Much has been made of the need to open up more land on the fringes of Auckland to help drive down residential land prices and free up housing supply. Setting aside the issues of transport accessibility of fringe areas and the daily costs of getting to work or education, usually the first question asked is who is going to pay for all the infrastructure. Auckland Council is hobbled by its debt limits and nobody wants to put up rates to pay for the necessary bulk infrastructure.
Given the funding constraints present, Auckland Council’s Chief Economist, David Norman, has called for "more innovative solutions to deliver the infrastructure Auckland desperately needs as traditional funding options are impracticable" (See note 1). I think that means: "get someone else to pay".
It has also long been claimed that urban expansion is subsidised to an extent, with new households and businesses in greenfields areas not facing the full costs of the necessary infrastructure. This is in terms of capital costs of infrastructure, but also operating costs. Environmental costs are better addressed these days than they were 20 or 30 years ago when urban expansion meant streams were filled in, bush cleared and sediments discharged into coastal areas. But the issue of infrastructure funding remains. In the past we tended to average out infrastructure costs across the city, with core bulk infrastructure seen as a basic public service. While this may have helped expansion to get along, it possibly lead to too much growth in some areas. If costs are artificially low, then it is easy to over consume a good.
One of the potential benefits of the current focus on a more responsive planning system is for the 'subsidies' for urban expansion to be identified and better addressed (i.e. reduced or eliminated as economic theory suggests should happen). The issue also helps to highlight the point that tools like the old Metropolitan Urban Limit Line were partly designed to counter act these incorrect price signals. The new RUB has kind of missed this point (or rather relies upon better prices signals to be put in place to work properly).
Given the funding constraints present, Auckland Council’s Chief Economist, David Norman, has called for "more innovative solutions to deliver the infrastructure Auckland desperately needs as traditional funding options are impracticable" (See note 1). I think that means: "get someone else to pay".
It has also long been claimed that urban expansion is subsidised to an extent, with new households and businesses in greenfields areas not facing the full costs of the necessary infrastructure. This is in terms of capital costs of infrastructure, but also operating costs. Environmental costs are better addressed these days than they were 20 or 30 years ago when urban expansion meant streams were filled in, bush cleared and sediments discharged into coastal areas. But the issue of infrastructure funding remains. In the past we tended to average out infrastructure costs across the city, with core bulk infrastructure seen as a basic public service. While this may have helped expansion to get along, it possibly lead to too much growth in some areas. If costs are artificially low, then it is easy to over consume a good. One of the potential benefits of the current focus on a more responsive planning system is for the 'subsidies' for urban expansion to be identified and better addressed (i.e. reduced or eliminated as economic theory suggests should happen). The issue also helps to highlight the point that tools like the old Metropolitan Urban Limit Line were partly designed to counter act these incorrect price signals. The new RUB has kind of missed this point (or rather relies upon better prices signals to be put in place to work properly).
So how to address the funding issue and the price signal issue? Easy, say many people, just make the people who are going to benefit from the infrastructure pay for the infrastructure. Set up some sort of special agency. Get them to build or fund the required infrastructure. The costs of infrastructure could be recouped through either the developed land sale price, or through targeted rates on that developed land.
There are a few questions:
- Will this cover bulk and local infrastructure costs? How much if both?
- Does the agency get access to lower rates of finance that the council enjoys?
- If private capital is involved, will there be a return to these 'investors' ?
- If costs are recouped through rates, over what pay back period - 10 years, 30 years, 100 years?
- Who carries the can if costs blow out and / or growth is much less than anticipated?
- And what happens if the infrastructure built by an 'special agency' turns out to be a bit shoddy?
Lets not get side tracked in the details. The first question is how much infrastructure spending for a new dwelling in a greenfields area are we talking about? One estimate is as follows:
- Local (civil) infrastructure costs: $80,000 per dwelling
- Bulk infrastructure costs : $105,000 per dwelling
The local (civil) costs cover the costs of pipes, cables and roads in a subdivision. This estimate comes from MBIE’s handy ‘development feasibility calculator’ (note 2).
The bulk infrastructure cost is calculated by looking at the Auckland Council's latest (2017) land supply strategy (note 3). This identified $19 billion dollars needed for motorways, bus and rail, arterial roads, the three waters and social and community facilities to provide for all the housing in the future urban areas identified by the Auckland Unitary Plan. There is space for 120,000 dwellings. There will also be employment areas and new town centres and the like. A simple calculation suggests that about 2/3rds of the demand will come from the dwellings. 2/3rds of $19 billion is $12.5 billion, divide that by 120,000 and you have $105,000 per lot.
The bulk infrastructure cost is calculated by looking at the Auckland Council's latest (2017) land supply strategy (note 3). This identified $19 billion dollars needed for motorways, bus and rail, arterial roads, the three waters and social and community facilities to provide for all the housing in the future urban areas identified by the Auckland Unitary Plan. There is space for 120,000 dwellings. There will also be employment areas and new town centres and the like. A simple calculation suggests that about 2/3rds of the demand will come from the dwellings. 2/3rds of $19 billion is $12.5 billion, divide that by 120,000 and you have $105,000 per lot.
As an aside this cost estimate is roughly double what a Council study suggested a few years back. Council’s 2015 Cost of Growth study said that greenfields growth generated infrastructure costs of up to $50,000 per lot (note 4). I think these were bulk infrastructure costs, but what they counted as bulk infrastructure may have been different from the Council’s latest land supply strategy. The 2016 land supply strategy identified $17billion in costs.
The local civil works already get built into the price of the section. At the moment, it is a bit unclear who pays for the bulk infrastructure. Council’s development contributions may be about $20,000 to $30,000 per lot. These cover some of the bulk infrastructure costs. Potentially the rest is something we all pay for through tax on petrol, income tax, user charges and general rates.
Rather than be subsidised by us all, the theory goes that the user of requred infrastructure extensions should pay. I know that a motorway extension that is built to serve, say, Kumeu will end up being used by lots of different people, not just residents who live in Kumeu, but let’s not quibble. Without the planned growth, the motorway extension may not happen. So if the user pays, then this is an extra $70,000 to $80,000 per lot to cover the bulk infrastructure costs.
Total local and network infrastructure costs are close enough to $200,000 per section. Then we need to add in finance costs, as someone has to borrow the money to build the infrastructure (or pay for it to be built by the likes of Watercare). This bit is a bit tough for me to work out, as it all depends upon the pay-back period and if commercial interest rates apply. If the extra costs are capitalised into the sale price of the section, then the developer may only need to borrow the money for 5 to 10 years to cover the development and sell down period (and at that point the new landowner effectively takes over their part of the debt in their mortgage). If it is paid back is through rates, then maybe the loan term is 30 years. If the extra costs are paid back through rates, then in theory the price of the section should drop back a bit to reflect this financial commitment. If the cost of the infrastructure is reflected in the section prices, then presumably the developer needs to pay less for the raw land as they may not be able to put up the price of the section by too much. Otherwise buyers will go elsewhere.
Add to this is the cost of the raw land, design fees, consent fees, contingencies and of course a profit allowance for the developer, and GST. Nothing is cheap. I'm not too sure how much is set aside for earthworks in the above MBIE estimate. Seems to me in Auckland’s hilly terrain an awful lot of time and effort goes into flattening things out.
I guess the idea is that if enough land is freed up by getting the funding of bulk infrastructure away from the financially strained council, then raw land prices will fall. But would they fall by enough to off-set the costs of the bulk infrastructure that are now to be directly paid for by the user? Too much land freed up means possibly slower sales of sections and houses for each individual developer, making the the costs of paying for all that infrastructure up front much more risky and hence expensive.
Of course there is also the problem that extending trunk infrastructure is not a straightforward exercise, especially if it needs to pass through or over multiple properties to get to where the demand is. No private agency can achieve that. What about quality, any worries there?
So are we back to the public using its powers to borrow more cheaply for the long term, to carry more risk and to use its planning and designation powers to build infrastructure being not a bad way to help development along?
And what about the infrastructure costs of urban infill and redevelopment - are these costs higher or lower than urban expansion? The 2015 Costs of Growth suggested that they were lower, but a lot depends upon the state of the infrastructure present in the areas subject to redevelopment: is there spare capacity that can be used at limited cost; or does the infrastructure need (expensive) extra capacity to cope; or is it old and needs replacing anyway, so more people and businesses help spread the costs? One simple way to look at the issue would be to say that in comparison to greenfields, infrastructure costs of up to $40 billion for infill and redevelopment would create an even playing field with greenfields, given that around double the growth is expected in the existing urban areas over the next 30 years compared to urban expansion (around 230,000 houses compared to 120,000). That is quite a bit of infrastructure that could be upgraded.
And what about the infrastructure costs of urban infill and redevelopment - are these costs higher or lower than urban expansion? The 2015 Costs of Growth suggested that they were lower, but a lot depends upon the state of the infrastructure present in the areas subject to redevelopment: is there spare capacity that can be used at limited cost; or does the infrastructure need (expensive) extra capacity to cope; or is it old and needs replacing anyway, so more people and businesses help spread the costs? One simple way to look at the issue would be to say that in comparison to greenfields, infrastructure costs of up to $40 billion for infill and redevelopment would create an even playing field with greenfields, given that around double the growth is expected in the existing urban areas over the next 30 years compared to urban expansion (around 230,000 houses compared to 120,000). That is quite a bit of infrastructure that could be upgraded.
(1)
(2) http://www.mbie.govt.nz/info-services/housing-property/national-policy-statement-urban-development
(3) http://shapeauckland.co.nz/media/1782/future-urban-areas-anticipated-dwelling-employment-capacities-cost-table.pdf
(4) F I N A L R E P O R T, Cost of Residential Servicing,Prepared for
Auckland Council, January 2015. THE CENTRE FOR INTERNATIONAL ECONOMICS
