Insights

Are development contributions to blame for housing affordability woes?

Posted September 20, 2021

Author(s):

Marcus Spiller

Sectors:

Housing

Types:

Local government
State government
Business

SGS Economics and Planning Marcus Spiller infrastructure costs article image

Calls by the National Housing Finance and Investment Corporation for greater transparency and accountability in the use of development contributions to fund urban infrastructure are well justified. But arguments for a return to traditional funding models based on taxes and recurrent user charges should be treated with caution. They could simply transfer wealth to development site owners with no gain in housing affordability.

In a recently released research paper, the National Housing Finance and Investment Corporation (NHFIC) laments the rise of development contributions as a means of funding infrastructure in residential growth areas. The paper concludes that these contributions have ‘shifted the cost burden of local infrastructure from state governments and local councils to end users’, implying that they are culpable in diminished housing affordability.

Numbers on the scope and scale of the infrastructure that goes into a new greenfield community are notoriously difficult to find. However, Infrastructure Victoria (2019) estimated the cost of infrastructure to support growth on the urban fringe in Melbourne at between $126,000 and $259,000 per dwelling. This is an all-inclusive estimate except for the facilities and services built into individual house lots and the cost of providing public open space.

Using these figures as a base and adding in a provision of $5,000 per lot for open space contributions, a broad funding mix can be identified. This includes an assumption that the cost of providing major roads is divided 40/40/20 between state taxes, development contributions and local rates, and the cost of providing community infrastructure is shared 50/50 between development contributions and local rates. In round terms then:

30 per cent of the all-inclusive cost of providing infrastructure in growth areas is funded through developers building roads, pathways, drains, parks etc on-site and transferring these assets free to Councils
20 per cent from cash or in-kind development contributions for ‘off-site’ assets
20 per cent from recurrent user charges levied by utility companies on households after they have taken up occupancy of the new community in question
20 per cent from general State revenues, and
10 per cent from local rates.

As NHFIC points out, this mix is the product of significant policy changes over the past five decades, not only in Victoria but across the nation. Since the late 1960s, there has been a rebalancing of funding sources requiring developers to:

complete all on-site infrastructure before lots could be registered and sold, and
make cash or in-kind contributions to the provision of shared off-site infrastructure.

Traditional methods of paying for infrastructure, through taxes and recurrent user charges, now account for only about half the total funding task.

NHFIC says that this rebalancing stemmed from councils struggling to keep up with the infrastructure funding task in the burgeoning new suburbs of the 60s and 70s. But this is only part of the story.

Traditional funding methods supported speculative subdivision and haphazard urban development

Under traditional funding methods, subdividers had few obligations beyond surveying the land and registering lots for sale. Purchasers then gradually paid for the infrastructure through rates and charges.

The great advantage of this was a lower entry price for aspiring homeowners – they basically bought an unfinished product and then paid for it to be completed as their incomes rose. This might have been a good homeownership policy back in the day but is unlikely to fly today.

The big drawback of the traditional approach was a rampant speculative subdivision and haphazard urban development. With low entry costs, developers chanced their arm with councils and state governments wherever there was a prospect of snaring the value uplift associated with planning approvals.

Urban growth was disjointed, adding to the substantive cost of infrastructure. Good quality agricultural land in peri-urban areas was often bought up by rent-seeking investors and left to sprout thistles. And, unsurprisingly, there was a fair amount of corruption in the development approval system.

Would a return to funding infrastructure through household taxes and charges aid in affordability?

Infrastructure has to be paid for somehow. In principle, there isn’t much difference between a household paying a lower upfront price supposedly due to reining in development contributions and then facing higher recurrent taxes and charges, versus the household paying a higher upfront price and meeting the extra costs through recurrent mortgage payments.

In any case, as the NHFIC paper acknowledges, developers in an efficient market are price takers, not price makers. Profit maximising developers will pass the cost of development contributions back to the sellers of raw land, not forward to home buyers. Certainly, developers will look to push up prices if market conditions allow, but they will take any such opportunity regardless of the development contribution regime.

There is undoubtedly scope for improvement in development contribution systems across the country, particularly concerning transparency of collections and accountability for deployment. But a move back to traditional infrastructure funding methods would likely have little impact on end-user prices and would simply lead to a greater wealth transfer to raw land sellers who themselves add no value in the housing production process.

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Author(s):

Marcus Spiller

Sectors: