The most recent paper published by Auckland Council’s Chief Economist Unit takes an excellent look into the economics of greenfield development and how to more fairly fund the costs of roads, pipes and other infrastructure that is necessary to enable this development.
It starts by reminding us how expensive all that sprawl enabled by the Unitary Plan actually is:
Infrastructure is expensive
The Auckland Unitary Plan identifies about 15,000 hectares of rural land for future urbanisation (10 per cent reserved for business uses) with the potential to accommodate roughly 137,000 dwellings. Because this land is currently rural, it requires substantial investment in infrastructure before urbanisation can occur. The indicative total cost of new bulk infrastructure required is $20 billion – or about $146,000 per dwelling on average.
Remember that this is just the bulk infrastructure (so excludes local streets that are built by developers) and doesn’t include things like hospitals and schools. So roughly $150,000 of spend on bulk infrastructure for every single dwelling. Given how expensive housing is in Auckland at the moment, even $150k/dwelling might make up a relatively small part of the purchase price if it was all covered by the developer. But how does the cost of this infrastructure “split” between the developer and the ratepayer? This is what the paper looks at next:
Development contributions (DCs) are currently the main recovery mechanism for infrastructure costs. Developers pay DCs to council at the time of residential sub-division. DCs in greenfield areas currently range between $21,900 and $27,500 per dwelling, plus an additional $11,300 per dwelling in water infrastructure growth charges. This means if DCs remain at current levels, they are likely to cover only a fraction of the total infrastructure cost.
Okay so there’s a pretty big cross-subsidisation from the ratepayer to the private developer here. At most the developer is paying around quarter of the cost and the ratepayer is picking up the tab on the other three-quarters. No wonder developers are screaming out to get rid of urban limits!
The article goes on to look at how the “benefits of infrastructure investment” are spread. In other words, how much more valuable is land that has infrastructure compared to land that doesn’t – and how does this compare against the amount of money the landowner/developer has contributed to the infrastructure provision.
Infrastructure servicing adds between $138 and $265 per square metre. For a 500 square metre section, this amounts to an increase of $68,750 to $132,500.
This is over and above the value uplift that occurs when land is rezoned from rural to future urban land. Using REINZ data as a starting point, we estimate the value of rural, unserviced land at about $5 per square metre. This means the total value of announcing imminent infrastructure, and then providing that infrastructure, ranged from $110,000 to $160,000 (a multiple of 44 to 64 of median farm land value) for a 500 square metre section across Auckland.
Wow what a deal! For an average site, a landowner just needs to chip in around $40k per section and the Council comes to the party to subsidise the infrastructure that lifts the land value of each section by up to $160k per section. Or, put differently, the land value increases up to 64 times what it previous was!
Crazily though, that’s not even the worst bit. After dismissing some of the arguments often used to justify these sprawl subsidies, the article goes on to explain why development contributions are such a terrible way of recouping even the small fraction of infrastructure investment that landowners have to pay for.
DCs are the main mechanism whereby developers contribute to the costs of new bulk infrastructure. DCs are paid at the time of sub-dividing as a lump sum at a pre-determined per-dwelling rate. Because DCs are charged as a ‘lump sum’ payment at the time of development, they can create a number of issues:
- Uncertainty of timing: They are only paid when development occurs, which can be many years after infrastructure is built. General ratepayers end up funding the infrastructure in the interim.
- Slower development: When land values are increasing much faster than the holding costs of land, the incentive to develop land quickly is weak. DCs can act as a further incentive to land-bank as they are only charged when development occurs.
- Higher upfront section prices: As discussed in the previous section, because a DC is charged as a lump sum, it may be added to the cost of a section, increasing upfront section costs.
The Unitary Plan has dramatically expanded the areas where growth can occur. But there is no guarantee that actual development will match forecasts. If revenues only come in several years after debt has been issued, it affects council’s ability to finance infrastructure projects. This makes DCs a risky mechanism for funding infrastructure.
It certainly seems like development contributions are a terrible way to charge landowners for the infrastructure that makes their land so much more valuable. They essentially incentivise land-banking and discourage the construction of housing that is so desperately needed and the whole reason why the greenfield land was opened up in the first place! Fortunately, there is a much better alternative available – targeted rate:
It might be time to consider greater use of an alternative funding mechanism – targeted rates. Targeted rates recoup infrastructure costs over time and are imposed specifically on the land owners who benefit from infrastructure that enables urban growth.
There are several benefits to targeted rates:
- Incentivise faster development: Where land that is re-zoned to allow urbanisation has increased in value, targeted rates provide a stronger incentive to develop rather than land-bank.
- Stabilise short-term affordability: Using targeted rates to recover infrastructure costs might also be effective in addressing concerns about housing affordability and disruptions to housing supply in the short term. They spread the costs over time and developers pass on the responsibility of paying targeted rates on sale.
- Provide timing of funding certainty: Targeted rates provide more certainty to council about the timing of funding.
- Provide inter-generational fairness: Targeted rates spread the cost of repayments so that those benefitting from the infrastructure over the life of the assets share in the costs as well.
It certainly seems like a no-brainer to move completely away from development contributions and towards targeted rates for funding this growth, and to ensure those targeted rates much better match the land value uplift that is being derived from the infrastructure investment necessary to enable urban development.
Fortunately, moving in this direction is not just an idea permeating from some pointy-headed economists buried deep within the Council, it was also a key change to the Council’s financial policy that was made in the 2017/18 Annual Plan. Here’s what the Annual Plan says:
Changing our funding policy to allow for targeted rates to fund infrastructure for new developments
This change to the funding policy now means that the council will be able to implement targeted rates on large-scale developments. None have been agreed yet, as any targeted rate would be subject to a consultation process before it is implemented. 66 per cent of submissions supported this proposal.
Thankfully, it seems the days of massively subsidising sprawl (in Auckland) are coming to an end.