box 8.3 Views on the impact of infrastructure charges on housing affordability
Amongst those who argued there is little effect, Auckland Council argued that while the costs are borne by the ultimate purchaser of the dwelling and not the developer, contributions are a relatively small addition to the cost of housing.
Development contributions are considered to be one of the mechanisms by which Council will be able to provide affordable housing ... they have only been identified as generating approximately 3%–5% of housing cost. (Auckland Council, sub. 45, p. 10)
The submission also suggests that there is a risk that prices would not be reduced by developers if contributions were removed, and that mechanisms are required to ensure that savings are passed on (sub. 45).
Conclusion
It is difficult to draw a general conclusion about how much development contributions increase housing prices and reduce affordability: they vary considerably across New Zealand and the extent to which they are passed on probably also varies, although they are likely to be largely passed on to households in the long- run. It is clear, though, that while the implementation of development contributions in 2002 contributed to the increase in house prices, the charges were not large enough to explain the surge in house prices at that time. For example, the sample of 10 regions (Table 8.2) showed that in these cases development
contributions made up between about 1% and 10% of median section prices, whereas house prices doubled during the boom.
While development contributions did not cause the house price boom, charges of $20,000 per section are not uncommon and will often have increased land prices. However, given that infrastructure has to be provided to make land suitable for housing, and that infrastructure charges are intended to recover these costs, the relevant issue is whether the charges are being set so as to recover only the incremental costs of efficiently provided infrastructure. The next two sections consider this issue.
$5,000 and $8,000 and do not have more than a marginal impact on housing affordability (sub. DR111, p. 12).
Palmerston North City Council similarly suggested that infrastructure charges add little to the price of a house and should be met by the developers that profit from development.
Private housing developments are undertaken for economic benefit. Infrastructure costs should, therefore, be recovered at appropriate levels ... the examples given may only account for only 5% of the overall purchase price [of a home]. There are many other factors that will have a greater impact on the final purchase price. (sub. 46, p. 5)
Whangarei District Council (sub. 32) also argued that contributions are a relatively minor contributor to house prices and likely to be passed through to buyers in “good times” but may have to be absorbed by developers in the form of lower profits in “bad times”. The Development Contributions Group has a similar view:
While Development Contributions should be fully capitalised into the value of land there are circumstances where the entire value of the contribution is not borne by the land. This can be due to the particularities of the location, the relative value of the land to the capital improvements on the land, the indebtedness of the property and a myriad of market vagaries. The claim that Development Contributions cannot be fully capitalised into the value of the land typically arises when a developer has paid too much for a plot of undeveloped land, has underestimated the cost of completing the developments, or has overestimated the ultimate retail prices of the finished subdivision or other developments. (sub. 22, p. 5)
The Local Government Forum and Property Council New Zealand (LGFPCNZ) (2010, p.vi) pointed out that development contributions of around $30,000 are common in certain districts and can generally be expected to be passed forward to home owners and consumers, or backward to the owners of undeveloped land and suppliers of other inputs, including employees.
Tauranga City Council (sub. 19) has a different position, citing an example of how development contributions can have a significant impact on affordability:
These fees have a significant impact on the cost of new houses and if they were reduced the affordability of housing in Wairakei could be improved. As an extreme example if these fees were removed entirely then the cost of a house in Wairakei could be reduced by over $40,000+GST. (Tauranga City Council, sub. 19, p. 5)