Councils to have less reason to say ‘no’ to new housing

Dr Eric Crampton
16 December, 2019

Last week, Labour finally began delivering on its urban growth agenda. Housing affordability was one of the two main themes of the 2017 election. Restrictions preventing cities from either growing up or growing out made for serious problems when population growth increased demand for housing. Getting the infrastructure in place to allow for urban growth is absolutely vital.

But the real action was not in the multibillion-dollar infrastructure spending announcement which drew all the headlines. It was rather in the Infrastructure Funding and Financing Bill, quietly introduced on Thursday. That legislation will let infrastructure keep up after the current political push for greater infrastructure spending has passed.

Let’s recap.

Ultimately, councils set restrictive rules on urban growth when urban growth is costly for councils. Central government enjoys the boost in income tax, company tax, and GST when cities grow. But local councils wear the cost of the infrastructure necessary for that growth. And the bigger ratings base that growth provides is not enough to defray those costs – or at least not quickly enough in places where council’s debt limit binds.

Core water and transport infrastructure can last for decades. It makes sense to spread the costs of that infrastructure over the life of the infrastructure rather than loading it all up front, just as it makes sense to take out a mortgage when buying a house. But councils at their debt limits can have a hard time doing that. Issuing bonds to spread the cost of new infrastructure would make sense but would trigger covenants on existing debt that would increase the cost of council’s existing debt. So councils are reluctant to do it.

Labour’s announcement that central government is willing to take on a bit more debt to fund infrastructure can help with some of the catch-up. But it does not lay the groundwork for a longer-term solution. Growing cities do not just need a surge to remedy past infrastructure deficits; they need a rolling maul pushing out infrastructure whenever and wherever demand for more housing merits it.

And that’s where the Infrastructure Funding and Financing Bill comes in.

Currently, a developer wishing to put in a new subdivision, for example, either needs to bear infrastructure costs up-front through development contributions, convince council to take on debt to build the new infrastructure, or both.

The Bill proposes a new way of financing infrastructure that spreads the burden of paying for it over time among those who benefit from it. A developer wishing to turn a paddock into a subdivision could propose a new levy on the property on top of current rates. That levy would pay off, over time, the debt needed to fund the new infrastructure. Someone buying a property in the new subdivision would see the additional rate on the LIM and would weigh it in the same way that a person buying an apartment weighs the associated body corporate fees.

Shifting the burden of paying for infrastructure from councils and ratepayers at large to those who benefit more directly from the infrastructure removes one important reason that councils might block be lukewarm about allowing more housing. The special purpose vehicles issuing debt, setting levies, and commissioning new infrastructure would be separate from councils. Because there would be no recourse to council if the new development failed, the debt would not count toward council debt limits. Council would have one fewer reason to say no to new housing.

The Bill then promises a way for infrastructure to roll out whenever and wherever there is sufficient demand for the new housing that would be enabled by it. If it works as intended, it could be revolutionary in consequence. Whenever housing starts looking a lot more expensive than the cost of building new developments, our cities would grow.

That would make for more affordable housing not just at the fringes of the city, but across the whole area. The Bill’s Regulatory Impact Statement cites work from the Ministry for the Environment and from MBIE suggesting that house prices in Auckland are nearly three times their fundamental cost, and that a bare 600 square metre section in Auckland zoned as rural costs $200,000 less than the same section zoned for urban use.

But letting the Bill live up to its full promise might require some attention to its application in brownfield sites. Cities need to be able to grow in the places where people want to live and where the costs of that development warrant it.

The Bill contains provisions allowing for brownfield development, as it should. But brownfield sites with many owners of small properties come with greater risk that not everyone subject to an infrastructure levy is a willing beneficiary of the infrastructure.

It is easy to imagine cases where a developer proposes a new set of terraced houses in an area where not all existing owners are happy to sell their properties for redevelopment. If the owners of some of those properties then become levied ‘unwilling beneficiaries’ of the enhanced infrastructure, it is also easy to imagine that the situation could become politically difficult. Without decent mechanisms ensuring that the beneficiaries of the infrastructure also consent to the levy for it, the legitimacy of the mechanism can come into question.

Fortunately, the Bill is not proceeding under urgency; Select Committee will have time to weigh things.

It is understandable that the multi-billion-dollar infrastructure spending announcement took most of the attention last week. But if we have an eye to longer term housing affordability, the Infrastructure Funding and Financing Bill matters more.

It’s a linchpin of Minister Twyford’s vision for better-functioning housing markets.

And it’s come just in time for Christmas.

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