Developer fees are adding up to $85,000 to the cost of new homes, worsening affordability

By Gerv Tacadena | 31 Aug 2021

Developer contributions across states and territories appear to be having adverse impacts on dwelling supply and, ultimately, on housing affordability.

A study by the National Housing Finance and Investment Corporation (NHFIC) found that developer contributions have been adding more to the cost of building new homes, which end up being passed on to homebuyers.

Based on estimates, around 8% to 11% of total home construction costs can be attributed to developer contributions.

This translates to an added housing cost of $85,000 in New South Wales, $77,000 in Victoria, and $42,000 in Queensland.

Developer contributions are payments or works-in-kind that go into the efforts to improve housing and social infrastructures in certain areas where projects currently being constructed are located.

The study, which consulted with government and industry stakeholders, said these contributions can be "highly variable and unpredictable", which results in an unanticipated cost throughout the development process.

NHFIC chief executive Nathan Dal Bon said the cost of funding local infrastructure has shifted from state governments and local councils to new home buyers, which has adverse effects on the cost of homes in greenfield developments and on new housing supply.

"The expanding scope of developer contributions increasingly act like a tax on new housing, which can impede new housing supply and reduce housing affordability for buyers and renters," Mr Dal Bon said.

The study also found local governments appear to be struggling to keep up with the demand for public infrastructure and services, especially amid the rapidly growing population and the increasing expectations of good quality local amenity.

Funding constraints, such as municipal rate caps, and an aversion to borrowing also present as challenges to some local governments.

However, some councils, over the last four years, have utilised developer contributions to raise revenue over the past four years, instead of deploying the funds to new local infrastructure.

Less efficient system

Housing Industry Association (HIA) chief executive for industry policy Kristin Brookfield said the charges being applied through the development contribution schemes have become increasingly significant over the past 10 years, particularly in some states.

"This is partially due the large range of infrastructure now included and the gold-plated standards being sought by local and state governments," Ms Brookfield said.

"A conscious decision to shift the majority of the upfront costs onto new housing developments emerged in NSW almost two decades ago.

“While Sydney is the most expensive, other states have taken the same approach and we are starting to see costs increase in most other states."

Ms Brookfield said the developer contributions scheme seems a less efficient manner of funding local infrastructure costs.

"These levies are now so significant they are impeding orderly and affordable residential development from occurring and significantly add to the upfront costs of new homes," she said.

She added that the residential building industry already contributes substantially to the government coffers at around $36bn in taxation revenue or up to 12% of revenue collection.

"In almost all instances the development contribution models are complex to calculate and to administer. They introduce an element of uncertainty into the development process," she said.

These developer contributions, Ms Brookfield believes, only add holding costs for landowners and residential developers.

"Ultimately these costs must be passed onto the home buyer and end up being carried through for the life of the mortgage."

Need for a clear policy

Mr Dal Bon said there is a lack of comparable and detailed data on developer contributions at a state level. This makes it hard to conduct a proper policy evaluation.

"Only three states in Australia – NSW, VIC, and QLD – have modest reporting requirements, while some other states have no reporting requirements," he said.

"The study found that greater transparency on how developer contributions have changed over time, how they are collected and the timeliness in which they are spent is needed to build confidence in the system."

Ms Brookfield added there is a need for policymakers to address the lapses in the scheme and provide clearer guidelines.

"HIA would support further research to assess the unintended impacts of high and poorly functioning development contribution systems nationally and the implications these taxes are having on new homebuyers.”

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