Brian Fallow: Building more houses - it's one step forward ...

In fast-growing cities like Auckland, debt makes it difficult for the council to fund the infrastructure for new housing. Photo / Dean Purcell

On December 12, two things happened in Wellington relevant to Auckland's housing crisis — one positive, the other not so much.

The Government introduced to Parliament the Infrastructure Funding and Financing Bill, which aims to facilitate the use of special purpose vehicles (SPVs) to fund infrastructure for housing projects, on the model used for the Milldale development north of Auckland. And that would not only be for greenfields projects, but for brownfield developments too.

On this model the SPV raises debt which is not on the balance sheet of local (or central) government and which is serviced and repaid from levies charged, over and above normal rates, on the properties served by the infrastructure so funded.

That legislation, if it passes, would be progress for fast-growing cities whose councils, like Auckland's, are bumping up against debt limits.

The same day, the Productivity Commission released the final report on its inquiry into local government funding and financing.

The reaction of Local Government New Zealand, the local authorities' national body, was scathing. It is easy to see why. The report is so conservative that it is liable to be seen as a recipe for stasis and inertia.

The commission concludes that local authorities already have all the funding options they need, though they may need to make better use of some of them. It says they should be wary of schemes to peel off some of the revenue that central government levies, like GST, as this is likely to come with strings attached which would undermine councils' flexibility, autonomy and accountability.

On what it acknowledges is the serious problem of the failure of high-growth councils to supply enough infrastructure to meet housing demand, it says: "Councils have funding and financing tools to make growth pay for itself over time, but debt limits and the perception that growth is not self-supporting are significant barriers."

To be fair, the commission has backed the special purpose vehicle model.

And it continues to advocate, as it has in previous reviews, a system of value capture where existing property owners who derive a windfall gain from council investment in infrastructure help pay for it. "One way of applying value capture that would be feasible, efficient and fair is to enable councils to levy targeted rates on changes in land values. This would require a change in legislation." The Government, it notes sourly, has so far not responded to the commission's recommendation.

But the commission rejects, on balance, the proposal for central government to provide a pot of money to be divided among councils on the basis of building work put in place in their respective territories. These statistics are already compiled.

"The effectiveness of such payments to incentivise councils to facilitate development is too uncertain, given currently available evidence, to justify recommending them," it says.

Taxing vacant land would ... probably increase costs and slow housing supply. This is the opposite of what New Zealand needs.

The Productivity Commission

The commission has also, unsurprisingly given its prior comments, rejected the idea of a tax on vacant land, intended to discourage profiteering from land banking.

Vacant land is a necessary intermediate stage in a complex process that starts with rural or brownfield land and ends with new occupied houses on developed land, it says.

"Taxing vacant land would impose an additional tax on this process and would likely impair developer flexibility and risk-taking. It would probably increase costs and slow housing supply. This is the opposite of what New Zealand needs."

It worries about the difficulty of distinguishing legitimate from harmful holdings of vacant land, as a result of which the administrative costs of vacant land taxes are likely to be a high percentage of the revenue raised.

It says the evidence indicates ownership of vacant land suitable for development is not concentrated enough on the outskirts of New Zealand cities to cause problems from the owners using market power to restrict supply and push up prices.

The commission's thumbs down is not necessarily the end of the matter, however.

Back last April, when the Government killed off the idea of a capital gains tax, it not only directed the commission to consider vacant land taxes in its inquiry but also said it would include a review of the current rules for taxing "land speculators" in its normal tax policy work programme as a high priority.

The commission considered and rejected the idea of a system of local property taxes used in some US jurisdictions. Under this system property tax rates are set as a fixed percentage of the value of property within the local authority's jurisdiction.

The idea is that if property values generally increase across a jurisdiction, then the council would automatically gather more revenue. New houses and businesses in an area, as its population grows, would also increase revenue automatically.

The level of revenue would determine the amount a council can spend, rather than councils having to first decide on expenditure and then set rates to cover this spending, as under the current system.

However the commission concluded that this system would risk generating either too much or too little revenue, because property prices can grow strongly over extended periods for reasons unrelated to the quality and quantity of local amenities, and sometimes they can drop quite sharply. They would not, therefore, be a panacea for aligning the incentives of existing voters and property owners with socially desirable growth in dwellings.

"Given that property prices in New Zealand have been neither stable nor predictable, property tax revenues would not be either, and this would be undesirable."

The Productivity Commissions' inquiry, and final report, were not just about the issue of infrastructure impediments to housing supply. It also considers issues arising from the need to adapt to climate change, pressures arising from tourism and the legacy of neglect of three waters infrastructure.

But on that most pressing issue, Local Government NZ president Dave Cull is clearly right to point to the political economy problems of the status quo, that the commission largely endorses.

"We are not calling for rates to be scrapped, but for this mainstay of local government funding to be augmented with revenue tools that give communities a clear reason to vote for pro-growth initiatives," he said.

"Until we tackle the political incentives at the ballot box created by the rates system, New Zealand's infrastructure will continue to fall behind."