Thursday, July 25, 2013

Why infrastructure levies are hard to justify

Upfront per lot infrastructure levies, in addition to raising the price of new housing (and hence dampening demand) are also highly discriminatory. They apply only to new houses or apartments and effectively transfer a community wide infrastructure burden onto the mortgages of new home buyers. This approach is hard to justify on social fairness grounds.

One way to highlight the manifestly unfair discrimination of per lot infrastructure levies is to contrast the cost impact on a young low to middle income family buying their new home, with a wealthy family buying an established multi-million dollar home.

If you thought the millionaires would pay more, you’d be wrong. Yes, the way levies are now applied means that the young family will pay more tax on their new home in absolute dollar terms, and in percentage terms, than millionaires. Little wonder the new home building market is at generational record lows, and little wonder new home buyers have been on strike.

Here’s a simple illustration.

Alan and Kylie have finally scraped together their deposit monies for a new project home (or it could be an apartment) and got their bank approval. The purchase price is $450,000. Built into that purchase price is GST (10%) plus a $30,000 infrastructure levy. Add in the additional compliance costs, application fees and related government costs and the total tax and charges figure reaches the $120,000 mark. That’s a conservative number.  Other estimates put it higher.

So Alan and Kylie, possibly on a combined income of around $70,000 per annum, are paying upfront a $120,000 tax bill on their new home.  That’s money they’ll have to borrow. Even at today’s low interest rates that’s an extra $848 per month they’ll have to find just to pay the upfront tax bill (calculated on the basis of the extra $120,000 borrowed at 7% over 25 years).  With that extra mortgage burden, they’re deferring having children until later in life.  They’re deferring a lot of things actually. If this is their first home, they are exempt from stamp duty and can get a $15,000 grant (in Queensland anyway). But this grant and exemption combined, however well intentioned, does little to offset the discriminatory tax regime which their new home is subject to.

Now let’s contrast this young couple with another couple. Let’s call this couple Will and Kate, who are buying an established home in an established inner city suburb. They’re on a high household income (Will’s income alone is enough to support a big mortgage plus private school fees for their tribe) and want to live close to the CBD for Will’s job and so their kids can get to the best schools. They’re forking out $1.5 million. They’ll be up for stamp duty, which is $59,600. And that’s about it in terms of property taxes.

Will and Kate’s home also comes with all the handy neighbourhood infrastructure they could want, already in place. There’s taxpayer subsidised rail, buses, libraries and they’re close to action of the CBD’s cultural and recreational attractions. They’ve paid their stamp duty and will only need to pay rates going forward.

So our first young couple Alan and Kylie have kicked the tin for around $120,000 in taxes on their new home. Even netting off the grant for buying a new build, they’re still up for around $100,000 on a $450,000 home.  Let’s call it 25% for simplicity.

Will and Kate by contrast have only had to fork out a touch under $60,000, or around 4%.

Now don’t for a minute take this as some sort of excuse to impose even higher taxes on established homes. Taxes on housing are already too high and we have an affordability problem as it is which is locking out a generation from home ownership. Increasing housing taxes further would be disastrous.

The better and fairer way is to scrap the upfront tax burden on new supply, stimulate demand and produce more lower taxed supply. Spreading the infrastructure burden across the entire community makes sense because the entire community benefits.

However you look at it, the impact of the current infrastructure levies approach on young families buying new homes is very hard to justify. I'd challenge anyone to try do so.

Footnote: Yes, there’s a first home buyer grant, but as it applies equally to new builds and second hand (established) homes, it’s left out of this for obvious reasons.

Monday, July 22, 2013

Infrastructure levies should go.

It’s an axiom of economics 101 that to decrease demand for something, you increase its price. The advent of upfront, per-dwelling infrastructure levies in the early 2000s had a direct price impact on new housing, as did the GST, along with a range of other additional ‘innovations’ in regulatory compliance, fees and charges introduced at roughly the same time. The result? Demand for new housing is now at generational lows.  That’s a high distinction for basic economic theory but an epic fail for public policy.

Depending on whose research you want to rely on, we now have the situation in Australia where between a third and 40% of the price of a new home can be attributed to taxes, fees, charges, levies and other regulatory compliance costs. In the main, these were all introduced in a period of planning ‘reform’ from around 2000 which also introduced urban growth boundaries and increased micro-management of the planning and development process. 

Former NSW Labor Premier (and now Australia’s Foreign Minister) Bob Carr was an advocate, famously declaring in the 1990s that ‘Sydney is full.’ He then presided over a planning and regulatory framework which taxed and stifled development to the point that the risk of growth in Sydney was reversed, and new housing went into a long slump.

In the Australian spirit of poor public policy spreading faster than good, urban growth boundaries and a more punitive approach to development quickly took root in other states. Upfront development levies, which replaced more reasonable headworks charges, were among these policy innovations. They were championed by states and local governments on the basis that new development had to provide for a wider infrastructure burden than an immediate connection to services. Developers, widely attacked as ‘greedy’ by governments, should - the argument went - pay for widespread community infrastructure and upfront levies were a means to this end.

For evidence on just how problematic this became, have a look at this depressing summary.

These per lot housing levies rose quickly to anywhere from $30,000 to $50,000 per lot, without any economic, mathematical or rational justification – beyond ‘developers can afford to pay.’ Combined with the GST (which only applies to new housing not the sale of established housing), it wasn’t hard to find $70,000 in new taxes applied to a $450,000 house and land package, or new home unit. These taxes, it must be remembered, pretty much all arrived in the post 2000 period. And it’s the post 2000 period that’s seen new supply fall to such chronically low levels.

In some jurisdictions, these levies are now being re-assessed. There is recognition that they have damaged the market for new housing and the industry with it. There is some recognition that they are making new housing needlessly expensive. But there is little evidence of a willingness to decouple governments’ appetite for tax revenue from an industry – and new home buyers – that are already very heavily and discriminately taxed.

More alarming is that the very governments (mainly local) who claim they cannot live without these levies, cannot (or will not) identify how much revenue they generate. They do not appear as line items in most local government budgets (itself odd, given how they are allegedly so critical to funding local government infrastructure needs). Neither is there any obvious connection drawn between the quantum of funds now being raised through these levies, and where or on what they are being applied. In the main it seems as though the levies are absorbed into general revenue, and spent on general commitments, infrastructure or otherwise.

I’ve queried industry bodies and searched various local authority budgets for information on these “critical” revenue sources, to little avail. Do they raise 1% of revenue? Is it 5%? 10%? More? I’ve been told that many councils don’t even know themselves.

The question therefore begs itself: if a source of revenue is so clearly damaging to the new housing sector and so clearly having an adverse impact on affordability, it should at least be able to justify itself. Plus, it should be able to demonstrate there is no alternative or at least allow the community the opportunity to weigh the benefits against the costs.

Governments cannot tell us what percentage of rates revenues rely on these levies. If we asked the question “by what amount would general rates for all ratepayers need to rise to offset abolition of per lot levies on new housing?” we would be told “we don’t know.”

There’s an unverified figure I’ve heard that the number is roughly $150 per annum. If true, upfront, per-lot housing levies on new houses or apartments could be abolished provided the general rates base were prepared to accept an additional $150 per annum in rates. That might be unpopular, but we can’t even have that discussion because it seems no one knows.

But if that $150 meant a circuit breaker for the housing industry, if it meant that young families would find housing more affordable, and if it meant that new home buyers would no longer be carrying a disproportionate burden in funding expenditure commitments which benefit all ratepayers generally, maybe it should happen?

At the very least, any government which wants to argue the necessity of a tax which is so clearly damaging to home ownership and housing affordability and which is so demonstrably inequitable, ought at least be able to tell us how much revenue it’s collecting from it. It could be that the revenue collected given the damage being caused simply isn’t worth it.

*Footnote: since penning this article, I’ve seen some data from Gold Coast City Council. In that jurisdiction, developer contributions constitute a paltry 3% of revenue.