Private housing infrastructure charges: the way forward?

Event Details

Private housing infrastructure charges could speed up delivery of NZ housing - but at what cost?

Insights from an online debate:

As house prices continue to shoot ever-further out of reach for many people in New Zealand, a webinar debate hosted by The Property Foundation asked: are there new ways to finance housing infrastructure to help mitigate this growing problem?

Following the publication of a research paper funded and published by The Property Foundation and authored by Professor Graham Squires of Massey University - The use of housing charges to fund and finance bulk infrastructure: Is this what innovation looks like? - The Property Foundation debate featured a highly regarded panel of speakers comprising:

• Ian Purdy - Head of Property and Infrastructure at ACC
• Laura Harris - Head of Infrastructure, Government & Specialised Finance, Institutional Banking, at BNZ
• Hamish Glenn - Policy Director at Infrastructure NZ
• John Beaglehole - Manager, Housing & Urban Growth at Treasury
• Sean Wynne - Deputy CEO-Bulk Housing Infrastructure, Crown Infrastructure Partners.

Professor Squires hosted the webinar and discussion, asking four key questions that pulled out a number of fascinating themes that we now summarise:

1.      Will a longer-term private housing charge for infrastructure help mitigate the affordable housing problem?

It’s not a panacea, but one of the tools in the toolkit

Lack of supply is one of the main contributors to NZ’s housing issue, and accelerating housing enabling infrastructure will accelerate the delivery of more housing supply. Whether or not that housing is then affordable is up to the developer.

However, by enabling large-scale development, economies of scale improve meaning social, affordable and market houses can be built throughout a development (i.e. more affordable houses can be delivered when more money is made on the sale of other houses at market).

It could speed things up

If alternative funding and financing tools are successful they could speed up the deployment of needed core housing infrastructure leading to new housing being developed earlier than otherwise, which should be a positive impact on the supply side of the housing market.

Local authority lending limits are a constraint to infrastructure development. This type of financing avoids that constraint and therefore can allow more rapid progress on infrastructure development. This may allow the land developers to progress their project more quickly and release more land to be market.

It could make costs more transparent

The private housing charge model that was used at Milldale has now been developed into a legislative framework that can be more broadly applied. The Infrastructure Funding and Financing Act 2020 (IFF Act) is one of a suite of measures that overtime will help mitigate the growing problem of housing affordability.

In separating the financing decisions of the infrastructure from a council’s usual and rating processes, and overcoming council financing constraints by ring-fencing debt away from their balance sheets, the IFF Act will result in the costs of infrastructure becoming more transparent and been borne by the communities and homeowners who benefit. Overtime increase use of the IFF Act should result in more serviced land and increased housing affordability.

2. Does financing bulk road and water infrastructure on greenfield land negate the opportunity for a more integrated transport low-carbon future?

There was a resounding ‘no’ to this question from our panellists, who gave the following reasons why:

Councils will continue to have responsibility for District Plans, rezoning of land and conditions that must be met with such activities. Councils tend to be focused on delivering a total community solutions and integrated transport solutions are often a key part of this.

In larger scale greenfield areas such as Drury, the delivery of ‘bulk’ three water infrastructure and local roads is going to take place within a development that contemplates various modes of transport (bus and rail) being provided by other parties (Auckland Council and NZTA) pursuant to wider regional and national transport objectives (including emissions intensity).

Financing doesn’t drive the choice of infrastructure. 

The model is capable of funding any infrastructure development, including light rail and rapid transport. However:

It rightly shifts the burden of this responsibility to the wider community instead of putting it on new homeowners.

3. Is there an emerging inequity if we only fund infrastructure projects that we can finance through growth?

While saying that to date the model has been limited to new infrastructure in greenfield sites, and there’s no reason that the model can’t be applied to existing or brownfields infrastructure, two key points also surfaced:

Growth doesn’t immediately pay for growth

Greenfield growth presents unique challenges given the large amount of capital required and the fact that it primarily benefits those residents who move to the area over time. Thus councils finance this growth upfront and the costs are borne by all ratepayers until they are recovered from the new greenfield residents overtime. Therefore, using the IFF Act where appropriate alongside existing council funding and financing tools (rates, development contributions and debt) is the likely best way forward.

The model can lead to the more equitable treatment of all owners over time

Traditionally housing infrastructure has been financed through some form developer contribution system. An alternative funding and financing model spreads this cost out over time so that each property owner pays a portion of those costs.

However, financing only through growth doesn’t address historic under-investment in infrastructure - and existing infrastructure doesn’t necessarily meet standards (water quality for example).

4. Is the future of financing public goods a model that takes borrowing off the public balance sheet?

Presently, It shifts the borrowing from local government to central government balance sheets

However if in future projects the equity in the financing vehicle were held by the private sector then the loan would be off the public sector balance sheet.

Alternative funding and financing models can avoid additional debt on public balance sheets and ensure infrastructure investments are made now rather than in the future when/if Councils are in a stronger financial position. This allows Communities to have the benefit of important infrastructure now. However:

There is a fundamental inequity of the funding burden between local and central government

The burden is mainly on local government, who have limited balance sheet capacity to fund growth but are responsible for the bulk of the funding while the benefits (GST etc) mainly flow through to central government. This is especially inequitable given that the central government’s national economic growth policy is so heavily reliant on migration-driven population growth, in turn requiring local councils to provide the infrastructure and fund this growth. 

Note: although this view above is widely held, our speakers also noted that Councils get more houses to spread their costs over, which means they can provide additional infrastructure/services to their constituents without the political cost of raising rates.

It is not suitable for all public goods

There is a limit to public balance sheet borrowing that is far less than the amount required to address historic underinvestment in infrastructure as well as future growth.

Alternative financing tools are always going to be complementary to the primary means of financing infrastructure through central or local authority core borrowings. The government’s 3 waters reform programme, with its proposal to create a small number of publicly-owned multi-regional water entities with balance sheet separation from councils, will enable the advantages of scale, and more advantageous borrowing terms to fund infrastructure and services.

Finally – what opportunities and challenges exist here?

5 Challenges:

1. Multiple levies imposed over time on the same landowners. Aligning the charging of beneficiaries with the date that land becomes enabled from that infrastructure.
2. For example infrastructure costs may be incurred today but some landowners may not benefit from that infrastructure for a decade. Furthermore, you can only go back to the well so many times. How many times can you go back to impose levies on homeowners, and what happens when new infrastructure is needed later on?
3. Cost A lot of this infrastructure is very expensive. What do you do when there is still a significant shortfall after a reasonable infrastructure levy? Who pays this ? There is only the landowner, developer, council and the Crown.
4. Complexity in the model, retained requirement for government approval, ideological opposition to greenfield growth inside councils, failure to link the importance of competition in urban land markets to the model so that rural land prices can be accessed.
5. Timing - suitable developments that are ready for procurement. Understandably if authorities don’t have existing funding in place for these developments then land acquisition, consenting, designations etc won’t be in place and will take time.

5 Opportunities:

1. Align funding more closely to the beneficiary >span >
2. Accelerate financing by spreading the cost out. >span >
3. Use global dry powder. There is an enormous amount of funds under management around the globe that is looking for long-term investments offering secure returns in politically stable countries, like New Zealand. The intergenerational nature and high credit quality of infrastructure assets makes them very attractive and aligns well to long term investors objectives such as superannuation funds and iwi.
4. Find transactions that have the scale to offset transaction costs, while minimising the number of parties involved. Milldale only involved one developer, future projects may involve more. Larger brownfields IFF transactions would potentially access a lower cost of financing and free up Council’s traditional borrowing to finance smaller greenfield infrastructure project.
5. Assist councils with their balance sheet constraints. This approach could get infrastructure in the ground today.

We encourage you to read the full report, which can be found HERE under ‘The Property Foundation’s Commissioned Reports’: