Monday, August 3, 2015

Frank Newman: Changes to development contributions

Last year parliament made an amendment to the Local Government Act that has forced local councils to make changes to the way they charge development contributions. This is good news for commercial developers, but the benefits are less clear for those developing residential property.

Development contributions are a charge imposed by a council to recover some of the capital costs incurred by the council when providing infrastructure services for the development.

When they were first introduced they were touted as a means by which councils could more fairly recover the cost of infrastructure by charging developers instead of ratepayers generally. The charges are imposed in six areas:

·         Roading
·         Reserves
·         Stormwater
·         Sewerage
·         Water
·         Community Infrastructure
While passing the cost of providing infrastructure onto those undertaking developments may have some merit in theory, true to form local councils have used it as a means to generate new revenue - they happily collected the development fees but made no reduction to general rates!

Quite simply, the fees became a racket, and still are, unfortunately adding significant cost to housing - typically between $20,000 to $30,000 per household unit.
The amendments to the development contributions followed a review undertaken by the Department of Internal Affairs in 2013. It found a number of problems with the way they were being used by councils, including:

1.   Contributions from commercial developers were being used to pay for infrastructure that was not directly associated with servicing a development, including community facilities like art galleries, cemeteries, and aquatic centres.

2.   There was inconsistency in the way councils were calculating the fees, and little or no transparency in how the fees were calculated and the assumptions being used.

3.   There was little opportunity for those being charged the fee to challenge them.

That resulted in a number of changes which have just come into effect. Local councils were required to finalise the changes to their development contributions policies by 1 December 2014, with the new policies coming into effect on 1 July 2015.

The key elements to the changes are as follows:

1.    Commercial developers will no longer be charged for infrastructure that is not needed to service their development.

2.   There will be an objection process so those who believe they have been charged incorrectly will be able to challenge the council before an independent commissioner.

3.   Council will be required to provide more detailed information about what a council is using development contributions for and explain how the costs of infrastructure projects are being apportioned between developers and the community. For example where a council adds a "financing" charge to a projects cost it will need to justify its position.

4.   Developers will be encouraged to enter into agreements whereby they provided the infrastructure needed to service their development in return for lower development contribution charges.

Councils have reacted to the changes in different ways. To its credit, the Far North Council scrapped the fees entirely. On their website they say,

"As a means of encouraging development and growth in the Far North, Council has proposed to remove Development Contributions as an effective funding tool...Council is keen to remove any perceived barriers to potential development because it recognises that this is vital to the enhancement of the district...Council recognises that once conditions change, Development Contributions may once again be a useful funding tool but this is likely to be in a much more focussed manner."

Well done, the Far North Council. It's time other councils followed their example.

Interest rate wars

As expected, the Reserve Bank's cut in the Official Cash Rate has ignited a new round of mortgage cuts. A number of banks are offering "special rate" deals for those with equity of at least 20%.

The BNZ and Westpac have a two year special at 4.69% p.a. with strings attached. That usually means having a minimum 20% equity and the borrower must have an everyday account with the bank.

The ASB has a 12 month rate at 4.69%, and the ASB and ANZ are offering 24 months at 4.89% and 36 months at 4.99%. 

According to the NZ Herald mortgage rates have hit a 60-year low, and they are likely to go a little further down yet. 


Jigsaw said...
Reply To This Comment

We developed two sections off the back of our rural property around 2008 and were charged a development fee of $2000 per section even though there are little if any council assets nearby. In addition the Hauraki District Council charged us for sealing the road although they admitted that they had no intention of sealing the road and in fact they have done nothing at all to the road apart from routine maintenance in the subsequent years. At first they demanded $32,000 + GST for the road contribution but after two appeals that was lowered in stages to $4,700 + GST which we will soon be able to claim back. We have only just sold one of the sections and so recovered our costs. The council were an absolute nightmare to deal with and while I continue to point out their short comings we continue to be regarded as 'the enemy' by the council.
Incidentally the HDC are now proposing a new subdivision in Ngatea even though the town is only a metre above high tide mark. Seems that the HDC whilst paying lip service to climate change is determined to make money and increase their ratepayer base by developing this subdivision. I feel that the Hauraki District Council would make an ideal stufy of the defects in current local government services.
Roger Strong

M Bailey said...
Reply To This Comment

Hi Frank,
the changes to the development contribution legislation are worse if anything and the "reform" has increased Council powers in some areas. The ability of citizens to challenge the fees is extremely limited and they must be paid up front despite the new appeal process. The appeal process looks to be a waste of time - I can tell you from personal experience that even with sound arguments in the District Court the legislation is interpreted as favouring increases to council revenue rather than private property rights.

The premise of developers paying the fees is fallacious and the legislation is contradictory. The developer has no demand for infrastructure as they produce an inanimate good. Demand reflects a buyers willingness and capacity to purchase a good (or service). The infrastructure simply benefits others in the community who actually use the infrastructure. The result is distorted market signals as users who are not paying for the services (or are effectively subsidised) consume even more. I've previously pointed out the problem to a Minister who could not refute the argument and simply said "well someone has to pay for it". When politics are involved fairness has nothing to do with it.

Unfortunately many New Zealanders have an aversion to user-pays, also known as non-coerced exchanges. However, in the long run we all lose with contribution fees as the supply of housing is reduced, while the (genuine) demand remains intact. There can be only one outcome from this: house prices are higher than they otherwise would have been and councils are to blame for contributing once again to housing affordability problems.

As you say - full credit to any council that abolishes the fees!

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