We are now going to turn to how various development levies, contributions and tax structures that are layered into the property market and the impact that such costs are having on supply of new housing. We reflect on this topic with Mark Percy in this post.

From the on-set of this topic, I think that it would be correct to put the proposition that the weight of costs levied against the development industry are now trending towards ‘getting out of hand’. Clearly, infrastructure has to be provided, but are we going about this in the right way, and are funding models keeping pace or delaying projects?

The question to ask is, has the right to develop a project simply been held captive to the payment of these fees, shifting the cost burden unfairly, which appears to lead to the conclusion that such levies and contributions are clearly a tax in need of reform?

Mark opens his remarks with the comment that years ago, the various levies were minor and that, historically, there was a clear direct relationship between the impacts and needs of the individual development aligned with the charges that were being levied.

“Now, levies have evolved into many different formats and they are hindering development.  Levies are moving away from the original intention of financing directly related infrastructure.  I feel there is a foundation to suggest that the former direct relationship needs to be restored, but at the same time I acknowledge that this is a major topic and area for future possible reform.

“Voluntary Planning Agreements might be one way around this, because all parties come to the table in a constructive and open manner.  The developer has the opportunity to directly discuss options with the consent authority and jointly explore ways to manage the needs of the development and community.

“This is as opposed to a developer simply facing blanket Section 94 levies that often remain unspent by the authority many years after the development has been completed.”

“However, again I have to come back to the financial impact that these costs have on any project.  I would like to make the point that these development contributions and levies are usually payable up-front before any construction work is undertaken.  They have to be funded by either debt or equity, so they become part of the capital cost to be carried through the life of the project.  For large multi-staged projects, this cost may be carried for many years.  For a major project, it will be years before this expenditure can be recovered from sales revenue.  The need to fund these costs throughout the lifetime of the project adds considerably to development costs and therefore must impact adversely on selling prices and affordability.

“Why can we not structure the payment of the levies and contributions so that they are payable before practical completion of the development can be granted by the Certifier to reduce the cost of development and improve affordability?

“Given the fact that the construction industry employs so many people and generates so much flow-on activity throughout the economy, it is difficult to understand why so many financial burdens are imposed on it.

“The current approach needs some re-thinking, covering the purpose of levies and financial contributions and reconsideration of when they are paid.”

Mark points to what he sees as a failure in the current approach.  As an industry, we need to seek to reduce as many of these on-costs as possible to improve affordability.  At the end of the day these are passed on as part of the of the selling price.

“In practical terms, the buyer of a new home has to absorb all of this cost as part of their purchase price, yet the infrastructure will be used for may decades.  I think there maybe ways that subsequent buyers, such as second and third-time buyers of the home, can also contribute, possibly through council rates to the infrastructure that everyone uses and benefits from.”

GST is imposed on new dwellings but not on re-sales of existing homes.  The reality is that the States get the bulk of this tax, along with stamp duty from the sale of homes.  This is a hard area for any reform, especially in an era where State Governments’ are struggling to fund their infrastructure needs.

“How stamp duty is applied, rebated, used as an incentive and varied from time to time can distort the market.  It allows Governments to directly influence either the overall market or portions of the market.  Often the industry suffers because of policy shifts, without full regard to the unintended consequences.

“I do not agree that markets should be stimulated in a piecemeal fashion.  We now have a patchwork of offers in various forms that vary from State to State.  Just stimulating one sector of the market is a political move and it’s never really a good idea as other sectors suffer.

“Prior to 30 June this year, NSW offered stamp duty exemption on new off the plan houses under $600K.  This resulted in a significant increase in demand in this portion of the market but, once the deadline passed, sales in this sector of the market reduced dramatically – future demand in this sector of the market was brought forward, stimulated by the incentive.  While the stamp duty exemption was in place, demand for homes above $600K was significantly reduced.  Any homes that were priced in, say, the $600K to $650K price bracket before the stamp duty exemption was introduced, were extremely difficult to sell unless the price was reduced to below $600k so that the stamp duty exemption could apply.  Purchasers, understandably, were keen to focus in a price bracket where the stamp duty exemption applied.”

Mark also sees the reality that while most council rates increases are capped yearly to a fixed maximum percentage increase imposed by the State Government, it makes the question of local government being able to fund local infrastructure improvements a much more demanding and complex issue.

“We have State Governments who are concerned about taking on debt to fund infrastructure and this is putting pressure on local governments to increase Section 94 contributions and enter into Voluntary Planning Agreements to fund infrastructure.

In next week’s posts, along with Mark, we will take a look at the current and evolving role of finance and the very real impact this is having on project delivery and marketing, as well as quality and design in the project marketing mix.