By Oliver Hartwich*
There can be little doubt that New Zealand house prices, particularly in Auckland, have reached eye-watering heights.
This week it was reported that capital valuations in Auckland have risen 33 percent over the past three years.
Aucklanders already under pressure from lack of affordable housing must now worry that council rates, which are based on valuations, will also climb sky-high.
Such fears are unfounded, as Auckland Mayor Len Brown was quick to reassure ratepayers. His promise to restrict rate rises to just 2.5 percent may be ambitious but achievable.
However, this points to a common misunderstanding about the way the rates system works.
And it also shows what is wrong with relying on rates to fund local government.
The public often believes that rates are directly linked to property prices so that when houses prices rise the council increases its budget. That is only partly true: your share of the total ratings bill depends on your property’s value relative to other properties.
But total rates revenue is determined by the council in advance and then broken down to ratepayers according to the values of their properties.
What sounds like a technicality has implications for a council’s behaviour.
Because the total rates revenue is set independently of property prices or indeed the number of ratepayers, let alone figures relating to business activity, residential growth or income generated, councils do not have any financial incentives to pay attention to any of these matters. The budget will not be much affected regardless of whether the city is doing well.
The current local government finance system might in fact incentivise a council against development.
Extra residential or business development typically costs councils money as they have to provide additional infrastructure and services to make it happen.
Meanwhile, the benefits for councils are at best indirect and at worst non-existent.
Although there is no direct link between house prices and total rates revenue, higher house prices do make it easier for councils to justify overall rates increases. At least fast rising property prices make rates appear smaller in relation.
In this way, there is no good reason for councils to care for housing affordability.
To correct for this situation, what would be needed is a local government finance system that rewards councils that go for growth and punish those that inhibit development.
Our current rates system achieves the opposite – and that is what is wrong with rates.
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*Dr Oliver Hartwich is the executive director of the New Zealand Initiative.
10 Comments
Don't confuse demographic growth and economic growth. Don't forget that 18 of NZ's 68 territorial districts have experienced population declines over the last five years even as the Auckland-Hamilton corridor and Greater Christchurch have grown comparatively rapidly.
Councils in growing areas have to deal with growth whether they want to or not. The question is how.
DOES, Oliver, not "might" incentivise councils against development.
A quick summary of many of the things I have been saying here for the last few years:
1. Councils are institutions that provide public goods to their communtiies but they are not the communities themselves. What is good for a council is not necessarily good for their community.
2. There has been a major power shift from politicians to staff since the Reorganisation of Local Government (1989), so politicians now have very few, if any, opportunities to do anything noteworthy while in office. Their role is way more like trustees than politicians.
3. The re-election game for politicians is to make sure nothing goes wrong. Once they have got in the chances of being perpetually re-elected rest on the council not cocking up.
4. The career game for staff (especially managers at all levels) is also to make sure nothing goes wrong. That keeps elected members quiet.
5. The main source of things going wrong is development. Councils have money from rates to replace an ageing pipe; they don't have rates money to extend the pipeline to a new subdivision. Raising that money via rates counts as a cock-up.
6. Development contributions kind of fill that funding hole but not well enough which leads to councils being strongly incentivised to aggregate development into specific areas (that's zones or outline development areas to you) or just outright resist it.
7. Please don't repeat the fallacy that new ratepayers are a new stream of income so extending infrastructure is an investment that pays for itself over time. Councils budget to break even - i.e they raise just enough revenue to cover expenses but they don't generate income/profit. Seen in that light, development is a pain in the ass not a benefit to a council.
Oliver is absolutely right that the way councils raise revenue takes away any incentive to do anything other than tread a cautious path that is more about protecting their own interests rather than improving their community.
Fully agree, and add to that excellent summary, a few more field obs:
- Council staff (generalising wildly) have zero to minimal commercial experience, so cannot begin to comprehend such basics as time=money, the importance of business continuity, the assessment of business risk, and the need to watch debtors and cash-flow like the proverbial hawk.
- Council staff have few revenue responsibilties (budgets are mainly expense-focussed), zero cash-flow or debtor responsibilities, and are in general almost totally insulated from the revenue generation side of the institution. Their revenue can be pencilled in on Day 1 of the fiscal year, and be guaranteed to arrive without any futher action on their part. But see below for an exception...
- Council staff therefore have no comprehension of the business issues that issue from the injection of time, the arbitrariness of officer decisions, and the opaqueness of policy. The external (customer) business results (failure, costs, delay, deferment) are likewise not officers' concern: the officers are totally insulated from these consequences.
- Needless to say, no customer-experience is logged, rendered statistically, or measured in any menaingful way. Such surveys as are done tend to the happy-clappy, 'did youse enjoy all a them Buskers?' variety.
- Council staff have strong unions and an entrenched, patch-preserving culture. Culture change in this sort of environment is perhaps the most challenging task a CEO will ever attempt. Most cannot, or just don't. It's easier.
- Where, however, a fiscally-neutral activity is concerned (revenue generated must equal expenses), an alternate corporate personality emerges. It is intensely focussed on recoveries of time spent, and on scale and quantum of fees payable for any chargeable activity. This culture has great difficulty with notions of revenue equity (fixed costs bear hardest on the poor), has no concern about the business viability of its customers (so will charge them until they fold), and regards challenges to its fees and T&C's as existential. Hence the 'lawyer-up' reactions one so often sees. Planning and consenting is such an area - to all of our detriment.
While there may still be some people in NZ who are not sure whether there is a problem with local government I think it is time we moved the conversation on to developing policies to fix the problems.
One thing is certain: passing legislation and hoping councils do the "right" thing has proven a comprehensive failure over the last ten years or so. We need something bolder.
One policy direction would involve "backloading" development costs - basically debt-fund new infrastructure and get rid of development contributions. It would lower new section costs but would raise annual rates/charges. Depending on how it was implemented this would still mean current ratepayers not having to stump up while avoiding some of the worst impacts on new house prices of development contribution charges.
However, in my opinion the sector is way too broken to tweak. Major structural change is inevitable and infrastructure funding would likely just get swept up in the other changes.
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