Estimating Costs

Growth boundaries, land use zones and specific development controls, have indirect costs for housing development, as they interact with the value of land and the costs of land acquisition and of new housing production. There is also a series of direct costs and charges which range from administrative fees (and the fees required for consultancy reports and professionals) for the application process through to contributions made to the planning and/or infrastructure authority for the provision of shared public facilities and services. Sometimes, these contributions include affordable housing. The time taken to secure project approval (through to the completion of the project and the issuing of a final certificate to enable occupation) also represents ‘holding costs’—in essence the interest paid (or foregone) on the project’s finance.

Developer contributions towards shared infrastructure and other services (often called ‘impact fees’ in the USA, and ‘planning gain’ in the UK) have attracted particular scrutiny in the literature, particularly in the USA. In theory, known costs—such as development contributions towards community facilities and infrastructure—are able to be ‘pushed back’ to the landowner, since they are factored into feasibility appraisal which determines the bid value of land. The extent to which the other regulatory costs associated with development are able to be factored into land acquisition decisions depends on the extent to which the planning process offers predictability or certainty, and the level of competition between other potential land purchasers. It also depends upon the overall profitability of housing development and the implicit level of land values resulting, compared with the value of land in existing uses and the willingness of landowners to sell.

Most studies imply that, although compulsory infrastructure contributions represent a cost of producing housing along with other planning requirements, the extent of this impact on final house prices depends on the market at the time (Evans-Cowley and Lawhon 2003; Gurran et al. 2009). It could be argued for instance, that under strong market conditions, price premiums will be charged irrespective of the level of compulsory contributions towards local facilities. In a buoyant market, it is easier to pass compulsory costs forward to buyers, which is what developers will try to do if these extra costs are imposed after they have bought the land, but it is equally likely that buyers will value the amenity and infrastructure provided.

Concerns arise in slow housing markets over the viability of heavy contribution regimes. Local authorities wishing to encourage regeneration of areas with weaker markets are likely to waive contributions as a form of subsidy to encourage development activity. Like the other categories of planning control outlined earlier, the effects of contributions are likely to vary according to the ways in which they are imposed. For instance, a levy which is calculated as a proportion of capital investment value should in theory have little impact on the overall viability of development, nor is the levy likely to influence the type or quantity of housing produced. By contrast, a high flat rate levy applied to individual dwellings may discourage housing production, or perversely, encourage the production of fewer, larger homes, with higher profit margins, since the regulatory tax becomes a smaller proportion of the total development cost. On the other hand, if levies are attached to land area, in theory the most efficient use of the land will be encouraged, since levies will be a smaller proportion of costs for more intense, profitable development.

Development contributions can therefore have implications for the design and quantity of housing in ways that are different from the impacts of land use controls described earlier. As well as influencing developer behaviour, it is likely that contribution requirements may also influence landholders as well, who may be unwilling to sell their land for development if the contribution regime reduces the value of the land significantly below their expectations. It is essential to have a long-term policy commitment and stable contribution regime to avoid this problem, but behind-the-scenes lobbying by both developer and landowner interests may undermine these efforts. Finally, it is important to note that when development contributions fund essential infrastructure, it is likely that the contribution supports development that might not otherwise occur (Burge and Ihlanfeldt 2006). Therefore, development contributions may increase housing supply but also increase house prices as infrastructure is capitalised into home values.

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