News last week that Auckland Council had confirmed plans to charge housing developers $6 billion worth of Development Contributions (DCs) over the next 30 years to partly pay for $19 billion in capital spending on parks, public transport and water infrastructure didn’t get nearly enough attention.
Not because it was surprising or unusual or unexpected. It wasn’t. It’s now the standard way for councils to reduce the ‘burden’ of having to pay for at least half the infrastructure costs from population growth. Ratepayers, councillors, the Government and even developers seem to accept its fair and good, although developers often complain about the scale and increases. That’s understandable, given the breadth and scale of the latest increases in Auckland, as reported by Jonathan Killick for Stuff (bolding mine):
The highest leap in charges is in the inner northwest suburbs of Redhills, Westgate and Whenuapai where new builds will incur average charges of $72,000 per house, up from $25,000.
It’s one of five “investment priority areas” identified for growth. Others include Mt Roskill where contributions will increase on average to $33,000 and Mangere with contributions increasing to an average of $27,000. Jonathan Killick for Stuff
The reason it’s remarkable is that this ongoing and increasing use of DCs is an essential tool in a multi-decade exercise in magical thinking by both central Government and councils, in which they both believe enough infrastructure can be funded by private borrowers to sustain 1.5% per annum population growth. It goes like this:
Governments under both Labour and National wanted to reduce public debt-to-GDP ratios so always looked for the beneficiaries of public investment to pay for it, rather than the Crown more broadly, so have enabled councils to charge DCs;
Councils weren’t allowed to run budget deficits and also believe they must keep debt low, so they charged DCs and have progressively increased them to cover more of the direct water infrastructure for housing and widened them to include paying for parks and buses as their debt has risen; and,
Developers have accepted them because they can be easily itemised and passed on to the buyers of sections and/or house and land packages.
Back before DCs
But it wasn’t always like this. Before the late 1980s, the central Government, council water departments, electricity lines ‘boards’ and Telecom simply paid for the infrastructure, sometimes with debt and sometimes out of retained surpluses from rates and lines charges. They often laid the pipes, built the roads, moved the earth, put up the lines and dug the ditches with the help and planning of the Ministry of Works.
That wasn’t the only help the Government gave developers, builders and buyers of new homes, especially first-home buyers. The Government enabled young families to capitalise their child benefits into a deposit for a home with a 3% home loan from the state. The Government also guaranteed to buy unsold homes built on new suburbs and provided simple (and free) to use designs for developers and builders to use.
Then everything changed when Governments of the day from 1984 onwards took the view that New Zealand would not have much population growth and that previous Governments (ie Muldoon’s) had over-invested with foreign debt, which should never happen again.
The Government then took the view that the beneficiaries of public investment could be identified and charged, to avoid both other taxpayers and ratepayers having to pay, and to restrict new Government borrowing, in order to reduce the size of the Government and its debt relative to GDP over the long run.
A perfect solution. Higher house prices and lower mortgage rates.
So DCs started. These DCs have inflated new house prices in a way that has pumped up prices of all houses because the price of a new ‘marginal’ item of supply often drags up the resale price of a long-lived and tradeable product such as a house. That inflation is painful for those trying to ‘get on the ladder,’ but is welcome news to existing homeowners and their bankers able to use those higher (tax-free) capital valuations to enable further leverage.
Higher DCs are the perfect tool for voters in both council and general elections because they enable;
(slightly) lower mortgage rates through lower Government borrowing, which in turn increases land values and enables more leverage;
they discourage new housebuilding, which in turn reduces overall supply and elevates both the values of their own homes and the rents underpinning the values of their rental properties;
they directly increase the value of their own homes by increasing the cost of the marginal unit of supply; and,
they reduce the cost of rates for all existing homeowners, which in turn increases the disposable incomes needed to obtain more leverage to buy more existing homes.
That means DCs are one of the key tools in a suite of measures that have shifted wealth in a one-off way from the young to the old.
Ka kite ano
Bernard
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