How the Government can lower development costs

 

Housing and Government debt seem to be ignored by the Budget and pundits alike. Why when the two are linked I don’t know but it comes down to managing verses leading when it comes to an acute situation such as the housing shortage in Auckland.

 

 

Right now inflation, the Official Cash Rate (that governs interest and Bond rates) and 90 Day Bills (Short term bonds) are all rather low while Real GDP growth is not getting above 1% (Real GDP unlike Nominal GDP factors in both inflation and population growth). This means wages are stagnant, productivity and growth bombs and for some reason we have a Government allergic to using debt instruments to move things along. Furthermore this Government is trying obtain Budget Surpluses which is a fiscal contraction policy tool designed to take money out of the economy and prevent it from overheating. You normally run surpluses when inflation and the Official Cash Rate are both high – of which both are neither. On the flip side Budget deficits are a fiscal expansion tool to pump money into the economy to stimulate it. Normally the deficits would be used to fund infrastructure to set up support for the next boom. Once the boom is underway with inflation, Interest Rates and wage growth creeping up do you then switched to Balanced Budgets (steady as she goes) then Surplus to act as the break if things overheat beyond a Balanced Budget.

 

Now where am I going with this?

Well as I said earlier our key indicators are low but the Government is trying to fun a Fiscal Contraction policy. In the meantime Auckland is under high population growth and does not have the housing nor infrastructure to support the new residents we are getting (780/week). To make matters compounded Council is at its debt limit to fund new infrastructure like water while conventional Development Contributions from developers when building new homes have the double effect of not fully paying for new infrastructure needs AND due to the upfront nature of Contributions add a significant portion to the new house price. The ultimate consequence? Stalled infrastructure developments with steep upfront Development Contributions bearing on the final house price as Council tries to get infrastructure investment going again.

 

Government funds infrastructure

How we fund water, civic amenities and even transit will need to change. Development Contributions all upfront are simply not working, not when you have the nation’s largest money handler sitting right in front of you – that being The State! Given the State can access currency and credit at Rates cheaper than any private institution the State is in the best position to bankroll infrastructure funding.

Thus a State Infrastructure Bank would be set up and loan money to Councils to get the infrastructure built. The term of the loan is 50 years at nominal interest and is repaid as a Targeted Rate on property or properties affected by the new infrastructure to Council who then pays it back to the State Infrastructure Bank. The new infrastructure cost is spread via the Rate applied to the property over 50 years rather than a full upfront cost via the conventional Development Contribution. Regional infrastructure such as motorways or heavy rail should be born by the National Land Transport Fund thus all taxpayers given the often national benefits by such infrastructure (where as Light Rail would be borne by the SIB targeted Rate system).

With Development Contributions thus the upfront cost taken off the price of a new build and shifted to a Targeted Rate on the affected property over 50 years hopefully both house prices can stabilise out (and more affordable for smaller builds) while infrastructure is built.

What could the SIB loan money on? Well got a few ideas here at the price of a couple of billion dollars – #Budget2017 Lacks Vision for Auckland. So I Crunch Some Numbers

 

Of course there are more finer financial intricacies to a State Infrastructure Bank and how much of a percentage it should bank roll non regional transport infrastructure (heavy rail and State Highways) and so on but hopefully by penning down the basics here something might get rolling. Because the current method through Council debt and Development Contributions is simply not working while terms of finance are very favourable for Budget Deficits to fund the State Infrastructure Bank.

In the end the State needs to intervene in a broken system. 

 

Thoughts?