Bridging the housing-infrastructure divide

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ScreenHunter_01 Mar. 03 22.48

By Leith van Onselen

Interest.co.nz’s Bernard Hickey published an interesting article over the weekend arguing that New Zealand’s councils, which are primarily responsible for planning and land supply, should be paid a share of income taxes rather than just receive rates in order improve incentives for development:

Developers, builders, renovators and potential home buyers are champing at the bit.

[However,] they are often frustrated and angry about the time it takes and the costs for consents to be issued.

The increasing tendency of councils to load a bigger share of infrastructure costs onto developers at the margins rather than spread it thinly across ratepayers through general rate increases is particularly maddening for developers and buyers of new homes.

It’s almost as if the councils are actively trying to stop growth.

Bill English’s recent comments to a Wellington audience about Auckland’s planning delays indicates the tone of the thinking in this apparent tussle between central government and local government. “We cannot let 20 planners sitting in the Auckland Council offices make decisions that will wreck the macro economy. We cannot let that happen, and we won’t let that happen,” he said.

So what could be done sustainably to ‘unblock’ the system and change what is seen as a culture biased against growth?

…What if the incentives were changed?

Currently councils don’t really benefit from population growth because they have to pay for the roading, sewage and water infrastructure that goes with that growth, but are not compensated through the rates system.

The current rates system actually discourages growth and has led to the sorts of limits on growth seen with the Metropolitan Urban Limit [Auckland’s urban growth boundary].

It has also led to massive development levies designed to avoid the politically painful rates increases that ratepayers have become tired of over the last decade.

Instead, what if councils received grants based on population growth and the income growth of that larger population? That would change the incentives and encourage growth from the ground up.

That’s how many councils and local governments in continental Europe operate and they have much more affordable housing with a more positive approach to growth, even with plenty of regulations around building sizes and types.

Perhaps the government should be looking at changing these financial incentives for councils, rather than swinging a large hammer down from on high to crush the opponents to growth.

Bernard Hickey has touched on a key factor limiting land/housing supply across a large number of jurisdictions internationally: vertical fiscal imbalance.

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A classic case study in the European context is the United Kingdom, which operates a centralised fiscal system whereby local authorities – which are the primary decision makers on development and have statutory obligations to provide services for new houses – receive very little revenue from increased population and housing. As such, these local authorities tend to oppose development in order to save on costs, helping to make land/housing supply less responsive (see here for details).

Australia and New Zealand operate planning systems along the lines of the United Kingdom. In the Australian context, overall responsibility for planning policy, land supply, and infrastructure investment resides primarily with state government, whereas local councils are responsible for most individual development proposals and some local infrastructure. In New Zealand, local councils are primarily responsible. In both countries, however, the central government receives the lion’s share of tax revenues (e.g. personal and company taxes), which typically leaves the lower rungs of government starved of funds and inherently biased against housing-related development.

By Contrast, in Germany, the local governments that control the planning process have a direct financial incentive to provide land for housing and fund infrastructure, since they receive grants based on the number of inhabitants. Therefore, encouraging development is an important way for local politicians to increase their budgets. Not surprisingly, then, the German planning system is relatively permissive, land supply is responsive, and house prices have remained relatively stable and affordable for a prolonged period (see here for details).

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Fixing vertical fiscal imbalances by ensuring that those authorities responsible for planning receive a greater share of taxation revenue could, therefore, go a long way to incentivising development and the provision of affordable land/housing supply.

Arguably, an even better solution to the housing-infrastructure conundrum would be to follow Texas’ innovative Municipal Utility District (MUD) system, which is explained in detail here and here.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.