Who’s To Blame For The Rising Cost Of Property? (Column)

Olly Newland’s column May 2012

Almost on a daily basis websites are full of angry people accusing ‘speculators’ of ramping up the price of property — supposedly pushing it out of reach for ‘the poor’ and first home buyers.

'The Tax Gatherer' 1540 - Marinus Van Reymerswaele (click to enlarge)

‘Bring in a Capital Gains Tax!’ is the cry, or there are calls to ‘restrict’ lending for property purchases, or to ‘punish’ investors by removing tax advantages, or to flood the market with more undeveloped land. Some even want the government to tax gains that have not even been realised.

This cacophony of shrill envy aimed towards property investors is almost exclusively driven by those who cannot comprehend this market reality: where someone has actually taken the plunge, bought a property of some kind and then — whether immediately or over time — made a profit.

However let me tell you that it’s not ‘speculators’ who are driving up the price of property. Indeed, they are more likely driving *down* the price of property! For speculators can only really thrive by fierce haggling in order to buy at bargain prices.

No, the real culprits who are driving up prices are the Local authorities: Councils and quasi-council organisations and all their hanger-ons whose habit of profligate spending requires ever more income. As a consequence, outrageous charges have to foisted on the consumer in order to keep the money rolling in.

The public is more openly critical than ever. Mini ‘revolutions’ have already started. They will get more frequent no doubt, especially in these straightened times.

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The profligacy of local Councils, especially the Auckland Council, is a hot topic and frequently discussed. It seems that when Council can’t take money directly from its ratepayers’ wallets, it borrows on their behalf … so that spending can go on forever. Never mind how it gets paid.

Auckland Council rating under pressure

Let me give you an example of what the charges are just to build a house in the Auckland area. You will see by this exercise that the taxes and charges imposed add a huge amount to the final cost.

A builder friend of mine recently completed a development — a nice property, somewhat better than a group-house box, but not a mansion either.

The charges he had to meet (and pass on in the price!) included:

  • Building consent $10,000
  • Resource consent $5,000
  • Storm water approval $2,500
  • Compulsory inspections $15,000
  • Crossing permit $500
  • Water meter $5,000 (actual cost of meter: $400)

On top of all that, the Council decreed compulsory double glazing, stainless steal nails, extra and approximately another $20,000 in sundry charges as inspectors and engineers visited and revisited the site many times and often with overlapping and conflicting demands.

In addition, all the slab, excavations, retaining walls and bracing were inspected twice and he was double-charged and often treble-charged as a result of a new regime in the latest building code.

All these charges added at least an extra $100,000 to the building costs — to which, naturally, must be added the developer’s margin, and the ubiquitous GST impost of 15% which added many tens of thousands of dollars on top of all the rest.

My developer friend said that if the charges and taxes were set a fair and reasonable levels, the property could have been sold for an estimated 25% less (!) and still have left him a fair margin for the 12 months’ arduous work he put into it. (Not to mention the risk to his capital.)

From this exercise, which is repeated up and down the country, it is no wonder that developers are unable to build more affordable houses. The costs are just too great for the meagre margin they can earn for their time, trouble and risk. This is the true reason building consents have slowed to a crawl, and why there are bun-fights between buyers breaking out all over the place as people try to bid against each other for existing homes — and hence drive up prices.

The rabble who cry for punishment for those who “profit from property” should turn their misguided anger towards the bureaucrats who ramp up prices — via massive charges and wasteful projects designed to massage their egos with little regard to the consequences. Their actions, more than anyone else’s, push property prices out of the reach of the those who who like to own a small piece of paradise they can call their own.

Big fees for little service

Here is another example of how out-of-control charges can and do drive up prices and building costs. I was asked to look at a small development overseen by a hard working team of volunteers for a registered charity.

The charity owned an almost derelict homestead on a site, together with an existing small modern building that needed extending. The dedicated staff and management believed in their mission with great zeal.

For decades the charity had scraped and saved its pennies for this project. Cake stalks, sausage sizzles, fund-raising functions of all kinds were held — and slowly these efforts built up and came to fruition on a magical day when enough was in the kitty to actually make the dream come true.

Everything went according plan and recently the building was finally completed. Money was tight, as you can imagine, so it came as a bombshell when WaterCare sent a massive bill for more than $19,000 simply to check the connection. This one bill alone would swallow up the fruits of scores of cake stalls and fund-raising efforts over many years.

What is extraordinary is the fact that the site used for the new development already had a water meter — plus all the piping installed which supplied the old homestead that had been been removed from the site.

Read all about it. PDF 400 KB

So what was this massive WaterCare bill actually for?

WaterCare had to do nothing. They needed to supply no new equipment, they checked nothing, fixed nothing. All that would happen is the existing water meter would turn faster and WaterCare would be able to charge more for what it supplied in the future. Surely this was just a mistake? Surely no one would charge $19,000 and provide nothing in return?

According to WaterCare’s website these charges are created to cover the costs to provide the infrastructure, with the clear understanding (to me anyway) that new developments such as housing estates which required a large investment in new pipes, engineering, earthworks etc, should pay towards them … which seems almost understandable (see their ‘Infrastructure Growth Charge’ pamphlet – 400KB PDF).

The charity sent a polite letter to WaterCare seeking a remission of all or part of the charge in light of the fact that nothing had been or needed to be supplied and consequently little or nothing should be charged.

The response came back in typical bureaucratic double-speak from one of WaterCare’s Chief Officers:

“WaterCare is a minimum cost provider of water service. As a consequence it is a non-profit making organisation. Our charges directly reflect the cost of the services provided. The infrastructure Growth Charge for (address) reflects a portion of the increased cost of managing the extra demand your development places on the system. If we were to reduce our (charges) the cost of water would need to increase. This would mean that existing customers would unfairly fund new developments. Given the above we cannot change our charging methodology or make case by case exceptions irrespective of the reason for any development.”

Nonsense! It is obvious that the letter was self-righteous pre-written template designed to ward off pesky complaints. It was an excuse to cover the fact that in this case, NO services had been provided, no management had been needed (other than checking the meter), no significant extra demands were placed on the system, no charge to existing customers existed, and no unfair costs for funding had arisen.

In other words, WaterCare’s charge is a crude but simple tax. Unlike other taxes, however, it is not graded or designed to fit the income and budget of the individual taxpayer.

At this rate some serious thought might be given by many to obtaining a regular supply of water the simple way — by installing tanks to collect the abundant rain water that we are blessed with in Auckland. Maybe the time has come for the return of the old system of collecting water off the roof and aiming to become self sufficient, free from unwarranted and expensive controls. The problem is that WaterCare has no competition. It is a monopoly that can charge what it likes. Its officers and directors are not elected but are only accountable to its masters — the Auckland Council.

Just to be sure who is in charge here note that WaterCare has on issue some 260,693,164 shares and every single one of them is owned by the Auckland Council.In this manner the Council has used sleight of hand to divest itself of accountability so that WaterCare does not have to answer to the voters for its actions at every election. This one example demonstrates how a local bureaucracy can impose unnecessarily high costs, while remaining totally unaccountable to the people.

It also demonstrates quite clearly why building reasonable priced houses is a dying business. It simply does not pay to build reasonably priced houses when the layers of costs payable to the faceless bureaucrats mount up in ever increasing numbers- plus of course GST which is a tax plonked on top of every other tax.

Those who are baying for blood from ‘property speculators’ should think again and come to realise that they should be directing their wrath toward those who really are to blame. Reading the above it shouldn’t be hard to work out who they are.

Olly Newland
May 2012
www.ollynewland.co.nz
© 2012 Olly Newland. All rights reserved.

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One thought on “Who’s To Blame For The Rising Cost Of Property? (Column)

  1. Pingback: Can house prices be controlled? (Column) | Olly Newland

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