Property developers pay developer charges, that’s why they argue against them By Martin North | September 9, 2015 | Building & Construction From The Conversation. Link A good rule of thumb in debates on who bears the economic cost of a policy change is to look at the positions taken by vested interests in the matter. If anyone is going to know if they bear the cost, it is those who pay. In the case of infrastructure charges on new property developments, the vocal objections from the property industry are a sure sign that they bear the economic costs.
Infrastructure charges are levied by local governments on developers of new land estates, based on an increased load on essential infrastructure services the council is responsible for.
A research paper reported in The Conversation recently claimed that property developers could pass on these charges in the price of new homes with a mark-up of 400%. The paper also claimed that these charges had the same price effects on existing homes, meaning that new home buyers ultimately bear the cost of infrastructure charges, rather than developers.
But the logic of this should be challenged and is not borne out in the results of other rigorous academic studies of infrastructure charges, which have in fact found the opposite.
The idea that costs of developer charges can be passed on through new home prices sounds intuitive. But it is based on an incorrect notion that prices are determined by costs.
In fact, developers already charge the maximum the market will bear. To not do so would be the equivalent of selling your house for half the market price, just because it only cost you that amount 10 years ago when you bought it. You wouldn’t do it, and nor would a developer.
Using a statistical analysis of a simple regression of home prices with developer charges, along with many hedonic control variables – as this study has – will find a positive correlation simply because charges are set in proportion to housing size. But that isn’t a causal relationship.
As Ian Davidoff and former academic economist (now the ALP’s shadow assistant treasurer) Andrew Leigh succinctly describe in their study on how stamp duty affects the market:
…if one were to simply regress the sale price on the tax payable on that property, the coefficient would capture both the mechanical fact that the tax amount is a function of the price, as well as any behavioural impact of taxes on prices.
It’s true that observations of this mechanical relationship have been widely interpreted as a behavioural effect in the literature on developer charges. But the best analysis does not interpret such results in this way.
A better way to observe behavioural impacts is take advantage of natural experiments, such as when a developer charge is increased in one area but not in a comparable adjacent area, then look at any subsequent price changes compared to the “control group”.
These types of natural experiments can alternatively be attempted with statistical controls, and a recent paper does just that when looking at the house price effects from additional costs imposed to finance infrastructure.
They find that not only are proper statistical controls very difficult to implement, but that prices decrease per dollar of additional infrastructure charge by somewhere in the range of $0.33 to $2.09.
This range captures the standard view that costs cannot be passed on in prices, which in the case of developer charges means that the developer or previous landowner bears the full cost of the charge, and not the home buyer. Davidoff and Leigh’s controlled results support this view on the incidence of stamp duties in Australia.
These more properly controlled results are consistent with the political actions of the property industry who oppose developer charges because they bear the full cost.
Why is all this important? Vested interests benefit from any illusion of unsettled academic debate. In the case of developer charges the property lobby can maintain an intelligent-sounding “Goldilocks” view in public debates that goes something like this: “The research is not settled. But it is likely that we don’t pay the full charge, nor do we pass it on completely in home prices. The cost is probably shared between us and the homebuyer.”
They capitalise on this apparent uncertainty by claiming that their interests are aligned with the home-buying community; a seductive “Goldilocks” view that is hard for politicians to ignore.
Author: Cameron Murray, Economist at The University of Queensland
Sorry Martin, Andrew Leigh, and Cameron Murray but I disagree. If you add on a cost to production then the only possible outcome is a more expensive product. There is an argument that in an inefficient market any savings in production costs won't be passed on, or won't be passed on in full. However it's up to governments to create efficient markets, so this is effectively saying that an efficient market isn't possible, therefore we must tax the Bejesus out of housing to stop developers making a killing in a monopoly or cartel dominated market.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy