Local infrastructure funding model may adversely affect housing supply and reduce affordability

Released today, Developer Contributions: How should we pay for new local infrastructure? compares developer contribution policies across states and territories, exploring scope, timeliness, transparency, policy design and funding considerations.

NHFIC draws on case studies and shows developer contributions typically account for around 8 to 11 per cent of total home construction costs, amounting to as much as $85,000 per dwelling in New South Wales, $77,000 in Victoria, and $42,000 in Queensland.

Developer contributions are increasingly being used to fund social infrastructure like schools and hospitals, areas typically funded by state budgets, in addition to essential housing-related infrastructure like water and drainage, according to NHFIC.

NHFIC’s government and industry consultation suggests developer contributions can be highly variable and unpredictable, which can lead to unanticipated costs throughout the development process affecting margins and impeding new housing supply.

Increasing expectations of good quality local amenity, rapid population growth and funding constraints such as municipal rate caps and an aversion to borrowing have left local governments struggling to keep up with the demand for public infrastructure and services, NHFIC found.

Meanwhile, some councils (analysed over the last four years) raised more revenue through developer contributions than was deployed to new local infrastructure in a timely way, the research noted.

NHFIC Chief Executive Nathan Dal Bon said that over time the cost of funding local infrastructure had shifted from state governments and local councils to new home buyers, potentially adding to the cost of homes in greenfield developments and affecting new housing supply.

"The expanding scope of developer contributions increasingly act like a tax on new housing, which can impede new housing supply and reduce housing affordability for buyers and renters," Mr Dal Bon said.

The research also notes that a lack of comparable and detailed data on developer contributions at a state level, is impeding proper policy evaluation. Only three states in Australia – NSW, VIC, and QLD – have modest reporting requirements, while some other states have no reporting requirements.

The paper found that greater transparency on how developer contributions have changed over time, how they are collected and the timeliness in which they are spent is needed to build confidence in the system.