‘Who pays to make water flow uphill?’ is one of the key causes of Australia’s housing shortage. The cost of providing infrastructure and, more importantly, who pays for this infrastructure is critical to the price of land to the household and the shortage of housing in Australia.

Lowering the cost of delivering new homes is essential to increasing the supply. The more expensive homes become either through the price of land, building costs or taxes; the fewer new homes that will be built. One mechanism through which governments have made homes increasingly expensive, is an increasingly complex and taxed system to produce new land for home building.

The cost of farm (undeveloped) land is only a small portion of the price to bring a shovel-ready block of residential land to market. Most fees are incurred in developing the farmland, such as engaging with the local council to achieve rezoning and subdivision approval, building the blocks, implementing infrastructure, as well as the financial burden of holding that land through this process.

Work undertaken by CIE in 2019 concluded that government taxes, fees and charges add up to up to half of the cost of a new house and land package in Sydney.

Who pays the price?

Before the 1980s, the majority or all the infrastructure cost was provided through a partnership between state-owned infrastructure agencies and land developers. From the 1990s, the cost of building this infrastructure was transferred to focus the majority, if not all, onto the developer. The costs may fall on developers, but ultimately, the price is almost entirely passed on to the homebuyer.

As this cost was transferred to the new homebuyer, the price of land escalated, and an increasing number of homebuyers were forced out of the new detached home market (and apartments), contributing to the undersupply of homes. The more expensive new homes become, the fewer new homes will be built.

Transferring infrastructure construction costs onto homebuyers also ignores the public advantage created by building improved infrastructure, which benefits all taxpayers. Regardless, state and territory governments pressed on.

The true cost

In recent decades, governments have moved even further. The infrastructure provision is now considered the responsibility of the land developer, and hence, the full impost is passed to the new homebuyer. This transfer of the cost of providing infrastructure from consolidated revenue in the 1980s to a ‘user pays’ system wasn’t the end of this journey.

Then comes the sting. A series of cascading taxes are then applied to the cost of building broader public infrastructure from which new and existing homes will benefit. They go by different names: development levies, development charges, developer fees, etc. 

When applied early in the development phase, they become embedded and subject to charges, culminating with stamp duty and GST. The more revenue governments raise from taxes on new home building, the more expensive new homes become, and the fewer homes are built.

But wait, they still haven’t finished. In recent years, some state governments and local councils have moved beyond imposing these taxes just for the upfront cost of this infrastructure on the buyer of new land.

The cost of maintaining and operating critical infrastructure in NSW, such as roads, open space and public facilities, can also be included in these development levies.

Sharing the burden

These types of taxes are also hit by a series of taxes that benefit state governments. The combination of a move away from consolidated government revenue-funded infrastructure to an impost on the household that purchases a new block of land, including all the cascading taxes, is among the key causes of a shortage of home supply over recent decades. 

As governments make land more expensive, they effectively reduce the supply of new homes and work against the problem they seek to solve – making all housing more affordable.

While this article outlines the history of greenfield development, the same structural failures occur in brownfield developments. The constraints on the supply of residential land are not the only causes of a shortage of housing in Australia, but they’re a significant contributor.

However, not all state governments are the same. In June 2024, the South Australian Government released its Housing Roadmap and commitment to clear and transparent information through a land supply dashboard that includes tracking of infrastructure provision.

This consists of a plan to ‘share’ responsibility for funding the provision of water infrastructure across government, existing water users and developers (the cost of which is transferred to land purchasers). This approach in South Australia contrasts with other states that have repealed their obligations by imposing the cost of public goods on individual households.

This sharing of the burden of ‘making water flow uphill’ and allowing competition for the provision of construction will ensure the delivery of more land for home building and, over time, increase the supply of homes in South Australia.

As Premier Peter Malinauskas stated, ‘Where the capital goes, the homes go, the people go, the jobs flow.’ 

First published 27 September 2024