Big changes to the development contributions regime are offered in a discussion paper released by Housing Minister Nick Smith and Local Government Minister Chris Tremain at the weekend.
Proposals range from tweaking the existing system to abolishing it altogether and replacing it with an infrastructure levy or greater use of infrastructure bonds.
The Government is under immense political pressure to increase housing affordability so this review may deliver significant change.
Submissions are due by 15 March 2013.
Case for reform
Development contributions were identified as a factor in pushing up house prices by the Productivity Commission in its Housing Affordability Inquiry, a Chapman Tripp commentary on which is available here.
Problems identified with the current system, both by the Commission and in the review, are the lack of transparency regarding how the charges are calculated and the wide variation in how (and if) contributions are charged and in the amounts charged.
Only 45 of New Zealand’s 65 territorial authorities apply development contributions (regional councils are not authorised to charge them but can charge financial contributions under the Resource Management Act).
Usage is highest for water and wastewater (43 councils of the 45) and lowest for community infrastructure (29) and reserves (25).
Average total charges across all services (community infrastructure, reserves, roading, and the three waters) ranged in 2012 from $249 per housing unit equivalent (HUE) to $64,489.
Development contributions can be charged by local councils to recoup some of the capital costs of providing infrastructure services to support new property developments. They can only be charged on growth-related infrastructure investment – not on quality upgrades, maintenance or operational costs.
The proposals are grouped according to how easy they would be to implement – both legislatively and by councils on the ground.
Low end effort
Those changes which could be easily implemented are:
to improve council practice and consistency by updating guidance on how development contributions should be applied (this might include increased training and the development of a set of principles to guide use), and/or
tweaking and bringing together the existing provisions in the Local Government Act 2002 (LGA).
- Amend the LGA to explicitly enable discounts on HUE charges to encourage more affordable houses and housing on Māori land – for example, charging a two bedroom house at 66% of the normal HUE charge and waiving charges for papakāinga housing. A waiver policy in Ottawa to encourage inner city development in 1994 was estimated to cut $10,000 off the price of a new residential unit.
- Inserting a purpose and principles statement into the LGA. This could:
- clarify that development contributions are a charge related to the infrastructure demands created by growth
- clarify that they can relate to the marginal costs of growth
- incorporate more explicit direction around the need to consider both the cause of the demand on infrastructure and who will benefit from it when setting contributions, and
- clarify the extent of consultation required when developing contribution policies.
- Making more explicit the ability of councils to enter agreements with private developers for them to build and operate infrastructure. Such privately provided infrastructure might not need to match the standards the council would provide but the council would not be legally obliged to accept responsibility for it unless and until it was brought to council standard. The discussion paper cites the Hobson Point project where the developers were able to cut their development contributions by agreeing with the council to provide parks and stormwater infrastructure.
- Reducing the range of infrastructure that can be funded from development contributions to reflect more closely the benefit to the wider community and whether the item is a public good or a private good. Sub-options could include:
- only charging contributions on network infrastructure
- clarifying that network infrastructure contributions can be charged only for headwork and trunk services
- restricting the use of contributions for reserves and community infrastructure to facilities designed for use by the local community rather than the wider community (which is more appropriately funded through rates)
Queensland, Western Australia, South Australia and Tasmania exclude public transport, libraries, community centres, recreation facilities and sports grounds and New South Wales limits reserve and recreational contributions to local parks and to facilities which serve a particular development site or precinct.
- Making contributions payable only upon the issuing of a building consent or the authorisation of a service. A sub-option may be to allow a council to require a development contribution at the time of subdivision but to postpone payment until the section or houses are ready for sale.
- Capping development contributions. This might include:
- allowing the Minister of Local Government to authorise cap breaches in exceptional circumstances
- setting caps for particular types of infrastructure
- indexing the cap to the Producers Price Index, and
- providing a differential cap to recognise differences in house size, location or land ownership.
- Independent dispute resolution hearings. The review asks whether this should be restricted to points of process or whether it should go to points of merit. Currently the ability to challenge decisions is limited to seeking a judicial review or declaratory judgment in the High Court – an expensive, limited and uncertain process.
- Reinstatement of appeals to the Environment Court (this could be used in place of the dispute resolution mechanism above or in addition to it).
- Regulations to promote greater consistency. These would provide more detail on what types of infrastructure contributions can be charged, the timing of particular charges and the format and content of development contribution policies.
High end effort
Three proposals requiring radical change are offered.
One: implement a percentage based infrastructure levy as an alternative financing tool. This would be based on the anticipated value of the completed development work with a maximum rate set through regulations and authorities able to charge different rates up to this ceiling.
Two: abolishing development contributions and instead relying on a mix of rates, targeted rates, user charges and financial contributions under the RMA.
Three: making wider use of infrastructure bonds with the bond principal and interest costs recovered from the purchasers of the new sections or properties. This facility is already available to Auckland Council and to the Local Government Funding Authority.
Steps from here
Development contributions were first introduced in New Zealand in 2002 and are a significant and growing cost of doing business for property developers. They can also be a major irritant and source of uncertainty.
This is the first time that they have been reviewed since their introduction and we do not know when they will next be reviewed so it is important to make the most of this chance.
We urge you to participate in the consultative process. For further information, or help preparing a submission, please contact the lawyers featured.