Before we disappear down a path of expecting developers to solve the problems of the cost of new build housing we should reflect on what the reality is.
The economics of becoming involved in subdividing land for housing are far from what we might imagine.
Take a 40-section proposed development on the outskirts of Dunedin.
Buying the 3ha or so of land you would need (likely with a current house in it) will cost about $2million, which equates to about $50,000 per section.
About 30% of the land will be used for roading and other infrastructure with sections averaging about 525sqm.
Development costs to get the subdivision completed with the infrastructure needed will bring the costs to about $190,000 per section: $50,000 initial land cost and the balance of $140,000 made up of costs for site preparation, earthworks, roading, infrastructure, a development payment to the DCC, consent costs to the DCC and the ORC, and the costs of various consultants to satisfy the consent processes with both councils. (Some of these consent processes are duplicated by the two councils but may require different consultants to satisfy what are in essence very similar requirements).
A development will take 3 to 5 years to go through the processes required.
At the end of this time the developer can sell the sections, in quite a different market to the one which existed when the optimistic decision was made to go ahead.
There will be money borrowed and an initial investment by the developer of perhaps 40%. Interest will be due for any borrowed money, and continue until the sales are able to be completed.
There would be a hope that about 15 sections would sell once titles are available for purchasers.
At that time the clock is ticking because the interest keeps being required on whatever money is still owed. At this stage rates are being charged on a per-section basis.
The final return on a great day with the wind behind them might be 25%. Or the developer may go bankrupt from the delays, the reduction in sales prices or the inability to sell in time.
For reasonable security a developer would hope to sell the sections for 2.5 to 3 times the cost of carrying out the development.
The current position in Dunedin does not put the developer in this position.
Meanwhile the council(s) are in a great position.
When the land was initially purchased there would have been rates of about $5000 being paid to the DCC and another about $600 to the ORC.
The DCC will charge about $27,000 in development levies for each section. They will therefore receive $1.08m for the 40 sections.
This is intended to cover the extra costs to councils for increased housing. But there is little extra infrastructure to be provided by the DCC for sections close to the current residential boundaries. In any case the DCC can make the developer pay for any extra pipes etc which may be required for the subdivision or into the future for the area.
The roading etc in the subdivision will be gifted in its new state to the DCC.
If the subdivision was done over the last five years the rates due after the subdivision process to $328,000 per annum, as against the $10,000 the council would have received from the initial unsubdivided piece of land.
The ORC will likewise have a rates increase over the five years from about $600 to $48,000pa.
Central government won’t be left out of this lolly scramble either.
Any money made by a developer if the development succeeds will pay GST and tax at 39%, giving the government around half of any proceeds for no risk.
Meanwhile for their troubles the developers will have taken huge risks.
They will likely have given personal guarantees to whoever lent them the money needed, which puts all they own including their family homes potentially at risk. And be accused of taking financial advantage of ratepayers despite being a crucial part of providing new housing.
Not content with the million-dollar development levies and the huge increase in ratepayer payments each and every year forever councils are looking at asking for an extra contribution for social housing.
For anyone wanting new housing to be cheaper, there are a myriad of places during the development of land and the completion of houses for councils to reduce the costs and delays they impose on the process.
Central government could remit the GST on new housing to social housing providers or those who have lower incomes. They could build housing with the 39% tax they receive when these subdivisions are successful.
There is no principled reason why developers should subsidise cheaper housing any more than any other ratepayers or taxpayers.
Just a disclaimer: members of my family have the optimism to try developing property. Good luck I say.
• Hilary Calvert is a former Otago regional councillor, MP and Dunedin city councillor.
