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Funding a fair deal

Published: 23 August 2017

When councils or central government announce new policies or build infrastructure it can add thousands of dollars in increased value to the properties that benefit.

But is it fair that a property owner who benefits from the rise in property value should expect the infrastructure that underpins that price rise to be funded by others? 

In the latest Auckland Economic Quarterly (PDF), Auckland Council’s Chief Economist David Norman looks at how a value capture model could work as one way to find the money for the infrastructure Auckland desperately needs.

Beneficiary pays

“The idea of value capture is pretty simple. New or improved infrastructure or changes in council polices can provide windfall gains for property values,” says Mr Norman.

“For example, the Auckland Unitary Plan significantly increased the number of homes that can be built on thousands of sections, increasing the value of many properties across the city.

“The value gains of these properties assume that when the owner builds more houses on those properties that infrastructure such as roads, public transport, water and local sports fields will already be provided. But delivering all the infrastructure and services needed costs a lot of money.

"Many people would probably think the general ratepayer should not have to fund infrastructure that benefits a specific property owner.

“Rather, property owners who benefit from a policy change or new infrastructure should pay a proportionate share toward the cost of that change. In economics this is the beneficiary pays principle.

An existing precedent

“In New Zealand the primary tool local government has to capture value is by applying a targeted rate on properties that benefit.

“Auckland Council’s local boards can charge targeted rates to pay for infrastructure that benefits local residents such as community swimming pools and Auckland’s CBD businesses pay a target rate to upgrade and develop the city centre that results in more visitors and potential customers.

“Outside of Auckland, the Wellington Regional Stadium is funded by a targeted rate on households and businesses that diminishes with distance from the stadium.” 

How a value capture model could work

“An example of where a beneficiary pays approach could work in Auckland is the City Rail Link.

"Once it begins operating in 2023, extra trains will be required to provide increased speed and frequency of services and to move double the number of existing passengers.

“The extra trains will contribute to increased property values, with people paying more to live near train stations because of how much quicker and easier it will be to access other parts of the city by train. And businesses will also benefit from easier and quicker access and more foot traffic.  

“This increase in property value is a private benefit that would otherwise be paid for by all ratepayers. 

“So a strong argument could be made for funding these extra trains from a targeted rate on those who benefit most – property owners within walking distance of existing and new stations.

“A further benefit of a targeted rate is that it can be levied over many years. This reduces the burden on those who benefit in any one year, and spreads the costs inter-generationally across those who will continue to benefit from the service for many years.”

The full report

Click here to read the full Auckland Economic Quarterly (PDF) including this quarter’s commentary on Auckland’s performance across key economic indicators and where the economy is headed.

You can also learn more about the Chief Economist Unit and sign up here to have the Auckland Economic Quarterly sent to you by email.

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