Inefficient tax slugs all homebuyers

Housing affordability is more than just house prices. It also includes ready access to public transport, schools, good road networks, and of course access to all the basic utilities. However, local governments don’t have the money to build all the infrastructure new housing estates need.

So developer charges were introduced as a “user pays” method of funding new urban infrastructure. These charges are levied on property developers by local authorities at the time of planning approval. Some think these costs are passed back to the original land owner by way of lower land prices.

But property developers claim these charges are instead added on to new house prices, with a negative impact to housing affordability. When new house prices increase, existing house prices are also dragged up, extending the housing affordability issue throughout the community.

However, new research by QUT has uncovered evidence that these costs are not merely passed on to homebuyers, but are passed on at significantly over-inflated rates.

In an Australian first, the study empirically examines the impact of developer charges on housing affordability, providing evidence that developer charges are passed on to all homebuyers in the community. So while policy makers think they are charging developers for the provision of infrastructure in new communities, the cost is really being borne by all homebuyers.

The research

This research applied a hedonic house price model to 4,699 new and 25,053 existing house sales in Brisbane from 2005 to 2011. Using diverse data sets on both housing supply and demand items, it tested the impact developer charges had on both new and existing house prices over this time.

This study has provided the first Australian evidence that developer charges are passed onto home buyers. But these charges aren’t passed on in a dollar-for-dollar fashion. Consistent with international evidence, there is evidence that suggests these charges are inflated on both new and existing homes by around 400%.

What does that mean? It means that $10,000 of developer charge adds about $40,000 to the price of both new and existing houses.

In Queensland, where developer charges are around $28,000 per new house, this one fee alone could be responsible for over $110,000 of the house price. Over the term of a 30 year mortgage, this could be costing homebuyers in excess of $338,000 or almost $1,000 per month extra mortgage payments.

This is not to say developers are profiteering. The competitive nature of the development industry ensures developer margins are kept within a range reflective of the risky nature of property development. Developer fees are a supply side cost that often aren’t locked in until many years after the land is first bought for subdivision.

Demand factors, such as low interest rates and limited supply force up prices and land owners quickly adjust their expectations, asking more for the undeveloped land that will help with supply. Holding costs, time delays, limited supply of serviced land and imperfect data and models are all thought to contribute to this problem.

All buyers pay

This price inflation affects new home buyers and also buyers of existing homes, resulting in increased mortgage repayments of close to $1,000 per month in Australia.

Thus this inefficient developer “tax” isn’t being paid by developers at all. It is being paid by all home buyers across the community, even though the actual infrastructure built only services the new developments.

These findings suggest that developer charges are not only an inefficient tax, but are a significant contributor to increasing house prices and reduced housing affordability.

It is inefficient and inequitable to expect the community to pay four times the cost of infrastructure that services only new housing estates.

In the current environment of resource constraints and declining housing affordability, it’s now time other infrastructure funding models were considered by policy makers.