26 February 2011

In NSW state levies are imposing high costs on new homes and new business premises.

The burden of levies

Those that argue for levies are mistaken if they believe that developers bear the costs of new or increased developer charges.

Modern capital is very mobile. It flows to wherever it gets the best return. A local developer will not be able to secure equity capital for a NSW development if he/she cannot offer the rate of return that is available for investments of a similar risk profile in other states or countries. In order to ensure that a market rate of return is still achieved, a developer will either reduce the amount of money he or she pays for undeveloped land, or increase the price paid by the home buyer.

It is not often possible, in practice, to pay less for undeveloped land for several important reasons. Many developers have already acquired the land and factored in all the charges known about at the time of purchase in these cases it is too late to adjust the price paid to landowners for new or increased charges, yet the development cannot proceed unless the necessary rate of return can be earned. There has been no stability in NSW's policy on development levies at any point in the last 10 years and the policy framework remains uncertain and laden with risk today.

There is also a natural floor to land price, below which the owners of undeveloped land will not move. This floor does, in part, reflect the opportunity cost for other uses of the land such as rural lifestyle blocks (in greenfield) or low density housing (in brownfield). This is a major factor preventing the development of fragmented land parcels, say, on the edge of Sydney.

Even when, development of land is the highest and best use in the long-term, in the short and medium term those expectations may not be realisable. When land holders are very patient, hold minimal debt and/or originally acquired the land at very low prices, they may be prepared to wait years or decades before they decide to sell their land. Our experience to date, is that such land owners have no difficulty in waiting for prices to rise to the level consistent with their expectations. Economic models eliminate the short and medium term, and simply look at the long term. This may ignore the fact that the long term could be a 20 year plus horizon. That kind of delay in development would carry enormous social and economic consequences.

In this debate, economic purists tend to overlook the disproportionate market power given to the landowners by planning laws. For this reason, landholders are often able to resist developers efforts to pass the cost of development charge onto them through a lower land acquisition cost. Land owners enjoy disproportionate market power because appropriately zoned land (both in greenfield and brownfield areas) tends to be drip fed by the planning system into the market.

This generally means there is only one party left who must pay for an increased developer charge the home buyer (or commercial/retail/industrial end user).

However, often a home buyer cannot afford a new or increased levy. Thats because there is a ceiling on the price that home buyers are able to pay, i.e. their borrowing capacity. The maximum amount that home buyers are able to borrow is, in turn, based on their income. Without increases in income, home buyers are unable to pay more for new homes. As a result, any project, which cannot be delivered at a price home buyers currently can afford, simply doesnt get built. An increase in costs from a new developer charge cannot be passed onto a home buyer until home buyers borrowing capacity increases enough to pay for the levy.

Where a portion of the market can afford to pay the levy, developers may need to release serviced lots (or stage higher density development) more slowly so as to ensure that the price does not fall below the threshold necessary to recover development levies.

State infrastructure contributions

Western Sydney

In the Western Sydney growth centres, new homes are burdened by a state government levy of $11,000 each, which is set to rise, to $17,000 each, by June 2011. The levy is the same irrespective of the value of the property.

The market price for housing, commercial, retail and industrial property is set with regard to similar properties in the vicinity and elsewhere. If the costs imposed by a rigid formula, and flat dollar fee per lot or hectare are too high, land production is sterilised.

The viability of any land release effort may be seriously undermined by an infrastructure charge that is set in isolation of market conditions and the final sale price of land. Additionally, the existing system of flat charges is not related, either to the actual cost of infrastructure in a particular region, or the capacity of the land to bear the charge.

Greenfield sites would be better served by a percentage levy on the final sale price of land. This will ensure that in areas where the market price is lower, the burden of the charge is proportionally lower.

A flat charge artificially exaggerates the cyclical nature of the market. When property prices fall, a fixed dollar (flat) charge does not fall (unlike some other costs, such as marketing and some construction costs). This leads to a disproportionately rapid fall-off in investment in difficult market conditions. Conversely, when property prices are rising, development activity will be higher than normal. Government taxes and charges should not accentuate the boom and bust of the property cycle, but should act in a stabilising way to get a more even spread of economic activity over time.

A major difficulty with the existing system of charges has been that the payment is required too early in the development process. Even when the charges are affordable, the timing of the payment makes financing very difficult. The developer does not have sufficient real estate available to secure the debt made necessary by the charges. The financing distortion can be removed, if the charges that are payable only fall due when the developer actually receives final payment, for the developed land from the end-user. In December 2008, the government announced that developers would have the right to defer payment of the state infrastructure contribution, but the necessary determination giving effect to this decision, has still not been published.

The legal burden for the payment of the percentage levy will fall on the developer, and the payment will be paid on the transfer of title (that is, at settlement). This arrangement takes advantage of the governments existing revenue collection machinery. The developer will pay the levy amount to the Office of State Revenue and the purchaser will pay the stamp duty owed. The levy will only be paid once on each parcel of land sold (i.e. no further levy will be payable on subsequent re-sales). Where a home or other building has been constructed on the land prior to sale, the sale amount will be discounted by the construction cost of the building. Land sales between developers prior to the issue of a subdivision certificate will not attract the levy (i.e. it will only be payable once lots are actually subdivided and sold individually).

The actual dollar amount raised, by any percentage greenfield levy, needs to be a great deal lower than the $17,000 per home lot, that will apply in the Western Sydney growth centres by June 2011. The ability of the market to sustain a given revenue target should also be factored into decisions about the percentage level, rather than just the costs of the infrastructure.

By way of comparison, there has been considerable controversy in Victoria about the introduction of the new growth areas infrastructure contribution on Melbourne's fringe. This levy amounts to around $6,000-$7,000 a home lot; close to one third of the anticipated June 2011 Western Sydney levy.

It is also important that the new scheme has the conventional checks and balances. This means, any percentage rate set by the government should either be set under a regulation that is subject to parliamentary review and (potential) disallowance, or independent oversight of the Land and Environment Court. Additionally, a requirement to pay a particular state infrastructure contribution should be able to be disallowed or amended by the Land and Environment Court on appeal because it is unreasonable in the particular circumstances of that case.

For each region/sub-region/area (however defined) to be levied, there should be a requirement for a publicly available plan, akin to the current section 94 contributions plans required of councils.

Defacto state infrastructure contributions
Since 2007 the NSW Government has been progressively introducing a new defacto state infrastructure contribution regime outside of the growth centres. These new local environment plan provisions, grant rezonings, but make the rezonings less meaningful because a new arbitrary power is created for the Department of Planning to impose infrastructure charges, without even the threadbare safeguards of the existing state infrastructure contribution statutory framework.

For example, the new requirements mean that development approval for a rezoned land use cannot be given by the local council unless the Department of Planning signs off on a financial contribution to transport, education, health and emergency services, normally provided by the state.

By using local environmental plans (LEPs) to impose compulsory infrastructure levies, key provisions of the existing scheme are circumvented, in particular:
¢ The Minister is not obliged to make a determination of the level of development contributions up-front. Instead the Director-General of the Department of Planning makes a decision on compulsory charges specific to each individual development application. This reduces the transparency and certainty. The lack of up-front information acts as a disincentive to invest.
¢ There is no obligation on the government to publicly exhibit the proposed charges or consult with land owners or other relevant stakeholders. Again, this increases the perception that charges are arbitrary.
¢ There is no express obligation for the contribution to be reasonable.
¢ There is no obligation to identify a special contributions area or any similar area to which the contributions relate.
¢ There is no requirement that the funded infrastructure be within a particular area.
¢ There is no requirement for the decision on the quantum of charges to be made publicly available.

We ask the government to commit to implementing its system, of compulsory infrastructure charges, through express provisions in the Environmental Planning and Assessment Act, rather than local environmental plans. This should involve adopting the percentage-based framework set out above; in addition to the accountability provisions extended by the statutory framework for state infrastructure contribution levies and section 94 contributions.

No local environmental plans should be able to require arrangements for the payment of unspecified monies, prior to the lodgement of a development application.

Voluntary planning agreements
Voluntary planning agreements have become another means of legalised extortion by public authorities when a developer is endeavouring to secure a rezoning.

The original policy rationale for voluntary planning agreements remains sound. Planning agreements are designed to be a mechanism by which a developer can address a planning authoritys legitimate infrastructure concerns. Prior to the introduction of legislative provisions for planning agreements there was no easy mechanism for developers to volunteer to pay for infrastructure vital to securing a value-creating rezoning. The policy rationale for such agreements is not changed by the proposal for a percentage-based state infrastructure contribution.

Nonetheless, voluntary planning agreements are being increasingly misused by local councils intent on revenue raising. In particular:
¢ Development standards (floorspace ratios, height, etc) are being kept artificially low, so as to routinely force a rezoning, a departure from the requirements of a development control plan or application of State Environmental Planning Policy No 1- Development Standards. This creates an opportunity to demand the signing of voluntary planning agreements.
¢ Land owners are punished, for not agreeing to planning agreements, by the imposition of low value zones. For example the imposition of a primary production zone when surrounding land has been rezoned for urban purposes.
¢ Permissible uses are being kept narrow in scope in some areas, again, to force rezonings and create a need for developers to enter into voluntary planning agreements.