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. 

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