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Dwelling infrastructure levies mean demand for new housing is at generational lows; 40% of the price of a new home attributed to taxes, fees, charges, levies and regulatory compliance costs
Topic Started: 23 Jul 2013, 11:39 AM (2,718 Views)
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Infrastructure levies should go

Monday, July 22, 2013

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It’s an axiom of economics 101 that to decrease demand for something, you increase its price. The advent of upfront, per-dwelling infrastructure levies in the early 2000s had a direct price impact on new housing, as did the GST, along with a range of other additional ‘innovations’ in regulatory compliance, fees and charges introduced at roughly the same time. The result? Demand for new housing is now at generational lows. That’s a high distinction for basic economic theory but an epic fail for public policy.

Depending on whose research you want to rely on, we now have the situation in Australia where between a third and 40% of the price of a new home can be attributed to taxes, fees, charges, levies and other regulatory compliance costs. In the main, these were all introduced in a period of planning ‘reform’ from around 2000 which also introduced urban growth boundaries and increased micro-management of the planning and development process.

Former NSW Labor Premier (and now Australia’s Foreign Minister) Bob Carr was an advocate, famously declaring in the 1990s that ‘Sydney is full.’ He then presided over a planning and regulatory framework which taxed and stifled development to the point that the risk of growth in Sydney was reversed, and new housing went into a long slump.

In the Australian spirit of poor public policy spreading faster than good, urban growth boundaries and a more punitive approach to development quickly took root in other states. Upfront development levies, which replaced more reasonable headworks charges, were among these policy innovations. They were championed by states and local governments on the basis that new development had to provide for a wider infrastructure burden than an immediate connection to services. Developers, widely attacked as ‘greedy’ by governments, should - the argument went - pay for widespread community infrastructure and upfront levies were a means to this end.

For evidence on just how problematic this became, have a look at this depressing summary.

These per lot housing levies rose quickly to anywhere from $30,000 to $50,000 per lot, without any economic, mathematical or rational justification – beyond ‘developers can afford to pay.’ Combined with the GST (which only applies to new housing not the sale of established housing), it wasn’t hard to find $70,000 in new taxes applied to a $450,000 house and land package, or new home unit. These taxes, it must be remembered, pretty much all arrived in the post 2000 period. And it’s the post 2000 period that’s seen new supply fall to such chronically low levels.

In some jurisdictions, these levies are now being re-assessed. There is recognition that they have damaged the market for new housing and the industry with it. There is some recognition that they are making new housing needlessly expensive. But there is little evidence of a willingness to decouple governments’ appetite for tax revenue from an industry – and new home buyers – that are already very heavily and discriminately taxed.

More alarming is that the very governments (mainly local) who claim they cannot live without these levies, cannot (or will not) identify how much revenue they generate. They do not appear as line items in most local government budgets (itself odd, given how they are allegedly so critical to funding local government infrastructure needs). Neither is there any obvious connection drawn between the quantum of funds now being raised through these levies, and where or on what they are being applied. In the main it seems as though the levies are absorbed into general revenue, and spent on general commitments, infrastructure or otherwise.

I’ve queried industry bodies and searched various local authority budgets for information on these “critical” revenue sources, to little avail. Do they raise 1% of revenue? Is it 5%? 10%? More? I’ve been told that many councils don’t even know themselves.

The question therefore begs itself: if a source of revenue is so clearly damaging to the new housing sector and so clearly having an adverse impact on affordability, it should at least be able to justify itself. Plus, it should be able to demonstrate there is no alternative or at least allow the community the opportunity to weigh the benefits against the costs.

Governments cannot tell us what percentage of rates revenues rely on these levies. If we asked the question “by what amount would general rates for all ratepayers need to rise to offset abolition of per lot levies on new housing?” we would be told “we don’t know.”

There’s an unverified figure I’ve heard that the number is roughly $150 per annum. If true, upfront, per-lot housing levies on new houses or apartments could be abolished provided the general rates base were prepared to accept an additional $150 per annum in rates. That might be unpopular, but we can’t even have that discussion because it seems no one knows.

But if that $150 meant a circuit breaker for the housing industry, if it meant that young families would find housing more affordable, and if it meant that new home buyers would no longer be carrying a disproportionate burden in funding expenditure commitments which benefit all ratepayers generally, maybe it should happen?

At the very least, any government which wants to argue the necessity of a tax which is so clearly damaging to home ownership and housing affordability and which is so demonstrably inequitable, ought at least be able to tell us how much revenue it’s collecting from it. It could be that the revenue collected given the damage being caused simply isn’t worth it.

*Footnote: since penning this article, I’ve seen some data from Gold Coast City Council. In that jurisdiction, developer contributions constitute a paltry 3% of revenue.

Read more: http://thefingeronthepulse.blogspot.com.au/2013/07/infrastructure-levies-should-go.html
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Shadow
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we now have the situation in Australia where between a third and 40% of the price of a new home can be attributed to taxes, fees, charges, levies and other regulatory compliance costs
Yes, I pointed this out a year ago...

Tax on a new Australian home is 40% of the purchase price - Taxation of Housing Sector (CIE Report)

The housing sector is one of the most heavily taxed sectors of Australian economy.

If bears want their 40% crash, they should lobby for governments to remove the 40% tax they impose on new houses.

But unbelievably, most bears want the property sector to be taxed even more heavily by introducing new laws to prevent negative gearing.

http://www.residentialdeveloper.com.au/Article/NewsDetail.aspx?p=129&id=208

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Edited by Shadow, 23 Jul 2013, 12:27 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Shadow
23 Jul 2013, 12:23 PM
Yes, I pointed this out a year ago...
Yep - you sure did.

Leaving aside the notion of "fair taxes", the fact remains, these costs & levies have elevated the cost of producing land and a house over the past 10-15 years (way above CPI). This has has the obvious knock-on effect on existing house values (which have been widely mis-diagnised as a bubble).

It also explains why we have had rising house prices and no supply response. Supply has only been constrained because prices are too low. (ie: Prices are still below replacement cost on many areas - especially Sydney).

We simply will not have a housing crash if it costs more to produce a house than it costs to buy existing stock. If people have a genuine interest in lower house prices, forgot NG, or population growth. Government costs and charges have always been the real issue.
(S – I) + (T - G) + (M - X) = 0
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Elastic
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Shadow
23 Jul 2013, 12:23 PM


The housing sector is one of the most heavily taxed sectors of Australian economy.

If bears want their 40% crash, they should lobby for governments to remove the 40% tax they impose on new houses.

But unbelievably, most bears want the property sector to be taxed even more heavily by introducing new laws to prevent negative gearing.

That is a load of rubbish Shadow.
Negative gearing makes property more expensive as do infrastructure levies. Don't really see the contradicton.
The removal of both would make housing cheaper.

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But unbelievably, most bears want the property sector to be taxed even more heavily by introducing new laws to prevent negative gearing.
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Sorry, had to repeat that quote because it is such a doozy.
Only a rat can win a rat race.

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b_b
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Elastic
23 Jul 2013, 01:10 PM
That is a load of rubbish Shadow.
Negative gearing makes property more expensive as do infrastructure levies. Don't really see the contradicton.
The removal of both would make housing cheaper


------------------------------------
Elastic - the article relates to the cost of producing a dwelling. Removing NG will do nothing to lower the cost of supply. And therefore, have no impact on housing affordability.
(S – I) + (T - G) + (M - X) = 0
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Shadow
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Elastic
23 Jul 2013, 01:10 PM
That is a load of rubbish Shadow.
Your reply doesn't contradict anything I said, so which part was 'rubbish'?
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Elastic
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b_b
23 Jul 2013, 01:12 PM


------------------------------------
Elastic - the article relates to the cost of producing a dwelling. Removing NG will do nothing to lower the cost of supply. And therefore, have no impact on housing affordability.
That is true of new property.
My response was to Shadow's assertion that removal of NG for property somehow equates to an increase in tax on property and is therefore comparable to the range of taxes/levies that are loaded onto the cost of property.
Only a rat can win a rat race.

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b_b
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Elastic
23 Jul 2013, 01:30 PM
b_b
23 Jul 2013, 01:12 PM


------------------------------------
Elastic - the article relates to the cost of producing a dwelling. Removing NG will do nothing to lower the cost of supply. And therefore, have no impact on housing affordability.
That is true of new property.
.
Yes, but it is the cost of new property which anchors and influences the price of existing property.
(S – I) + (T - G) + (M - X) = 0
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stinkbug
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Elastic
23 Jul 2013, 01:30 PM
That is true of new property.
My response was to Shadow's assertion that removal of NG for property somehow equates to an increase in tax on property and is therefore comparable to the range of taxes/levies that are loaded onto the cost of property.
Depends on whether removal of NG would include removal of CGT on that asset. Each year individual residential property investors pay more than 4 times in CGT than they receive from NG.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Elastic
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It does help to create a floor to some degree.
In some cases, NG can increase the price of new property.
If an apartment complex is built in a desirable location then the prospect of claiming depreciation and using negative gearing will influence the decision of an investor to buy a new apartment.
The extra competition with other buyers will enable the developer to make a fatter margin than he otherwise would.
If demand is high there is nothing to stop developers from making larger profits and in these cases the selling price is much higher than the cost of production.
Only a rat can win a rat race.

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