Developers and Councils are waiting anxiously on the State Government to announce its reforms of infrastructure charges, which Councils impose on developers of new housing estates.  These charges result in higher new home prices, as developers pass these charges on to new home buyers.

Infrastructure charges enable Councils (and their water businesses) to fund essential infrastructure for the new housing development, including public transport, local roads into and out of the development, and water and sewerage pumping stations and trunk mains – i.e. the major pipes into and out of the development.

The November 2010 Infrastructure Charges Taskforce Interim Consultation Report (available here) recommended capping infrastructure charges at between $20,000 to $30,000 per new house.  Councils aren’t happy with this recommendation as often the costs of infrastructure exceed $20,000 to $30,000 per house.  The Local Government Association of Queensland (LGAQ) has made the fair and logical point that, if Councils can’t recover their costs through infrastructure charges, they will have to put rates up:

LGAQ warns of rate hikes

Arguably, this would be inequitable as the cost of new developments, which benefit new residents, would be partially borne by existing residents of the Council area who don’t live in the new housing development.

Furthermore, from an economic efficiency point of view, it makes sense to charge developers – and ultimately new home buyers – the full costs they are imposing on Councils.  Otherwise they may expand development beyond the level that is socially beneficial.  This is because part of the additional infrastructure costs would be borne by existing residents rather than new homebuyers.  This means new homebuyers would pay lower prices than they otherwise would (i.e. taking into account the full costs of additional development), and hence demand for new homes in the development would be higher than is optimal.

Regardless of the compelling economic logic behind infrastructure charges, there are calls to drastically cut these charges even further – i.e. to below the proposed $20,000 to $30,000 cap – with a view to stimulating the construction sector:

Housing market needs intervention

But this would be to use the microeconomic tool of infrastructure charges, which are designed to promote efficient levels of housing development over the long-term, to deal with a short-term macroeconomic slowdown in the housing sector, which is likely to right itself once the broader economy gets moving again.  Hence the Government would be well advised to ignore this call.

On the $20,000 to $30,000 cap, the Taskforce is correct to seek greater certainty in developer charges and a cap is one way of achieving this.  According to some commentators, uncertainty over infrastructure charges has led to delays in housing developments.  Hence, there is some merit in considering a cap.  However, the Taskforce needs to consult extensively with major Councils to determine whether the proposed range for the cap is too low (and regarding the appropriate periodic escalation factor for the charges).  Hopefully it is doing just that as it prepares its final report for the Government.