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Brendon Harre says to solve our housing shortage the simplest solutions should be tried first, such as reducing taxes and removing impediments on building decent housing. Taxing housing more won't deliver more housing

Brendon Harre says to solve our housing shortage the simplest solutions should be tried first, such as reducing taxes and removing impediments on building decent housing. Taxing housing more won't deliver more housing

By Brendon Harre*

New Zealand should take the Occam’s Razor approach to fixing the housing crisis. The simplest solutions should be tried first, such as, reducing taxes and removing impediments on building decent housing.

This keep it simple approach to urbanism does raise some interesting points. Such as, if a city has a shortage of bread, no one thinks a good response is to tax bread production. So why does local government tax house production in the middle of a housing crisis? Why not reduce taxes and make it easier to build homes?

Source: The Rent Controller’s tweet - Not enough bread? Too expensive? Bake More

Local government development contributions and impact fees of various kinds are taxes on house building. Not only are they taxes, they are very inefficient taxes. They unnecessarily complicate the task of building better and more affordable urban environments.

Given that local government adds taxation expenses to the cost of house building, this raises the question of ‘do they add other expenses too’? For instance, by poorly regulating land-use, land-banking, intensification etc so that the increasing cost of land (absolute or as a percentage of build costs) results in house prices or rents inflating faster than wages.

There is a myth in New Zealand that development contributions are assessed for each development. All the downstream costs for the community are assessed, weighed against the future benefits, including providing additional rate (property tax) paying dwellings and the resulting balance is then charged to the developer, as a development contribution.

I call bullshit on this process. There are too many unknowns to allocate costs and benefits down to individual cases. It is a pseudo-science.

Auckland Council for instance, has arbitrary categories for determining how much tax different types of urban development are charged. It is highly unlikely these categories match the best use of scarce urban land supply. The economic impact of collecting taxes based on the type of house being built may have distorting effects like the infamous window tax of the past. Although restrictive planning rules are likely to have the greatest effect.

In 1696 the King of England implemented the window tax because it was easy to collect. People avoided paying the tax by blocking windows. People also felt robbed of their hard earned income. These two factors led to the expression “Daylight Robbery”. The tax was finally repealed in 1851. Source

Development contributions are not an effective tax for local government. For instance their unpredictability over time means councils cannot borrow against them as a revenue stream to fund infrastructure. Surely a fatal flaw when their purpose is to help fund a cities infrastructure deficit.

Auckland city council economists have attempted to state that development contributions are unlikely to result in higher house prices (and therefore higher rents). I find their arguments unconvincing as they do not objectively compare development contributions to other taxation options. Also it is illogical to suggest that taxing the landowners who build, but not the landowners who don’t, has no effect on the supply of new housing.

Development contributions and impact fees are an regressive tax on renters. It generates a relatively small amount of revenue from approximately 1% of the housing stock which is being built, whilst allowing the prices and rents on the remaining 99% to rise. It allows landlords to raise rents because it adds tax and uncertainty to landlord’s competition -affordable house construction. This is the main reason New Zealand should unwind its inefficient system of development contributions.

LetsGoLA runs through the numbers to show that development contributions and impact fees is not a progressive policy option for California (see below article). California is reliant on impact fees because Proposition 13 prevents other more effective taxation choices being used to fund needed infrastructure.

LetsGoLA’s basic argument is that anything that raises the cost of building new houses, increases rent not just for new housing but also existing housing.

It seems unfair to me that house producers pay additional taxes, especially as shelter is a basic necessity of life. In New Zealand building a house costs hundreds of thousands of dollars in wages, profits, building materials and land purchases. A 15% tax is paid on those costs in the form of goods and services tax (GST). Note land sales only incur GST charges before it becomes residential land.

House builders make a significant contribution to the public purse. Why is it necessary to pay more than this?

A land value property tax system would be a better option than development contributions. It taxes the land, not the construction on the land. In New Zealand at the local government level we call this unimproved value rates. There is some deep economic philosophy underlying this point about taxing unproductive capital (rentiers) rather than productive labour or capital.

Henry George the 19th century political-economy theorist, who famously advocated for land value tax, is quoted as saying: “Like a flash it came over me that there was the reason of advancing poverty with advancing wealth. With the growth of population, land grows in value, and the men who work it must pay more for the privilege.” The above illustration of Henry George is by Walter Russell.

Regardless of the philosophical arguments -pretty much any tax would be better than taxing house building in the middle of a housing crisis.

Renters in New Zealand face a lot of difficulties. Comedian Robbie Nicol or White Man Behind a Desk makes a strong argument for New Zealand making policy changes, so that renting becomes really really good for millenials, who according to Robbie Nicol will never buy a house.

Robbie Nicol’s proposed solution is to incentivise density -the defining feature of towns and cities compared to countryside or wilderness areas.

In other words Robbie wants to incentivise the building of more houses in urban areas.

Recent media reports indicate New Zealand’s previous government minister in charge of building and construction believes the current government can’t grow housing any faster than his government did. Also reported is the Auckland Council defending the compact city virtues of the 2016 Unitary Plan approach to housing supply.

There are elements of truth to Auckland Council’s position. Auckland does need to address the escalating road building costs of its current urban growth model (see the congestion tax section of this paper), but there is also a whiff of belligerence. This is a problem because belligerence prevents acknowledgement of strengths in other opposing viewpoints -such as the need for more affordable house construction by removing taxation and regulatory costs.

Belligerence can become contagious, leading to a gordian knot of opposing views which cannot be resolved. Read my paper Unravelling the strands of the urbanisation debate:To improve urban performance for further discussion of the gordian knot problem.

If the government wants to deliver for Robbie Nicol’s renting millenials, it will need to increase New Zealand’s house building rate, in a way that delivers affordable housing, so that rent inflation becomes slower than wage growth.

The importance of New Zealand building more houses that are more affordable goes to the heart of whether the public perceive the government as one of transformation or the modified status quo.

Anecdotal evidence indicates that building affordable housing is of huge public concern.

Mike Hosking is a well known New Zealand right-wing pundit. His facebook post on the slow ramp-up of the government’s KiwiBuild scheme received a big response in the form of likes, shares and comments.

Empirical evidence confirms New Zealander’s believe affordable housing is the most important issue facing the country.

Source: The NZ Ipsos Issues Monitor -April 2018. Housing affordability was the highest concern for all incomes, sexes and age groups in New Zealand, except for the retired where healthcare had pushed housing down to second place. This differs from Ipsos Australia’s results where housing affordability was of much lower concern.

Housing and Urban Development Minister Phil Twyford has responded to these criticisms and public concern by explaining that KiwiBuild will deliver more affordable housing by four channels;

  • Converting existing Crown land and purchasing additional land from the private market (under the Land for Housing programme), which will be on-sold to development partners who commit to delivering KiwiBuild homes.
  • Identifying and leveraging opportunities to deliver KiwiBuild homes through existing Government-led housing initiatives, such as those being undertaken by Housing New Zealand (e.g. McLennan development).
  • Doing the groundwork to enable a new urban development authority (once established) to undertake major urban redevelopment projects in partnership with iwi, councils and the private sector.
  • Purchasing or underwriting new affordable homes off the plans (under the Buying off the Plans initiative), to de-risk suitable developments led by the private sector and others, in exchange for accelerating the delivery of a greater number of homes at KiwiBuild price points.

Phil Twyford says the Government’s Kiwibuild ‘Buying off the Plans’ initiative attracted “overwhelming” interest. He says “almost 100” proposals have been received from developers in response to the tender conducted by the Government, which closed last Friday, the 8th of June.

My suggested policy changes to incentivise building more affordable houses, addresses the third option of an urban development authority working in partnership with local government, iwi and the private sector.

I believe this could be best incentivised by implementing the following policies;

  • In New Zealand’s towns and cities with high demand, create a network of urban growth corridors -using the Making Room for Urban Expansion concept. This network is both within the existing urban footprint and extends out into greenfield areas.

  • Replace development contributions with a targeted rate on land values, by calculating a per sqm charge on land in private ownership within the urban growth corridors, so that there is no net loss of revenue to local government. Charge at least that as a land value targeted rate and take into account the following points.

The majority of Auckland’s rapid transit services are within the city -so intensifying existing low density suburbs along these growth corridors is naturally a focus. But the corridors do extend out past the city fringe in the northwest, north and south so there is also greenfield opportunities too.
  • Build congestion free rapid transit systems in the growth corridors using the targeted rate, government grants and fare revenue to pay for it. These rapid transit systems can be public/private ‘special purpose vehicles’, such as the government is considering since the SuperFund and a Canadian infrastructure provider made the offer to own and operate the proposed light rail system in Auckland.
  • Use an urban development authority and legislation to remove unnecessary density and greenfield planning restrictions along urban growth corridors. The urban development authority can also coordinate the provision of trunk infrastructure for these growth corridors.
  • Estimate the housing growth potential for the corridors and build the underground trunk services -for sewer, storm and fresh water and any other local government services that are needed -traffic management systems for increased populations, cycleways, libraries, swimming pools etc. Again use the targeted rate and expected increase in general rates to pay for this.
  • Encourage the use of innovative hyperlocal solutions such as Master Planned Blocks to improve intensification, as they have the additional benefit of opening up the urban form with new laneways to give greater access for walkers and active modes to the rapid transit network.

A through lane in the above picture of a typical ‘sausage flat’ NZ intensification suburb would use less space than existing driveways (in red). Laneways would benefit the wider community by improving connectivity. So it would be a good idea to purchase such lanes for the public good.

  • Budget for local government to purchase new hyperlocal laneways, where they improve walking and active mode connectivity for the wider growth corridor, using the revenue from the targeted rate. See my paper - Can Great Design Help Solve the Housing Crisis? -A Master Planned Block Proposal - for further description of the benefits of hyperlocal solutions.
  • Consider alternative tax sources or government grants for local councils with high demand from excessive population growth, rampant tourism or other demand pressures that have resulted in infrastructure deficits due to insufficient revenue to supply the needed infrastructure.

There are lots of moving parts in an urban environments regulatory system and it is easy to get overwhelmed by it all. I would suggest a simple rule of thumb -using the spirit of Ockham’s razor -for policy makers attempting to fix the housing crisis.

Policies that make it easier to build decent homes are good and policies making it difficult to build are bad.

Further discussion of taxes and subsidies in urban areas

One of the five key questions for the Tax Working Group is “can tax make housing more affordable”. The working group stating that;

Making housing affordable is one of the biggest challenges we face. Rents are rising faster than wages and many Kiwis find themselves locked out of the housing market.

The problem of wages rising faster than rents is a problem found in many, but not all cities around the world. A recent US economic paper by Richard Hornbeck and Enrico Moretti found;

when a city experiences productivity gains… there are substantial local increases in employment and average earnings. For renters, increased earnings are largely offset by increased cost of living; for homeowners, the benefits are substantial.

In my opinion, in New Zealand there is a huge thicket of taxes, subsidies, quotas and rationing around urban development that is so confusing it has lost all purpose. If this system was simplified so that houses could be affordably built close to economic activity, then house prices and rents would increase at a slower rate than wages. This will benefit renters and those who do not own property yet, as they will profit from moving to areas of economic growth.

The Tax Working Group has asked for submissions from the public, my thoughts are;

Alternative tax sources for local government.

  • There are a large number of different revenue sources that would be better than development contributions because they would not directly tax house production i.e taxes that would have less effect on the marginal cost of building additional residential space.
  • Local government do need effective revenue sources, so they can provide needed housing related infrastructures, in a timely manner that supports elastic housing supply, which underpins affordable house prices and rents. Targeted rates on land as discussed in the main body of the paper are a good revenue source and should be used in the first instance.
  • If another revenue source is required, I agree with a proposal advocated by the NZ Initiative, whereby GST on local construction projects is allocated to local not central government, in exchange for local government not using development contributions. It is important that only the GST revenue on construction costs, not from land sales, be allocated to local government. This is to incentivise local government to competitively regulate land-use planning and keep land price inflation to a minimum.
  • A further variation on this is that accommodation supplements paid to renting beneficiaries and low-income earners could be taken off the GST construction revenue for each municipality. Accommodation supplements was increased last year by the previous government against official advice and costs the taxpayer over $1 billion a year.
  • Accommodation supplements and similar housing demand subsidies, given current market conditions in New Zealand, are poor policy solutions that benefit landlords more than renters. The use of such demand subsidies should therefore be limited and the policy making focus should be on making housing supply as elastic as possible. Economist Eric Crampton explains the economics of why when housing supply is inelastic the accommodation supplement is a landlord subsidy in this paper. He further explains why the NZ Initiative supports construction GST going to local government.
  • These combined policy initiatives would provide a revenue source to address infrastructure deficits, whilst providing clearer consequences for local government decision makers, so they are incentivised to better regulate land-use to provide more affordable housing and rents.
  • A partial counter argument to these proposals is that although they help address the housing crisis -which is a major structural weakness in the economy -it would increase procyclical spending. Which can exacerbate boom/bust economic cycles. To remedy the pro-cyclical problem an infrastructure trust could be formed to hold over some of the funds in economic good times, so they can be allocated in bad times, as a way of evening out infrastructure spending over time.

Capital gains tax

  • Might help in some parts of the property cycle to ease speculative pressures but it isn’t a silver bullet.

Road congestion charging and car parking metering i.e congestion taxes

  • It makes no sense for urban spaces in high demand to be expensive for housing yet free for automobiles to either drive or park, especially when the limited supply of road and parking spaces becomes congested from the growing demand. Pricing these spaces is necessary to incentivise a change in transport behaviour to more space efficient transport modes, routes and times of the day so that roads are less congested. This will allow more people in urban environments to have better access to places of importance and economic activity.
  • Any revenue collected from such schemes (which is not its primary purpose) should be used to assist low income earners, so they can affordably transition to more space efficient transport modes too.
  • If congestion taxes are not used, especially in congested cities such as Auckland, the result will either be; costly blow-outs of transport budgets as ever bigger and more expensive road schemes are constructed through existing built up areas, or longer productivity sapping delays in the existing road network.

Auckland’s automobile dependent urban growth model as it currently exists is on an fast growing cost curve. A change to a more spatially efficient multi-modal transport urban growth model will be necessary.

Further reading:

A report titled Missing Teeth details why it is easier to build on smaller sites in France than in England. It explains that by keeping the planning system simple and predictable it is easier for smaller developers to build in the missing gaps of the urban fabric.

Californian study says development fees quashes Bay Area housing - uncertainty being as bad as the taxation charges.

Cities Are Trying to Make Housing More Affordable -by Making Some Rents More Pricey is another report detailing the research indicating impact fees add to the cost of housing.

Impact Fees: An Urban Planning Zombie in need of Slaying - Eight reasons why impact fees thwart the creation of equitable, sustainable cities.

This is a repost of an article here. It is used with permission.

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So basically any Country that is a democracy and capitalist has a housing crisis!

Democracies make choices....

Germany is a capitalist democracy -it doesn't have a housing crisis.

Japan/Tokyo is a capitalist democracy -it doesn't have a housing crisis.

Houston, Phoenix and lots of other cities in the US are capitalist democracies and do not have a housing crisis.

San Francisco is a capitalist democracy and it does have housing crisis. A new San Francisco Mayor -with an interesting name 'London Breed' was voted in this week running on a fixing the housing crisis platform.

Here is her post election analysis, when questioned by a journalist.

But was there a particular policy position that you think worked in your favor?

I think my push for more housing. Even though it’s controversial, my support for SB827 (Sen. Scott Wiener’s proposal to compel higher-density housing around transit hubs), despite the fact that every other candidate opposed it and tried to imply it was something that it wasn’t. I think the fact that I am open to trying new things all over the city for the purposes of building more housing — while also preserving neighborhood character — is something that people appreciated, because we have to build more housing.

Free Markets = Free for slavers, Free for substandard housing, Free for private prisons, Free for government to bail out private losses, etc


Free Markets = Freedom from slavers, Freedom from poor housing, Freedom from monopolies, Freedom from government zoning restrictions, etc

People have forgotten what 'free markets' are. For all those who refer to '1984', few seem to have read it - or at the least their remembrances have gone down the 'memory hole' a long time ago. People are so ignorant of the philosophies/logical-conclusions many of their words imply.

The KEY to fixing the housing crisis is putting people in Key Appointments who want to and are actually capable of fixing it. New Zealand is pretty far gone, big changes needed to happen yesterday (so-to-speak). I have ZERO confidence things will get better, any time soon.

Bureaucracies are very good at defending themselves. They do not like change.... Fresh thinking is to be opposed.... This goes for both central and local government structures.

MBIE for instance is useless.... bugger all of use has come out of their thousands of overpaid 'Yes Minister' types.

These bureaucracies are more of an opposition to a 'transformational' government than the actual opposition.

It is not surprising that Phil Twyford plans to restructure these bureaucracies.

I’ll need to re-read this a few times to take it all in. I can relate to the taxes part though.

I have a mortgage free property in the Eastern Bays that is North facing with all day sun and a small harbour view. The new Tamaki Link bus will run every 15 minutes and cost $3.50 to be in the CBD in less than 25 minutes. My section is subdividable and I have sufficient funds to build on it without bank funding. However, as long as I continue to see no discerable profit due to taxes, fees, building cost escalation and an anti landlord government I will be happy to invest in bank Term Deposits.

Rex I would be really interested in what you think as a landowner of the proposition of joining with your neighbours to build a really profitable intensification scheme -if there were ways to keep the transaction costs down etc.

I have written about it here.

I have a work colleague who owns a house in a nice but not one of the top suburbs in Christchurch. Her neighbour wants to a sausage flat sub-division and my friend hates the idea. But she would be in a favour of a whole residential block redevelopment scheme. I think this scenario might be quite common?

If I was in an homogeneous block of end of life properties I would be interested. However, it doesn’t appear likely to work in higher value areas as some properties have typically been renovated and the sunk cost is too much. I do see options in the flat area of Kohi, which is mostly church leasehold land. I think there is too much focus on affordable housing. We should look at overall mobility e.g. the pensioner with assets and no cash could be convinced to move to a more appropriate home, thereby leaving the old house free for development. In some ways that’s what retirement homes do now, but that’s for people in their late 70s. Bring that forward 10 to 15 years.

Another thing I’d like to see is positive signalling. If you read these pages on a regular basis you will see a pattern of tax and regulate solutions. It’s all stick and no carrot. How about offering granny a cash free swap into a warm sunny home rather than trying to tax her out?

Yes it would work best for places where land/location is becoming more valuable but the houses are as you say 'end of life'.

So it is not a solution for everywhere. But I estimate there is over 10,000 residential blocks in Auckland, if just a small fraction of them could make Master Planned Blocks to work it would deliver thousands of new homes.

I fully agree that carrots are needed...

Wrt retiring people and downsizing. My Master Planned Block proposal would allow them to downsize to a smaller purpose built older persons unit in their own neighbourhood. Plus release some equity to help with the retirement lifestyle....

Yes, thank you Brendon. I am going to have to read this again too. The land tax and transit corridor intensification are both fine by me but may be greeted by some "contagious belligerence". Where is the picture of Henry George?

Thanks. The Henry George picture is there on my website.

A few links were also lost. Including a nice paper on Henry George.

Rest assured,while any Labour government is in power, no central or local government taxes will ever go down.

Rest assured,while any government is in power, no central or local government taxes will ever go down.

There you go fixed that for you!

Drat, that means if one accepts the mantra of Benjamin Franklin, the other certainty is now beckoning.

So is it peice meal development that is actually preventing the issue of housing supply being addressed? For example I own a quarter acre that I subdivide and put two houses on. Big deal, two houses thats it, yet with high costs relative to the development I suspect. When I have travelled overseas I saw enormous developments under way, one example was regentrification of entire suburbs in parts of London, for example. Clearly thats an entirely different approach but I imagine the scales of efficiency may be far far greater than my poxy two house project. So how could we get that sort of activity underway here in NZ? Or is it being actively blocked to protect the profitable interests of the incumbants...

Yes if we could do bigger intensification schemes in NZ we could get a win win system going. The existing land owners would benefit and more houses would be built which would benefit FHB and renters. Economies of scale would cut costs... bigger schemes better deal with nuisance externalities versus upzoning gains.... lots of advantages....

London has not fully solved this problem but there is some experimentation going on.

I write about the opportunity we have to do this in Auckland. Here

Also I do not claim my proposed intensification solution is a silver bullet. I think it will help and it will better balance greater efforts to make greenfield growth more affordable. People will then have more competitive choices.... This should mean the end results is better....

Possibly london is leasehold but here we could start with the local golf course.

Brilliant article, Brendon. There simply has to be some way of cutting through the thicket of self-contradictory, poorly targeted, and obtusely written planning and development rules, and their associated fees.

Quite apart from anything else, the power that such 'rules' allow to unelected and un-fire-able bureaucrats is the very antithesis of Democracy.

Can I suggest a litmus test for the need for Revolution?

Any set of TLA rules, anywhere, that can be interpreted only with the assistance of paid-for-by-applicants consultancy (whether by the TLA staff, or externals), is fodder for La Guillotine.

À la lanterne!

I was involved recently in an Environment Court declarations case where the applicant provided the court with nine rules in a proposed district plan that they considered to be unlawful. The nine rules were provided as examples, and the applicant pointed out to the court that many others, too might be unlawful but that they hadn't checked all the rules across the whole plan.

The court made a declaration finding that 6 of the 9 rules provided in example by the applicant were indeed unlawful.

What did the council do? It withdrew the 6 unlawful rules from the proposed plan - but it did not put forward any replacements for them by way of a plan variation - nope, it just withdrew them in full.

Point is - if they could just be withdrawn, and no replacements were needed - then these rules must not have been needed in the first place.

Considering that was 6 out of 9, simply able to be struck out without replacement - one could reasonably ask: what percentage of all the rules across the whole of the plan were similarly totally unnecessary?

Kate what hope does the small guy wanting to undertake a modest intensification scheme have if they don't have the resources to get a remedy from the Environment Court?

Very interesting, Kate. I suspect that if you cut out every bit of a district plan that could not be linked explicitly to s.5 of the RMA there would not be much left. The only way planners can justify some of the rules is by tortuous arguments that (e.g.) silence or nice scenery counts as a natural and physical resource.

A while ago I read some of Fred Harrison's work on this stuff. As I remember he recommended using the MTR model for new developments. It went something like this, the MTR company buys a large development block around the site of each of the proposed new metro stations. The MTR then builds the line and develops or sells the land, the uplift in land value paying for the capital cost of extending the rail line.

We like our rules though, but there must be a better way.

That's essentially the MetroLand model from a century ago. Worked a treat then....

(Apologies in advance for the Grauniad reference)

Great link Waymad. Amazing journalism. And interestingly has regard for the lives of the inhabitants.

An excellent paper- very well written ... i fully agree with his views
The 100k contribution on a $1m house is 10% that the market price in general does not need ATM ( the Gov is skimming its share of GST quietly)
That 100k additional cost propagates through the entire Auckland housing market ( some of that has recently gone up by about 30%) ...

It will raise all prices as the cost of new built and replacement affects existing house prices whether we like it or not ...and eventually it raises rents too ...

So in a nutshell , decades of money miss management by local authorities ( with central turning a blind eye) contributes to higher house prices and development impediment.

It is A problem that can see no end unless they strike Gold in Rangitoto or Find Oil in the Waitemata Harbour !!

The more the council borrows and spend like there is no tomorrow, the more taxes they will require in all shapes and forms .. and that is a vicious circle ... A Billion $$ stadium, and 1.5B light rail in the middle of a housing crisis ... Go figure !!

That is the problem, both the problem and it’s solution are enmeshed in a quagmire of infighting, petty bureaucracy that is completely, utterly counterproductive. It reminds me of a cartoon in an old English annual, of the natives trying to get a screw out of a plank of wood, thought to do everything but turn it and in the end all the arguing came to blows. Apologies to all that may be concerned, for that depiction not being PC these days.

Crisis everywhere, but put the pounds into an exchange for dollar and we are twice as overpriced...

Go Figure.

And if ya ain't figured it out yet, it is Foreign Investors fixation there too...cos it says denying it....

And Poor Taylor suffering an Irish consequence perhaps...and the Mancunian accent.

nice article Brendon.
Land tax - I 'm a fan.
There are some valid objections, though.
Such as - 'why should existing residents pay for the costs of new growth'
I think that can be countered. We build new schools, hospitals etc. out of tax revenue. Much of the reason we need new hospitals, schools is because of growth (noting the need for some new facilities is because the old ones are not fit for purpose).
I would note though, that I see the value of a land tax more as a disincentive for land banking, rather than making a big difference to development feasibility. In Auckland, development contributions on medium / high density housing are a very low portion of total development cost.

If existing landowners who have paid development contributions, or where the new owners have paid a higher price for the property due to there having been an earlier development contribution, are asked to pay a land tax to pay for the very thing that the development contribution was supposed to pay for....expect a successful legal challenge.

A land value property tax system would be a better option than development contributions. It taxes the land, not the construction on the land. In New Zealand at the local government level we call this unimproved value rates. There is some deep economic philosophy underlying this point about taxing unproductive capital (rentiers) rather than productive labour or capital.

Hear, hear!

Is this to be a new tax that is levied, or will there be a compensatory decrease in income tax? And if so how is that allowance preserved? Bearing in mind the Lange Labour government reduced income tax and introduced & then increased GST which, as a form of indirect taxation, was touted at the time , to be the panacea of all tax ills. Then the Clark Labour government promptly shoved income tax right back up up again. Apart from another increase to GST National never righted the ship either. So now we have 15% GST and virtually the same income taxes of pre GST. History tells us no government can prevent itself from picking off such an easy target as the sitting duck PAYE earners. So again, how do you stop repetition of the same scenario?

How about reducing gst on new build housing for say 3 years. Reduce it to say 5%. Yes there will be lost tax revenue but if it helps lead to a housing boom the revenue loss will be minimised

Will it bring the price point down or increase the margins along the way?

That's up to the developer. All things being equal more profitable development = more housing

Very good point.

‘In my opinion, in New Zealand there is a huge thicket of taxes, subsidies, quotas and rationing around urban development that is so confusing it has lost all purpose.’

No Brendon, that is the purpose of all these taxes, subsidies etc. That is the Bureaucratic class have built themselves fiefdoms on making sure, that you and the rest of us cannot do the simplest of things without their permission and help, which all takes time and money. Our cost is their revenue, after all they have families to feed as well.

This is no slight on anyone individual in the system, as this is how the system has been created, and if you do anything within a system long enough you become institutionalized, or to put it more politely, becomes part of the culture.

They have become the Catholic Church of Bureaucracy, where us as laymen need them as the high priests to guide us through the labyrinth of rules, and once there , to interpret what they mean, given that the rules are deliberately vague eg ‘wellbeing’. It can’t be (it used to be) made simply enough that anyone can have ready access and understanding.

If we unravelled the tangled mess of rules, then three things at least would happen. 1) Land and development costs would be a lot lower 2) Councils would be half the size they are today and since what they get paid is based on how big the entity is, the pay scale would also be a lot lower and 3) and by letting the costs fall where they truly belong, then a whole paradigm shift would take place as to what would be developed where, including at what density and type of design. All of which would result in more affordable, better built, and more healthier homes.

I often tell people to not take advice from local Councils. They barely understand the rules and often provide incorrect advice. People often need consultants to fight for what people are allowed to do anyway, rather than have Councils add fictitious requirements for whatever their idiotic goals are.

Councils need consultants too. $ millions worth of them. It’s not much short of a feeding frenzy!

please , let's not get started on council consultants ... it is Highway robbery and there is 100% complacency in it .... that rotten can of worms needs to be opened and cleaned !! ... the stories I hear from insiders about them make my hair rise in horror...

Nice article. I agree regarding land tax and eliminating development contributions. Both measures would do more for Auckland insane house prices than anything, and are pretty easy to implement and administer.

Not a fan of rail, too expensive and lacks granularity unless it is underground (eg Musk's boring company) or above ground (eg BYD's skyrail) either of which appear massively faster to create, much cheaper to build ($30-40million/km), and able to accommodate more frequent smaller 'trains'. But autonomous taxis and buses in 5-10years would beat them all.

Hi Brendon,
Great article as usual & I agree with most of it.
In addition I note:
1) Reducing the immigration rate to something sustainable would also be helpful, especially for Auckland.
2) Asset prices (effectively housing land in this case) are high at the moment also due to very low international and thus domestic interest rates
3) The government's limitations on the tax working group's scope means that a land tax will never be a real option (no land tax under the family home, but rented properties would face a land tax) - this is simply absurd
4) The second best alternative is to force all local & regional governments to rate on land value only
5) The RMA was never intended to be land zoning based (it is effects based legislation) - it needs serious reform. There should be no density limitations as long as the effects are remedied, mitigated or avoided.
6) Local government needs to stop screaming poor. The smaller districts should be amalgamated & all local government spending should go through proportionate business case assessment. Local government should be required to do the base budget on "needs" and then put the costed "wants" to the ratepayers for feedback/vote during long term plan consultation

Land is currently taxed through property rates, and can simply be adjusted to a more appropriate level to cover what was previously taken through consenting fees and infrastructure growth charges. It should really just be a % of the land values. Auckland has some of the lowest rates against land values in the country.

I'm doing a small project at the moment expressly in order to bring forward a part development contribution into this financial year because if i delay it, the 2018/2019 financial year development contribution will be payable. There is a huge jump in development contributions from 1 July in Auckland.Way more than CPI inflation. In fact all these above CPI council tax increases will drive up CPI to a certain extent! Which will help increase the cash rate and will make mortgages that much higher. Minor I know, but it does have this effect.

Increased house supply fails to halt price spiral

Very thoughtful, Brendon. A couple of comments:

Planning is the most significant cause of spiralling house prices in that it prevents rates of house building from adjusting smoothly to changes in demand (i.e. population growth). In pretty much every corner of local government law there is a requirement to plan for decades in advance. By default councils take a linear view of the future. And, having negotiated their way through the tortuous and mandatory processes leading to a budget that secures funding for future growth and operations, councils are very unwilling to make changes to these plans. It is a simple matter for any professional or amateur speculator to assess the gap between council planning and reality to a make a quick profit. I believe high house prices are largely speculative and that attacking fundamental cost drivers of housing is less important than bursting the speculative balloon.

It is my long-held view that councils use their district plans as a way of controlling the pace of development. Any programme to improve how we develop cities and put people into affordable housing must change how councils use their district plans. The vast bulk of the content of any city's district plan has nothing to do with the RMA. Most of what is in a plan are rules to prevent nuisance arising. So we have restrictions on height, setback etc which may prevent adjacent property owners from getting the hump with each other but has nothing to do with the environmental objectives of the RMA. The zones we are familiar with aren't actually anywhere in the legislation. Planners use them so that tanneries can't get built in a residential housing area. They are also used, as I say above, to align the pace of new development to the council's ability to roll out new infrastructure. And then there are all the latest urban design trends that have to get incorporated. Again nothing to do with preserving the natural environment.

I don't have a problem with the RMA but councils have to be stopped from over-using it.

Secondly I absolutely agree that the development contributions regime is an absolute blight on the country. However it isn't compulsory and any council could switch to infrastructure bonds and targeted rates tomorrow if they wanted to. It's just that DC's are politically wonderful so why would they?

If we are to improve how we fund city growth, however, we should understand what these contributions actually are. We are too hung up on the question of who should pay for what. All councils want is a capital contribution. More infrastructure means a bigger balance sheet either funded by more capital or by debt. The capital can come from an operating surplus or a compulsory contribution. There is a logic to the 'new properties cause impacts so they should pay to mitigate them' argument but equally the 'what goes around comes around' argument is also valid. The regional fuel tax in Auckland is just a compulsory contribution levied on all residents and visitors. While technically unfair from an inter-generational equity perspective a small annual growth levy on the whole community is both simpler to administer and more likely to deliver overall benefit to the whole community than the current development contribution approach.

If you believe that an affordable housing market will only arise when key infrastructure is built in advance of development then it follows that you need to build a war chest well before it is needed to fund infrastructure. Or you get more relaxed about councils taking on debt when they need to to fund growth-enabling infrastructure. This implies ditching impact taxes in favour of collecting operating surpluses or collecting a population-wide contribution through mechanisms such as fuel taxes or, even better, congestion charges.

Ten out of ten for most thoughtful comment so far Kumbel! (although there are some other pretty good ones too, Dale Smith's, Kiwi-Overseas, Waymad's, Fritz's...)

Do you think we have created in NZ a urban development structure so complicated with district plans, 10 year long term plans, development contributions of so many kinds -financial contributions, consent fees... that this structure has lost all purpose yet it dictates the thinking and behaviour of Councils?

For instance, the structure needs to be defended, so local government economists make some torturous economic justification why basic economic incentives do not apply to them i.e. why charging landowners who develop their land but not those who don't, somehow does not discourage landowners from intensifying their land?

I think this infrastructure funding problem is why SHA's did not work.

If the government partnered local government in creating urban growth corridors with a plan of how to fund specific infrastructures -DC's replaced by targeted rates paying off infrastructure bonds plus whatever other population-wide tax is needed -fuel taxes, congestion taxes, GST on construction going to local not central government....

If the growth corridors were managed by joint local/central government Urban Development Authority to prevent the Council backtracking to its rigid and convoluted thinking ways.....

Would this sort of flexible thinking and behaviour prevent rigid, controlling and unresponsive Council behaviour that allows property speculators to game the system with ever increasing prices?

See my only semi-fictitious account of how TLA rates are set. Basically, anything that can be shuffled sideways into anything but 'Rates Required' is so moved.

There is zero analysis of the economic effects of this impost - the only thing that engages Councillors' rarely-capacious minds is ' How much will the rates rise, and can I therefore get re-elected?'

Brilliant Waymad :)

Do you think that a comedy series could be written about such practices?

100% correct. This is why councils prefer development contributions to capital levies. Or bed taxes, or government grants,...

And because nobody takes any notice of councils normally the only thing that matters come election time is rates payable. The collective responsibility principle often means that, regardless of how individual councillors voted on certain matters, they all can get caught up in an electoral rout. So, the incentives are for the flock to huddle very close together in a risk-averse circle.

It was obvious to everyone from day 1 that Auckland Council could not provide infrastructure to most of the SHA's. Developers were pretty happy to get a cheaper, streamlined path through the resource consent process but could never build until the roads and pipes were there. So they got their resource consent but there was no intention to do actual site works let alone develop bare sections into houses.

I think everyone has worked out by now that there is no statutory urban development process. What we have is a Planning process that produces a design that may or may not ever be built. But a district plan is only an end state description with no idea of how to get there.

Then there is the Regional Land Transport Plan that is a plan agreed by NZTA, the regional council and the TA's which sets out the big picture for roads and public transport.

Then there is each council's Ten Year Plan which includes its 30 year Infrastructure Strategy.It does not reference the district plan although it would be lunacy to extend infrastructure into "no build" areas.

Most growing councils do produce non-statutory growth strategies which attempt to tie all the other work together. Some strategies are good and are actually master plans for development areas. Others are puff pieces.

But in the end none of them work to produce an affordable housing market because councils don't care. Yes councils get very set in their ways and they are incredibly risk-averse. So they operate on the assumption that only they can properly plan out a city and they aim to develop infrastructure after the need for it is well-established. So anyone who wants to "invest" in property can be pretty sure that councils will never get ahead of the curve and supply of housing will never exceed demand.

Look you could give Auckland council 100 billion dollars and you know what? Bugger all of it would be spent on useful assets such as infrastructure.

They would basically flush 80% of it down the drain like they do now. There'd be way more staff, with way more useless jobs and way more waste on everything imaginable (and plenty of totally bizarre and unimaginable).

It's not a funding problem, it's a culture problem. Auckland council (and I'm sure most others around the country) just have no concept of using money wisely, or allowing people to get on with their everyday lives without them sticking their noses in.

It might be Davos36 that the current regulatory framework has created this culture. See Kumbel's comment and my response. What do you think?

Good article. Over 150 sentences and I don't think I disagree with any but most of them deserve another article just to discuss. For example a land tax - my property value is 75% land value but half of the land is so steep and unstable that building is probably not viable and then again how to change from current system to land tax - progressive or big bang.
One problem is how politicians look at an issue in terms of virtue; so from among the govt Kiwibuild points "" undertake major urban redevelopment projects in partnership with iwi, councils and the private sector "". Three entities in order of virtue but why not sequence in order of who has the money to actually action a project? We have to stop treating private developers as baddies; probably they are but I don't ask for a moral assessment of my baker.
Is there any reason all development contributions can't be paid say via increased rates say five years after completion. Yes it would seriously delay payment to the council but they could treat the debt as an asset (as safe as houses!) and easily borrow against it to fund infrastructure.
Too long a reply but good to hear support for congestion charges - the IT infrastructure for congestion charges needs to be paid for by central government and done now (better still yesterday).

Thanks for the praise Lapun. I write these article pro-bono because someone has to do this sort of housing affordability/urban performance analysis. I know that neither central or local government will do it -so I do. It does annoy me because I know there are huge local and central government departments with +++ people on salaries far greater than me doing bugger knows what. I am thinking about one more article -then taking a break for awhile.

It will be a pity if you stop publishing articles. I'm travelling in Europe and looking at things in a new light because of your writings. For example Vienna in terms of housing density not Habsburg legacy.

I need a bit of a holiday to recharge the batteries... so after my next article I will take a break for a while ... then come back refreshed.....

Brendon obviously put a lot of time into this.

But, with respect, if you don't scope the problem fully, you can't be sure you're doing any good.

If this were the Titanic Times, the repetitive chant is 'Stateroom Crisis'. Just as the repetitive chant is 'More money in Steerage children's pockets'. In light of the in-motion paradigm-shift, staterooms aren't the problem - the problem is too many people for the number of lifeboats.

In terms of the here-and-now, that's too many people - a population problem. It's a population crisis, not a 'boxes they live in' crisis. Only arrogance - and/or ignorance - can be the reason we call it the former. And less children means more children per finite resource - the only real definition of wealth.

So until we have a mature discussion about limiting population, and/or per-head resource consumption, attempting to 'fix' housing is pointless. It just begs the question: What then? And what then? And what then? Exponential growth - as exemplified in Cant'y dairy-farming, Auckland sprawl, Central Otago infill et al - will outrun problem-patching every time.

Then there's displacement. We talk of 'land supply', but it's really 'land displacement'. Which begs the question of where the food (and everything else) comes from to supply the new house occupants. Only one journalist has touched on this, en passant; Kim Hill interviewing Alan Gibbs.

Good luck with those cheaper state-rooms, though. The ones at the stern should stay driest longest....

Totally agree, population is the problem and its going to get a lot worse once oil output declines and the industrialised agricultural system no longer functions or functions at a price ppl can pay. However there is no mention let along a mature discussion at present, even from the Green's.

They do dip their toes in however, no-one is brave enough yet to face this square on. The impetus is most definitely going to have to come from the bottom up.
The issue is as important as climate change, in fact I do not think we can deal with one without dealing with the other.
We will "deal" with it, but sadly more likely in the same old, time honoured way of blowing each other to bits for a while.

Hi PDK I missed your grim tales, they are delivered with good humour and interest.

I of course disagree with your underlying premise. That being NZ cannot transition to a fossil free economy without a titanic decline in population. I definitely think NZ can go fossil free without such difficulties and I am betting that there is no other resource constraints that cannot be replaced by a sustainable/renewable substitute. Obviously you believe otherwise.

PDK once you accept your underlying premise then your following arguments are entirely logical and linear, which is pretty darn impressive : )

There are some very good points here Brendon, I especially like , development contributions "generates a relatively small amount of revenue from approximately 1% of the housing stock which is being built, whilst allowing the prices and rents on the remaining 99% to rise. It allows landlords to raise rents because it adds tax and uncertainty to landlord’s competition -affordable house construction." This is much like the impact to existing housing from introduction and subsequent increases in GST. Then there is the brighline and ringfencing. Next comes CGT. All are contributing to a tightening and progressively more expensive real estate market. The central and local government dodos only have themselves to blame for rising house prices and rents.

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