Man, that’s a bad comic reference in the title of this post. I’m sorry everyone.
But seriously folks, development contributions (DCs) are very important, and I think we should all have a general understanding of what they do and why they exist. This post was prompted by a Herald article where Phil Twyford, Labour’s housing spokesperson, said that the fact that more DCs had been collected across the country meant that “the Government’s reforms have failed”. That’s really twisting the figures. I’ll explain why below.
“Development contributions”are payments which developers have to make to councils, to help fund the cost of new infrastructure. They exist because new houses, shops, offices etc create extra demand for council-provided resources. For example, if we’re going to build another 400,000 homes in Auckland in the next 30 years, the council needs to invest in transport, parks, water reservoirs, and community facilities. The ‘sprawl’ areas alone could cost the council $13.7 billion.
These costs could be funded in several different ways:
- General rates. The costs of the new areas are spread across all Aucklanders, but is this fair?
- Targeted rates, which are only paid by properties in the new areas.
- Up-front development contributions, which end up getting capitalised into the price of properties in the new areas.
A couple of decades ago, most councils essentially used approach #1. And some are even returning to this approach, either to encourage development, or because they’ve got lots of spare capacity so don’t really need the contributions. As one example, Rotorua has recently scrapped DCs.
However, most councils are now using a “user pays” approach, i.e. #2 or #3 above. I think that’s a good thing, but it’s also good that councils have the flexibility to charge less if they want to – it helps Rotorua compete with Tauranga, for example.
As a side note, #2 and #3 have much the same effect, with one main difference – #2 pushes property prices down and has higher ongoing costs (rates), and #3 is the opposite. The “net present value” of each one should be pretty much the same. More on that in a future post.
The 2014 reforms came about because the government was concerned that DCs were actually being used to fund projects that didn’t actually have much to do with the new developments. The reforms have brought more transparency and accountability, which is good, although some of the other changes could be argued either way (e.g. DCs could previously help to fund a wide range of community facilities. Now, they can only fund very basic facilities with a very local focus. Swimming pools and libraries which might be used by people from further afield have to be funded through general rates).
Because the reforms narrowed the range of things that DCs can be used for, they’ve generally meant that the DCs per new house, or per new building, have declined.
On the other hand, because more development is occurring, the ‘total’ level of DCs being collected has still increased. And that’s the issue with Mr Twyford’s statement. He was quite rightly called out on it by Nick Smith, who replied that “building activity had picked up substantially, yet the increase in contributions was below that pickup level”.
We’re now getting closer to a situation where new development ‘pays its way’, and if it’s cheaper to provide new infrastructure to Grey Lynn than to Greenhithe, for example, that gets reflected in lower DCs for Grey Lynn.
Note that this is only true for council-provided infrastructure. Government infrastructure, like schools and motorways, aren’t funded this way. It might be that these things cost more to provide in ‘sprawl’ areas than in ‘intensified’ areas, so sprawl still gets a bit of a subsidy, but that’s something for the government to consider.
Likewise, there might still be other issues to sort out – e.g. if we’re under-charging for greenhouse gas emissions, there’s more incentive for people to live out on the fringes and drive more. If we can find the ‘right’ charge, whatever that might be, then people face the true cost of their emissions and might choose to live more centrally instead.
At any rate, once we start to untangle these kinds of issues, we might not be so reliant on blunt instruments like urban limits.