Development contributions (DCs) are proposed to increase in Auckland to frankly non-viable levels from a development perspective, especially for affordable or middle-end houses.

The graphic below shows before and after the proposed costs.

Auckland Council asserts that development fees have no impact on house prices, claiming that high development contributions do not influence housing costs because developers do not pass these fees on to buyers; instead, the market determines prices.

This is nonsense, supported by “word salads” dished up by the council’s favoured economic advisers. Of their nine economic reports cited, six did not agree with this assertion. Auckland Council only quoted the three that did in their study of the issue.

Further, in 2013 Auckland Council received advice from the Department of Internal Affairs that clearly said development contributions do affect houses prices.

Notwithstanding this, Auckland Council are cherry-picking economic advice and analysis to justify increased taxation on home builders, and are driving policies that will contribute to the next housing crisis – one that is unfolding in slow motion at the hands of Auckland Council.

The inevitable decline in housing supply (from making development non-viable through high development contribution costs), will not only exacerbate affordability issues but will also lead to a significant drop in the revenue the council aims to collect.

In short, crashed consenting due to non-viability will lead to less construction, fewer ratings, and fewer connection fees. Auckland Council policy advisers are commercially naïve and showing poor judgement.

Infrastructure proposals

A new layer of uncertainty is emerging. The Minister of Housing and Infrastructure, Christopher Bishop, has announced new funding and infrastructure proposals, designed to accelerate infrastructure investment. We applaud his intentions here.

No detail yet, but from listening to speeches, it appears Bishop intends to make it easier for councils across New Zealand to levy areas benefitting from new infrastructure. This could mean targeted ratepayer levies in affected areas, to socialise the cost across existing homes as well as new connections.

I think extending the cost wider over all users of infrastructure makes sense, and is in alignment with the requirement of the Local Government Act, S197AB, which says infrastructure should be spread across the users and capacity life of the asset.

However, if they continue to gouge developers with high proposed development contributions and make targeted rating levies, this will just be acid on the wounds of developers and ratepayers and a double dip. We are keeping an eye on this. Moreover, the planning budgets are flawed and over costed. We don’t think central government are aware at time of writing, but we are bringing it to their attention.

SANZ review

Many home builders and people working in the home building supply chain are infuriated by Auckland Council’s costs. I, along with Kirsty Merriman and a number of professionals, have been working on behalf of home builders and homeowners to investigate Auckland Council and Watercare’s planning and charging. This group is called Subdivision Advocacy NZ Ltd (SANZ).

We have requested information (some under the Official Information Act), including their financial models, which were not otherwise available until we asked that they be released. The review has revealed some quite extraordinary things. So extraordinary, we decided to peer review our findings.

In short, we think Auckland Council’s financial models are flawed, and their development contribution budgeting process will need to start again.

We procured a peer review of our findings. This review, which we will release shortly, says we are right, and the initial results are astounding, showing significant errors which impact the development contribution figures materially.

Auckland Council’s economic analysis is self-serving, cherry picked, and also flawed. Heads should roll for this. Auckland Council are failing in their duties to Auckland ratepayers, undermining Auckland’s growth by crashing financial viability of housing developments through obscene development levies. They are failing in their duty to central government by producing misleading financial information.

It’s incredible that an organisation as big as Auckland Council would produce forecasts and reports with such huge gaffs in the information. More to come on this, but it is a show-stopper for Auckland Council, and they will need to rework their levies.

Implications for Auckland

High development charges create a ripple effect that suppresses housing supply, exacerbates shortages, and drives prices higher. A decline in housing construction also results in reduced ongoing revenue for Auckland Council from both development contributions and rates. The claim that DC charges do not impact housing costs ignores fundamental economic principles. In the long run, however, rising house prices ensure that Auckland Council ultimately receives its revenue.

This issue directly affects Auckland residents. It appears that the Bishop intends to facilitate additional costs through ratings, based on what we believe to be deeply flawed and negligent forecasts. This needs review.

If Auckland Council continues to demonstrate poor budgeting practices and excessive infrastructure spending, should they still be entrusted with its management? A minor example, spending $600,000 to install and later remove a simple traffic crossing, as reported by the New Zealand Herald, appears both imprudent and irresponsible.

Similarly, allocating $172,000 solely for traffic management for a crossing in Grey Lynn, described by mayor Wayne Brown as “a disgrace”, highlights further inefficiencies. On average, Auckland Council spends over $466,000 plus GST to install two poles and a patch of compacted bitumen, topped with painted lines. That’s absurd.

Rather than asking, “Where do we raise the money from?” the real question should be, “Why does Auckland Council spend ten times what the private sector does for similar projects?” Their procurement processes are evidently failing, alongside their financial forecasting.

SANZ is preparing to release its report critiquing the flawed development contributions budgets and Auckland Council’s highly selective economic advice. The report will be available on our website, sanz.nz, and distributed directly to the financial contributors who made the peer review possible. We are also taking it to central government.

Why do high DCs affect the price of houses?

The relationship between DCs and housing prices is fundamentally tied to economic principles of viability, supply, and demand.

1. A significant increase in DCs, such as the ones proposed, directly impacts project feasibility by eroding developers’ profit margins. As a result, supply diminishes. Developers halt construction and “land bank” their assets, waiting for more favourable conditions.
2. In short, supply crashes, and demand continues to build. Values get pushed up as a result, and it’s not until house prices increase that construction becomes viable, and so the end purchaser pays the higher DCs through resulting house price inflation. Higher DCs therefore get passed along and push up house prices, and this is noted in other reports provided to Auckland Council; they know this.
3. So on one hand Auckland Council say DCs don’t affect house prices, and on the other their own reports say stalled supply will be inflationary, but this will allow for DCs to be paid.
4. If DCs are ramped up, the value of the land that has become non-viable to be developed crashes from a development perspective. If it costs more to develop a plot of land than you get in revenue, the land has less value or even a negative value.

I was told by a member of Auckland Council that this is part of their strategy – the land values will fall and then (he says) developers will sell, and there will be a “reset” on new devalued land.

If this is their strategy, this is disgusting. They are attacking landowner’s property values through indirect taxation. We have raised this with our legal counsel. Secondly, in regard to the reset, we say it’s unlikely to occur to any great extent. Auckland Council lack commercial experience saying this.

Only distressed developers will sell. LVR settings and bank prudential controls tend to make Auckland brownfield developers financially robust. My bet, very few will sell or be forced to sell. They will just rent the existing houses out.

Bear in mind I am a chartered accountant specialising in property, a home builder myself, and my accounting practice has over 7,500 entities that we act for. I know property and home builders inside out. They won’t dump and devalue with high DCs as Auckland Council think. Instead, developers will tend to rent and hold the development sites as homes, and wait. It’s called land banking.

So in reply to Auckland Council member’s comments that there will be a reset in values from high DCs, we say these are brownfields (infill) subdivisions that Auckland Council are trying to levy super high fees on. The land value falls to the lower of a) the value of the land with the house on it as it stands pre-development, or b) the value as a development.

We think the Council planners may be ignoring the alternate use of the asset as an existing home in their assumption set. Because the asset has another use, there is no land value crash and “reset”.

With DCs proposed, financial viability is vanquished. This results in the value as a family home trumping the land as development value, and the house gets used a home again, not developed into multiple units.

In short, the value will be buoyed by the alternate use as a home, and there will be no reset in value, so supply crashes. Auckland Council are in effect cancelling the zoning through non-viability with these high DCs. It’s not smart.

Will Auckland Council get their high DCs?

My view is over the long term, yes. We need to break this down, though, into the three housing markets:

• High end: not affected by DC increases
• Middle end: moderately affected, but development may still be viable
• Affordable housing: severely affected, consenting will crash, and values will fall. This is the area we are most concerned about.

Over time, the reduced supply leads to a significant shortfall in new housing developments as projects become financially non-viable.

As years pass, the sustained demand coupled with reduced supply leads to a housing shortage, driving prices upward. Eventually, supply resumes, but by then, housing has become significantly more expensive due to prolonged scarcity.

A further unintended consequence is the loss of skilled supply chain labour. With limited local opportunities, many workers (engineers, surveyors, planners) will seek employment elsewhere. Once they reskill and establish themselves in a higher-wage market, they are unlikely to return, resulting in a permanent loss of human capital and weakening New Zealand’s ability to meet housing demand.

In the short term, council revenues may also decline. With fewer development applications due to financial non-viability, fewer new connections will be made and there will be fewer new ratings for council (property rates are a big source of council funding). Ultimately this will reduce the funds available for infrastructure investment. If developers cannot justify projects due to excessive DCs, the anticipated revenue from these fees will not materialise.

SANZ legal challenge

We are raising funds to cover a legal review by a King’s Counsel of our concerns about the Auckland Council. Preliminary advice is that Auckland Council are in clear breach of many of their duties under the Local Government Act, but we await the formal written advice. Secondly, the economic review of council’s “word salad” advisers is scathing. And their failure to review the financial models in tandem with the economic advice is damning.

The SANZ initiative is not for profit. Please consider donating to sanz.nz to support the costs of legal and financial reviews. No one involved with SANZ, including the writer or Kirsty Merriman, receives any payment – we are volunteering our time. All donations directly fund legal and peer reviews of financial and economic reports. You can donate here: https://givealittle.co.nz/caus...