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:

  1. General rates. The costs of the new areas are spread across all Aucklanders, but is this fair?
  2. Targeted rates, which are only paid by properties in the new areas.
  3. 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.

Development Contributions
Development Contributions: serious business.

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.

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21 comments

  1. Good topic – not well understood.

    I know that local playgrounds, landscaped stormwater ponds, nice bus shelters and streetscape improvements are all unavailable to land developers these days, because Council won’t accept them (even if the developer builds them). This is due to the high ongoing maintenance costs. And rightly so. However, as a result, many of our brand new neighbourhoods will be lacking in character and amenity.
    Hobsonville and Stonefields are the last of the ‘old breed’ of new communities because they do have lots of small parks and unique & attractive features. If we are to build places like this in future, a targeted rate is definitely necessary. It’s user pays.
    We should remind ourselves that high amenity places are more likely to support higher population densities.

    1. “If we are to build places like this in future, a targeted rate is definitely necessary. It’s user pays.”

      But why does it need to be targeted? In the established areas there are parks and other amenities that need to be paid for, and are paid for out of general rates. Why would a new park cost more to maintain than parks in established suburbs? If it doesn’t, why do established suburbs get their parks maintained from general rates but new suburbs have to pay for their own maintenance on top of paying general rates? Or do we have targeted rates for new and existing suburbs? I wouldn’t be against that (say having local boards being able to raise their own rates to fund local infrastructure).

      1. What I mean is that small parks/plazas and other ‘upgrades’ should be targetted. Council have guidelines on the ‘default’ amount and do provide a very basic level of services. Most older suburbs have a very low quantity & quality of parks anyway (compared to the likes of Stonefields).
        Amenity encourages density, so we need to make it easy to build parks and other amenities. If a developer is willing to pay to build it, and people are willing to pay an ongoing premium to live next to it, then I think Council should be encouraging that type of development. There are generally some wider public benefits as well.

        One could argue the inverse; eg swimming pools and libraries would logically be paid for by the local catchment and people without those services would be charged less. The digital age we live in does allow for all sorts of specific rating policies that are only just becoming viable.

  2. There is a fourth option (at least for some aspects of infrastructure) – increase user charges so they cover capital and operating costs. We currently under charge for water, wastewater and road use for ALL users (not just new users). This would decrease demand on infrastructure by everyone as everyone pays for the true cost of their demand. Development Contributions are definitely a second best option compared to having appropriate charges.

    Note that supermarkets dont set up targeted rates in order to service a new area. But they still manage to open more stores.

      1. Ricardo, you might like to read up on externalities and how they relate to cycling. Also note the negligible contribution cyclists make to road wear and tear, and that more than half of Auckland’s local transport costs are funded through general rates.

        1. Other than getting in other people’s way and delaying them and wrapping there backsides in glad warp style clothes. that is certainly and externality.

      2. Nah. Marginal cost of cyclists is very low. Cycling infra is a little compensation for the annexing of road space by mororists.

  3. Perhaps they could weight DC so that attached/medium/high density developments pay less proportionally than detached stand alone houses.

    1. Apartments do pay less – although it’s a more complex system for Auckland because development contributions exclude water infrastructure, which is instead covered by Watercare’s Infrastructure Growth Charges, and there are different systems for both. And stormwater is calculated differently as well.

      Trying to (roughly) combine those things, apartments in Auckland would typically pay about 65%-75% as much as a detached house, although it depends on the size of the apartment. Terraces are more like 80%-90%.

        1. Yes, except for dwellings below 65 sqm (i.e. small apartments or minor dwellings) which pay 2/3rds of the normal amount. But crikey that’s a very blunt tool. I’ve been starting to look at water use recently – some work by BRANZ from a few years ago showed that a big amount of the usage is for things like pools and watering gardens. I have a strong suspicion that apartments and terraces have much lower infrastructure requirements for water.

          1. ‘But also in a part of town with existing infra’ that can in no way cope with the coming demand and will need huge investment to bring it up to spec.
            And it’s only the metro area that has an ‘identical’ charge. Out in the ‘whoops’ they pay far more.

            PS, BRANZ are about as much use as a one legged man at an arse kicking contest.

            PPS DCs are a sure fire way to increase the cost of housing to everybody. The first up user pays all system is a huge barrier to _all_ development. Does give a nice kick in value to all those who live off the infrastructure payed for by previous ratepayers though. It must also be a major reason why you get all those wriggly cul-de-sac type subdivisions.

  4. John, in the Herald story Nick Smith chose to use consent data from a time period different to the one I had used for the development contributions. In fact if you compare development contributions and consent numbers for the same period – in the year to June 2015 – development contributions increased faster (9%) than building consents (8%). So in the first year after the law change, average development contributions increased, albeit by a small amount. The point is Nick Smith talked up the Government’s law change at the time, how Councils were rorting the system, and how his initiative would reduce the cost of new housing, by reining in the charges on developers that were being passed on to new home buyers. Like so many of his initiatives it turns out it has had no impact.

    1. Hi Phil, thank you for coming by and replying. I appreciate that different time periods might give slightly different results, but on the whole I would expect the new reforms to (slightly) reduce the cost of providing new housing. I’ve read your comments on the bill’s third reading (http://www.parliament.nz/en-nz/pb/debates/debates/50HansD_20140729_00000024/local-government-act-2002-amendment-bill-no-3-%E2%80%94-third) and agree the points you made there, and note that Labour did support the bill, albeit with reservations.

      As far as the data comparison goes, though, does the year to June 2015 gives adequate time to show the impact of the changes? I assume it came into effect five weeks into that year, when it received royal assent on 7/8/2014, and while the changes were supposed to come into effect immediately, councils also needed to revisit their DC policies, and had until June 2015 to do so. For example, we’re the project managers for an apartment development on the North Shore, and that is likely to have lower DC charges under the Auckland Council’s 2015-16 policy than under its 2014-2015 policy.

      Development contributions are not necessarily levied at the same time as building consent is granted, so that’s another conflating factor with the data – e.g. I believe councils are entitled to ask for them when resource consent is granted, but in most cases it would be later. For residential subdivisions, it might be at the time of subdivision consent, although councils might also let that be deferred until building consent or even until the homes are completed.

      It’s still good to play devil’s advocate, that’s certainly a key role of the Opposition, and I agree that this bill doesn’t address all the issues. I’m also glad that you’re doing some post-implementation reviews, which is certainly something we find lacking with many of the Government’s policy changes (RoNS for one). If you take another look at the DC/ building consent changes for the year to June 2016, perhaps send me a note? I’d be happy to revisit, even if it might not get as much media attention the second time around.
      Cheers,
      John

  5. The quantum for DCs are set when Resource Consent is granted but collection comes after Code Compliance Certificate is issued (i.e. after final inspection approves building for occupation/use) which is often many months, sometimes several years later. DCs were introduced in the late 90s to replace the old FC (Financial Contributions) system which was subject to appeal and was regularly challenged by developers on a range of technicalities such as exactly what Council was to use the money for.

  6. Thanks John. We voted for the changes because like so much of what National does in housing they were better than nothing, but not by much. The worst of it, is that they were a missed opportunity for genuine reform. Labour believes it is time to think more deeply about how infrastructure for development is financed.

    The current approaches are inefficient and expensive. Infrastructure within a new development is funded through the developer, and a share of the cost of the connections with the wider networks is levied on the developer through development contributions. Both are simply shovelled onto the price tag of the new home and paid by the home buyer. It pumps up the price of new housing, and as you point out, is capitalised into home values in the market. The cost of much other infrastructure for growth is then funded by the ratepayer which risks subsidising development in places where it perhaps shouldn’t be happening.

    We think a better option is to bond-finance new infrastructure (both within a development, and a significant share of the connecting services) which would be cheaper than paying it off on the mortgage. It would allow the costs to be spread over the lifetime of the asset. If the bond financing is repaid by a targeted rate on the properties in the new development, that ensures the costs land with those new properties, and should discourage development in places where the infrastructure costs are high. There is an added benefit. Relieving developers of the job of financing infrastructure should remove some of the risk and cost that can delay new developments or at worst cause them to fall over altogether.

    1. That sounds promising, though slightly more complex than lumping it on the mortgage. If its on the mortgage then I suspect people (and banks) will perceive they are paying toward an asset, whereas a bond would be a liability. To be attractive, the bond rate would have to be *substantially* lower than the mortgage rate.
      I do believe this would be a useful direction, but would only amount to tinkering. How do the $100m+ projects get funded?

      To make a real impact, Auckland needs large, strategically-planned growth areas developed to high densities, to become fully-functioning communities (like Hobsonville, or denser). Unfortunately, due to a dire lack of strategic infrastructure, places like Hingaia, Silverdale and Redhills are being ‘drip fed’ capacity at a very slow rate. This results in piecemeal development to a low density (aka sprawl), and with greater competition for zoned land. In these areas, utilities, schools and transport (to support 10 years of growth) must be forward-funded. Developers (even the biggest ones) will never be in a position to pay for this type of strategic investment – yet Council, Government, and CCOs are not being proactive. It seems hands are tied.
      Levies for individual wastewater/water connections are absolutely small potatoes compared to this strategic stuff.

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