Letter to Nick Smith
12 March 2013
The Rt.Hon. Nick Smith MP
Minister of Housing
Private Bag 18888
DEVELOPMENT CONTRIBUTIONS REVIEW
The Nelson Residents’ Association’s interest in the “Cost of Building” issue ranges over a considerable period of time, consequently our records hold a considerable amount of information which we now forward.
We are aware that the Development Contributions Review has a limited focus and therefore we feel that it is necessary at this stage for the total costs faced by all developers should be taken into consideration by the committee.
Aircraft engineers spend their lives trying to reduce the weight of an aircraft so that it can fly. They cut or drill holes in every conceivable part of the frame to ensure it flies satisfactorily. By comparison, New Zealand has, over the last forty years, progressively plugged the holes up to the point where the country is weighed down and cannot fly.
If you accept this analogy, then we should start boring holes in the framework until New Zealand is again able to fly.
Let’s start with small holes - Land Agents charging commission on the GST content of a deal. This accepted practice forces the first home buyer to borrow approximately $2,000 just to finance this factor. The fact that the total commission is often more than the carpentry labour content of a basic house also needs to be urgently addressed. It is acknowledged that this situation has improved of late.
Another small example is the practice by many local authorities to demand that entranceways onto new sections be installed at the time of development and then invariably it is found, when building, that they need re-positioning at a cost of many thousands of dollars.
Perhaps one of the best examples of little changes in methods of construction having a big effect on costs is the current good practice of requiring an air-gap between the traditional framing and the exterior cladding.
This requirement, although minor in comparison to the overall project cost, has an interesting dimension to it as the following explains.
In the past the timber frames (liners) around the windows were manufactured from a timber size that cost approximately $10 per metre. To provide for the current requirements, the timber now needed doubles in cost due to the requirement for bigger and better logs to enable the larger size frames to be manufactured. This results in significant cost rises.
The introduction of the insulation code in 1972 has seen a continual modification of the requirements that have affected the cost to the point where it is quite a significant amount.
When considering structural timber work, a look at the bracing code will give further understanding of the complexities involved which again create additional costs.
There are many other examples of a minor nature that contribute to increased building costs but the simple items mentioned above hopefully will give some pause for thought.
Moving on to items of more significance, the perceived needs for attached garaging and the luxury of two bathrooms have had an impact on the bottom line although surprisingly, on a crude square metre base, the comparative costs between now and 40 years ago is remarkably similar.
This situation, like the farming industry, is due to efficiencies in methods and training which, unfortunately, have been grossly eroded by the crushing impediments imposed on the housing and land development industries. These impediments are wide and varied but the major one is the Resource Management Act which has given the right to local government staff to interpret an application as they see fit. To prove this point, if one were to apply to the 76 local authorities in New Zealand for a consent, the chances are there would be 76 different response.
In addition the frequency of bureaucratic requirements, arising from varying interpretations of the terms of the Act, for supplementary applications results in significant additional fees.
All this is not to be confused with the enormous hurdles that land developers are required to jump. Apart from the essential people like surveyors, civil engineers, geotechnical engineers, roading, reticulation etc. there is a raft of additional people and processes that all contribute to a major financial blowout. As examples, consent fees, frequent Environment Court proceedings and the perceived need for lawyers’ input at many hundreds of dollars an hour, all combine to create major obstacles.
If the Resource Management Act was reformed as a prescriptive document, arguably there would not be a need for an Environment Court which would not only help to drive down costs but would remove a big percentage of doubt out of the consent application process.
A major cost factor in the consent process results from the participation of third party litigators who engage in opposing the applicants for a consent without having any personal financial interest in the outcome of the application. Of recent times, politically motivated parties have been able to interfere in the consent process, causing developers to incur greatly increased additional costs where local bodies have levied consent fees under the provisions of the RMA and when a revised plan is required following successful third party objections, the local authorities treat the matter as a new situation ab initio.
To minimise the costs of third party objections and to deter frivolous litigation, some form of financial deposit, equivalent to a resource consent application fee, should be required from a litigant unless he can satisfy the commissioners that he has a specific financial interest in neighbouring property which will be materially affected by the grant of the consent to which he is objecting.
A point worth pondering is the fact that the survey costs per lot are usually no more than the land agent’s cut but one should realise that the surveyor is with the project long before the physical work takes place and is still there long after it is finished.
Now for some big items - the 15% GST factor may not sound a lot at first glance but on a property selling at $500,000 the GST amount is $65,000. This, of course, has to be financed almost certainly from borrowed money and coupled with what are now significant local government levies, often tens of thousands, it has drastically increased the relative cost of property over the last 40 years.
Regarding the value of a property, there are two aspects: one is the true cost and the other is the dreamer’s guide to existing property values. One of the biggest faults in the whole property industry is the way in which the valuation industry has been allowed to drastically damage people’s belief in what their holding is worth. The current system of establishing a value based on what sold on the open market without the discipline of actual costs of production, has in large measure been responsible for the extreme global pain in the property market. There is only one true value – the cost of production.
It is also important to consider the cost of employment today as opposed to the recent past. ACC, PAYE, provisional tax, GST, super schemes, fringe benefit tax, accountancy fees, employment contracts etc have all but eliminated the ability of small businesses to physically, mentally and financially cope with the overwhelming requirements. In the past, small business people worked on the job for most of the day and spent half the night on planning and bookwork but the current regime not only takes up the night hours but also a considerable part of the day as well. Consequently the inability to progress financially has all but destroyed the incentive to take on the risk of providing essential amenities that city dwellers desire, reasonably priced properties.
The alternative is to employ expensive accountancy assistance, which allays some of the stress for small business operators but again puts up the cost of employment that, in many cases, makes the business uneconomic.
Now that a few examples have been identified as to why our plane can no longer fly, it is time to start on the big holes.
If GST was spread over all property sales, new and second-hand, two things would happen – one, a lot of revenue would be gathered which would be a discipline on everybody and two, the percentage of GST on all goods and services should drop considerably thus giving a fairer deal on everyday necessities.
Equally unpopular but requiring consideration is the proposition of applying a tax on money transactions. This issue is nothing new but if we are serious about trying to better balance the tax system, improving the country’s economic health and at the same time lower costs on essential items such as housing, then supplementing GST with a financial transaction tax (FTT) will have to be considered. It is interesting to note that several European Union and G20 member states are actively investigating forms of FTT.
As it is, under the current regime, and because the valuation industry does not recognise the GST content of a new development when assessing values relative to the existing older neighbourhood, distortions in the order of 15% are occurring. This situation does not encourage infill development and is another reason for the lack of activity in these residential areas. Conversely, when times are over-heated the valuation industry disregards the true value (cost of production) and repeatedly falls into the trap of simply using unrealistic inflated values as the yardstick. This nonsense has to stop. The industry must be made to accept by law that the only true value is the cost of production. Only then can we have a degree of stability in the property market.
The current practice repeatedly leads us into chaos and in many cases, financial ruin.
Moving on to another major impediment we must return to the Resource Management Act. This Act, although based on good intentions, is now rapidly choking the advancement of our country. There are many reasons why this Act must either be put through the shredder or drastically modified but the following simple example should show why it is not working. As mentioned earlier, local government staff who in the main are loyal, dedicated people, have too much influence on decision making. Their input arguably, is based on their collective or personal views of the principles of the Act. This can also be extended into the process of notifying public or affected parties of an application and often people who should be notified are left out of the process. There is also no compulsion on staff to notify the elected councillors of an application. This situation often leads to unnecessary friction between the parties and a lot more cost to all involved.
It is also disturbing to note that many of those responsible for what has become little more than an expanded employment for lawyers and so-called consultants, are currently employed in rehashing local government without focusing on the clear reasons why New Zealand is failing.
One solution might be to study the Scandinavian example which apparently has a clear prescribed set of rules. They set the bar high but you can clearly see how high you will have to jump. In New Zealand we have allowed the controlling authorities to raise the bar just as we are gathering speed down the high-jump approach. In other words, the Act allows for too much interpretation and power by staff to impose their opinions based on ideology rather than what used to be a prescribed set of rules.
As it stands only the naïve or first time developers will provide excuses for the present system to continue. It is bordering on being imperative that the RMA be redeveloped into a prescriptive document that applicants can have confidence in as far as a clear pathway through the procedure is concerned.
Another major impediment is the fact that local government is permitted to compete, often on a subsidised basis, with the private sector. This practice of local body enterprise backed by the limitless resources of the ratepayers is totally unacceptable and inexcusable.
The very private sector that currently provides substantial revenue to local government is being penalised when ratepayer finance is used against them. Quite often they are eliminated from the process by subsidised and unfair competition from the local authority. Internet cafes are a good example but they are not the only ones. This objectionable practice ranges from the above small example to major subdivisions and we wonder why things are not firing.
Another concern involves the Reserve Bank. Historically this department of the State has all too often used Auckland as the yardstick for regulating the money supply or more particularly, the cost of borrowing. Often Auckland is out of synchronisation with the rest of the country and when its economy needs cooling, the Reserve Bank all too frequently increases the cost of borrowing to the gross detriment of the primary sectors of New Zealand. Auckland is big but its importance as an export earner per capita is minor and must be viewed accordingly.
Now that we have drilled some of the big holes needed to give New Zealand a chance to fly, we should return our attention to where we started.
Can anyone claim to justify a reason why the state service heads of departments, local government CEO’s and a huge raft of highly paid academics, including the Treaty settlement industry, all with little to no physical or financial risk in their employment, are entitled to incomes that are frequently way above the primary providers of the revenue? These providers of course are those in private business who risk everything physically and financially, often failing in their endeavours but who are conditioned to believe that their servants in the public service are worth more than them. There is something mighty wrong here.
The problem does not start or stop at the civil service door. There are many in the private sector, ancillary to the producers, that are on astronomical incomes compared to those trying to provide the basics for society. People in the production sector carrying large financial risks, never see anything like service sector incomes but the cost of the ancillary services have an effect on the ultimate cost of the new home.
Perhaps not such a small hole that could be drilled is the culture in this country for most new homes built in recent times to be of individual designs. This situation has given us an extraordinarily high standard and a pleasure to see but it is very expensive compared to volume building. The one big drawback to volume building is the need for a great deal of flat land, land that arguably needs retaining for other essentials.
Speaking of land, it is often stated that local government needs to free up land for urban development with the view to drive section prices down. Although this sentiment is worthy of consideration, the fact is that the bare land value of a completed site would be no more than 10%. However it could be classified as a small hole.
It is appropriate at this time to point out that one of the main reasons for price rises in Canterbury is not so much a heated market, but the need to upgrade some of the standards that have been responsible for much of the recent destruction. As an example, the “Acceptable Solutions” clause in the building code permits the exclusion of reinforcing from floor slabs and provides a good reason for looking at what has become a very complex and time-consuming document.
In conclusion, it is often said that “out of chaos comes order” as is the case in Canterbury and as painful as it has been to watch the plight of the people, there is a slow realisation for changing the culture of over-regulation on what could be termed frivolous items to the extent that protocol designed for the convenience of employment opportunities in the civil service have been responsible for considerable community anguish.
Whether any of the above points are acceptable or not is up to the reader but there is one thing certain – if we want to do more than sit on our butts all day in court rooms or just taxi around the runway, we will have to change our ways.
Society also has to wean itself off the belief that bureaucratic structures will guarantee individual or collective protection. Not only is this attitude corrosive to society, the costs involved in many cases have both direct and indirect effects on building a new house.
Secretary/Treasurer, Nelson Residents' Association Incorporated
Appendices relating to actual costs of Development in Nelson Region:
- 1.Hillside Development on “Challenging Sites”
- 2.Average Section Development on Flat Land
- 3.Development Costs for 80 Sites in 1993 (Walters Bluff Subdivision)
Hillside Development of Challenging Sites
Cost Breakdown as Follows:
Earthworks (including all engineering, geological and geotechnical physical works)
Land 5,000.00 max
Reserves fund and development levies 28,000.00
Cabling - Power, telephone, computer etc. 4,800.00
Administration (project management, accounting etc.) 4,800.00
Land Agent (Incl. GST) 5,300.00
The above amount excludes the cost of borrowed finance.
NOTE: The inclusion of GST in the Land Agent’s fee is to identify that they are charging commission and GST on the GST content of $24,500.