My recent articles on the supply-side of the housing market have certainly aroused interest. My last three posts have each registered over 30 comments – a feat only achieved by this blog six times in 54 posts. But that’s nothing compared to my latest article on Seeking Alpha, which is a re-print of last week’s post: The Truth About the US Housing Market. This article has so far registered over 200 comments, mostly from North America. If you have got 20 minutes to spare, it’s worth checking these comments out. There is certainly some interesting and animated discussion.
A reader, ‘Mike’, who works for a leading property developer, has sent me an email explaining the issues and barriers faced by developers in the greater Sydney area. It’s an interesting read covering everything from government fees and charges, infrastructure provision, and environmental considerations.
With Mike’s permission, I have reproduced his email below for your reading pleasure. If you wish to provide comment, can I ask that you remain courteous and respectful to Mike. I don’t want this to turn into a free-for-all against developers. Abusive comments will not be published.
Before I start my rant, could you tell who in Texas pays for the infrastructure and infrastructure services? I refer to the roads and storm water, power and power substations, water service reticulation and storage reservoirs and Government charges to develop residential estates.
Is the cost payable by developer/landowner (future reference assumes the developer is the landowner) or subsidised by the State and the cost spread over the population who then enjoys the benefit of cheaper land?
In Sydney, NSW State Government infrastructure and Government charges are increasingly been paid for by the developer. Within the State of NSW, infrastructure services have not been upgraded for at least 40 yrs. It’s been more important for the State Government to maintain its AAA credit rating than spend for future expansion and growth.
In so doing, the growth of urbanisation has caught up with the existing infrastructure planned 40 yrs ago and that’s the problem we have in Sydney today.
Can you imagine building a Snowy Mountain Hydro Scheme with today’s Government policies? It wouldn’t get off the ground and that’s exactly what’s happening, it doesn’t.
With regards to your comment,
“This control on supply restricts the market for land, in-turn enabling developers to land-bank and drip feed supply onto the market, thereby significantly raising its price. In turn, the higher land prices push-up the end cost of housing”.
Developers’ preference is NOT to land bank. This is political spin by the State Government pushing the heat from their inefficient planning departments. It‘s more profitable to develop the land as soon as acquired to maintain certainty which closely reflects current market costs and conditions adopted within the financial model on acquisition. As with any business, having stock sitting on your books not turning over is bad news. The outgoings incurred by Government, land taxes and Council rates, not to mention the lenders interest rates, only further erode the bottom line.
The land may appear to be land banked from the State Government perspective, but the delays to commencement is due to slow planning approvals. (up to 3 years +, in my experience). Due to the planning delays, the land has risen in value only by default. This also works against the developer if the market is declining. But you don’t hear that part.
Government fees and charges:
I can only speak from my involvement with Local Western Sydney Councils and NSW State Government in developing ‘greenfield’ land. You will note from the following list of fees and charges, why it’s in the Governments interest to artificially continue to prop up the property industry and maintain the revenue stream. The fees and charges payable are:
- Local Council S94 contributions -Storm water and roads external to your property. Supposedly downstream impacts and increased traffic demands. Approx 48% cost above the land purchase price.
- State Infrastructure Contributions (SIC) – Roads and infrastructure can be up to 20km away from your property with no nexus to the development. Approx 15% cost above the land purchase price.
- Sydney Water Fees and Contributions – New Water storage reservoirs and reticulation. The water reticulation (pipes) in the roads are constructed by the developer and handed over to the Service Authority.
- Power Fees and Contributions – New Zone substations. The land the zone substation is positioned is contributed to the local power service Authority at no cost to the Authority. The power reticulation is constructed by the developer and handed over to the power Authority.
- Roads and Storm water are constructed by the developer and handed to Council at no cost to Council, including the land component. This is also a given. Approx 12% cost over the land purchase price.
- Long Service Levies – <1%
- Stamp Duties at 5.5%
- Local Council rates – Approx 2%
- State Government land taxes – Approx 2%
- The usual Statutory DA and development fees and charges prior to commencement of work on site.
The actual cost for earthworks, retaining walls, design, prelims etc is approx 25% to 30% cost above the purchase price.
As you can see from the percentages above, the cost of Government charges and fees are edging closer to 70% to 75% above the purchase price of the land and is by far the biggest cost to any development over and above the purchase price.
Sydney‘s remaining greenfield land is located within a 35km – 45km ring to the West, SW and NW of the CBD with no power, water, sewer or roads and its up to the developers to supply the infrastructure as the State Government is broke. That’s the true reality.
China is already ahead of us in this respect.
Now ask yourself again, why is the land so expensive in Sydney?
My belief is the State Government should be paying for this cost and spreading the burden over the entire State population over generations who benefit from the infrastructure over time and the increased land values for years to come.
Infrastructure creates population and industry expansion. Currently the burden of the cost is proportioned over each individual developer who then increases the specific land sale price being developed to try and recoup the fees and charges under today’s market conditions. The land then has skyrocketed in price.
The cost of Government charges spread over the State population over generations would be negligible. The population would benefit from cheaper land prices and employment for all. Maybe this is what’s happening in Texas?
(I should mention, when I talk property it’s really the land component we are buying. The house component is negligible.)
Despite my belief and sticking with the status quo , if the Government stands firm on fees and charges and no further Government stimulus like the FHBG is deployed, how will further growth and expansion happen at affordable prices?…..it won’t, land prices will drop to accommodate some of these charges. Not to mention the pressures from reduced bank credit issuance. It’s just that existing land owners don’t know this yet.
As we know the market can no longer support these ridiculous prices, as affordability is the issue. (Just a thought, as the banks require increased growth, because that’s the model they work on, maybe the banks should push Government to employ the above methods).
I should also note, that key Industrial Greenfield un-serviced land in Sydney’s West has dropped in value between 35 to 40%. Industrial Employment Land didn’t receive the benefits of Government guarantees or similar schemes to the FHBG during the credit crisis. The drop accommodates increasing Government charges and lending charges.
Despite the above, we should stand back and take a broader view looking through the sustainability lens. Do we really want continued urban sprawl? Shouldn’t we be planning ahead and future proofing our cities for a possible world of less?
The WEO have confirmed that Peak Oil is close, if not already passed. Therefore higher oil and energy costs are inevitable. Community living, rather than big urban sprawl cities might be the way to go, were reliance on oil and energy costs are minimised.
What about creating different products to shelter the retiring baby boomers, approx 25% of our population over the next 15 yrs. Smaller homes (not duplexes or units) in existing areas close to friends and families and existing support services is what’s desired, not urban sprawl in the boondocks.
From this it’s obvious I work for a developer. The developer is national in the top ASX 200 and develops industrial, commercial and residential properties for their own property portfolio and institutions to purchase for their REIT structures.(that narrows it).
Now I will probably get smashed over your site for working for a developer and the stigma that comes, particularly contrarian sites, but obviously developing involves huge amounts of risk dealing with uncertainty with Government departments and banks This needs to be rewarded and I work bloody hard at it. Sometimes I ask why I’m still in the industry.
Developers accept that a fair share of contributions should be made to the Community and Councils and accommodate these costs in their finance models. It’s the scale of the increasing Government fees and charges that’s gone too far and ultimately will stop development altogether until something gives.
I work in the Industrial commercial section and the details above are examples from a residential development. The resi boys next door know the wheels are moving slower and slower until the land values drop or Government reduce some of the charges.
All the best, your site is becoming addictive.
NB: Forewarned is being forearmed.