The Productivity Commission is recommending reform of the development contributions charged by local councils in relation to new subdivisions, including a merits-based review right for developers.
The recommendations are included in the Commission’s draft Housing Affordability report, released today. Submissions are due by 16 February 2012.
The Commission’s principal recommendation to ease the pressure on house prices is to release more land for greenfields development, particularly in Auckland. This reflects the fact that land prices now account for almost 60% of the cost of a new house in Auckland, and 40% across the rest of the country. This compares to 10% in Adelaide and to 25% in Sydney.
But land release policies are the province of local government. Although development charges are a much smaller piece in the puzzle, the Government can legislate to change the charging regime.
Development contributions are designed to cover the costs to the local council of expanding existing infrastructure to accommodate new areas of housing (hooking up the water supply and sewerage system).
Traditionally these costs were met out of general rates but the trend in New Zealand and internationally has been to move toward a user pays system. Typically the charges are levied off the developer who recoups them through the price of the new house or section.
But submissions to the Commission revealed widespread concern that councils are using these charges to “gold plate” infrastructure services or to keep general rates down. Particular complaints were that the charges are not subject to judicial review and that the method of calculation is often unclear.
The size of these charges varies widely across the country but can be more than $40,000 per section.
The Commission is recommending that the Best Practice Guidelines to Development Contributions, developed in 2007, be updated.
Matters which the Commission considers should be covered in such an update include:
- when development contributions can be required (whether the investment (A) of a scale to justify separate funding and (B) is required predominantly to meet the needs of the new subdivision, and whether alternative funding methods are available)
- how to calculate contributions (so that the developer is charged only for that portion of the cost which is necessary to meet the increased demand arising from the development, with any wider benefits met through general rates)
- how to recover costs (upfront or over the life of the asset or a mixture of both), and
- how to increase transparency.
Recommendations to strengthen compliance with the new guidelines include:
- giving them statutory status by incorporation into Schedule 13 of the Local Government Act
- requiring councils to produce regular, externally audited activity reports, and
- improving capacity through a central government-led drive to upskill relevant council staff.
This mechanism would allow developers to challenge both the requirement for and the size of development contributions. The Commission suggests that the merits-based test might include answering such questions as:
- is the project justified
- have alternative funding methods been considered
- do the charges pass the “rational nexus” tests (including reasonable provision for a share of the cost to be allocated to general rates)
- are the estimates of costs of supply and capacity life of asset reasonable (essentially an engineering assessment that might be satisfied by a commitment to competitive tender)
- does the calculation method have integrity, and
- what are the implications of the contribution charges and the way in which they are exacted for other community and national objectives and policies?
Other building regulation costs
The Commission also looked at the impact of building regulations on housing affordability. Areas it has identified for possible action include:
- creating a contestable market for building consent and inspection services by encouraging private building certifiers and allowing homeowners to use the services of any registered Building Consent Authority (BCA), not just the BCA associated with the local authority
- exploring the advantages, disadvantages and barriers to the consolidation of BCAs between local authorities, and
- having the Department of Building and Housing (DBH) monitor councils’ use of ‘stop the clock’ provisions to ensure that they are not being used to drag out consenting processes beyond the 20 working day timeframe.
Chapman Tripp comment
The regime the Commission is proposing represents a significant improvement on current practice. We recommend that you take this opportunity to have input into how the regulatory framework governing the industry can be improved.