Want more housing? Introduce a Development Rights Charge
The following is Dais Partners’ submission to the Wellington City Council Draft Spatial Plan Engagement: Our City Tomorrow
The Dais Partners submission on the Wellington City Council website can be found here.
Lets begin a discussion about one of the great challenges facing Aotearoa.
The key premise of the Plan is seemingly to limit urban sprawl and increase densification of the inner city and transport corridors. However, the current plan will have potentially perverse distributive and equity impacts and is incomplete in setting the conditions to adequately achieve its intended goals – particularly those of being more Inclusive & Connected and Compact.
Creating a Compact City that is Inclusive and Connected
Achieving such goals equitably and sustainably can only occur with buy-in from existing residents, which is often difficult. The primary beneficiaries of increased densification (i.e. property developers) must be seen to contribute equitably to the advancement of the community to mitigate such resistance. Property developers simply engaging in the process of development is not a sufficient ingredient for inclusiveness and connectedness, and is often short-term focused and extractive when combined with perverse development incentives – with countless high-density development scandals in Sydney and Melbourne as an example. Without such buy-in, development is likely to only occur with reluctant agreement between residents and developers that cater little, if at all, to the needs of future residents.
To achieve such a goal, Dais Partners recommends that prospective property developers be subject to a Development Rights Charge.
Why a Development Rights Charge?
At stake are significant windfall gains for developers in the rezoning of parts of Newtown and Thorndon to the central city zone and the promise of increased densification of Mount Victoria and Te Aro. Such a charge, which should replace more ad hoc taxes on development, signals to the community that development will equitably contribute to its longer-term interests.
A study by economists from the University of Queensland showed that rezoning decisions increased land prices by 81 per cent relative to the neighbouring sites outside the rezoned areas. Council rezoning decisions implicitly promise future public resources and services to cater for the increased density of new residents, whether they be new roads, expanding schools or enabling infrastructure. Each implied promise of public services, delivered at the stroke of a pen, raises the net present value of scarce land.
Similarly, property developers employing a lobbyist improved the chances of approval by 37 per cent, even after controlling for all other factors, while politically connected landowners owned 75 per cent of rezoned land and only 12 per cent of the land outside 1.
The reasons why property developers are not trusted by communities is clear. Developers can sell the land with the new property rights the following day and cash in their gains.
Precedents from the Australian Capital Territory
Such schemes are not without precedent. Since 1971, the Australian Capital Territory (ACT) has successfully implemented such a rezoning charge, without stifling development. Since the early 1980s, Canberrans have delivered 1.94 per cent of Australia’s building consents despite having only 1.66 per cent of the population 2. That may not sound like a large difference, but Canberra has a disproportionately high rate of dwelling construction compared to the rest of Australia, especially compared to the neighbouring New South Wales.
The ACT charges 75 per cent of the difference in site value when valued ‘at current use’ compared to ‘at approved use’, in a system known as a Lease Variation Charge 3,4.
Instead of increasing rates, one must question why New Zealand councils fail to purchase development sites, rezone them to higher density, and then sell them again – particularly if returns of 81 per cent are at hand.
A Development Rights Charge would shift incentives for developers towards a system that values high quality developments, and would disincentivise the gaming of council rezoning processes and rent seeking.
Similarly, the post-COVID19 era will be highlighted by questions of how the public sector returns to a sustainable fiscal position. Such a charge improves transparency, efficiency, and certainty of developer contributions.
Limiting perverse incentives
The extent of underutilised land within the central city is striking, pointing to a prevalence of land banking. A Development Rights Charge would limit the perverse incentives created by current urban planning processes, which create uncertainty when related to the future promise of increased urban densification.
For instance, if a developer has a site and can economically build a 5-storey building on today, doing so removes the option of making even larger profits from building a 10-storey building in a few years’ time. This happens in the absence of any zoning controls, since as prices rise, a larger scale of development becomes more profitable. Such incentives see developable land left underutilised as landowners wait for more expansive options to increase in value of their asset.
Footnotes / Sources:
[1] Clean Money in a Dirty System: Relationship Networks and Land Rezoning in Queensland: http://ftp.iza.org/dp9028.pdf
[2] Australian Bureau of Statistics: Building Approvals and Demographic Statistics
[3] https://www.revenue.act.gov.au/lvc
[4] In addition, by being the monopoly developer of land subdivisions the ACT government gain 100 per cent of the rezoning uplift in converting rural land to urban uses.
