The Centre for Resource Management studies

Director, Owen McShane

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Media release (immediate) 

29 May 2008

Local Government Policies Ensure We are in for a Long Recession.  

"Local Government policies have caused the housing bubble which has now burst and thrown the New Zealand economy into recession," said Owen McShane, Director of the Centre for Resource Management Studies today. "Unless our Local Councils change their policies, and their general attitude to those who drive growth and development, it will be difficult for New Zealand to enjoy economic recovery even when other countries gain confidence and leave this recession behind them," he continued.

Mr. McShane points out that those local councils, here and around the world, that adopted Smart Growth or other policies which constrain the supply of land and promote high compliance costs, are largely (indeed almost entirely) responsible for the housing bubbles which have afflicted so many markets in the UK, the US, Canada, Australia and New Zealand. Consequently, those local governments and their agencies are equally responsible for the bursting of the bubble and the consequent damage to the financial sector, and of course to the dreams of millions of families who risk of losing their homes or their life savings.

"One would think they would have learned from this experience and accepted responsibility for the outcomes and would now be doing whatever they can to ease the pain and encourage a prompt recovery," he said.

"One would be wrong. An economy in recession depends on a flexible and responsive economy to allow people to begin to re-invest in their future as soon as they recover from their loss of confidence. Consequently, Councils here and elsewhere must reverse their policies and do everything they can to increase the supply of land and reduce compliance costs so that people do not need to take out a mortgage just to pay the costs of "manufacturing" a new lot, or of getting a new building consent. In cities and districts throughout New Zealand the costs of application, of consultants reports, of peer reviews, of reserve contributions, of roading and development contributions, and of testing and monitoring, typically add up to over $50,000 a residential lot. Many Councils want these fees, charges and contributions paid up-front, either on granting of consent, or prior to issuing any title, rather than out of sales.

"It is difficult to see why applicants should pay for a roading contribution before anyone has occupied the site and begun to generated any traffic. No other enterprise regards new customers as a cost centre to be 'fined' rather than as an ongoing source of revenue," said Mr. McShane, "and if they did, they would soon be out of business." 

"Bubbles encourage bad habits" said Mr McShane, pointing out that during the boom times, local governments came to regard applications for subdivision and use of land as bountiful and milkable cash cows, confident that applicants would pay the costs to get their proposals to the market. Similarly banks and finance institutions would fund these demands because assets were gaining in value by the day and appeared to offer solid security. Throughout New Zealand, rapidly inflating property markets were described as 'strong' even though their strength depended on the delicate skin of the bubble. Many of those financial institutions have now paid the ultimate price, while banks are reluctant to do support these bridging costs because sales may never eventuate and they do not trust the valuations of the present property assets which are required to support the extra borrowing.

"Furthermore, anyone who wants to build new premises to house their new business will be faced with roading or development contributions. A small factory of say 500 sq. metres can incur a charge of $100,000 before the owners even pour the footings. Such 'fines' really 'encourage' entreprenuers who struggle to find the capital to fund their new ventures. 

"If we don't want to wait several years for economic recovery, Councils and their advisers must realise that they need to pour oil onto the gears of growth and development rather than grind them a halt with sand and grit," said Mr McShane.

He points out that the Centre hears of people, families and small companies, all round the country, withdrawing from projects because the start up costs, which must be paid out of cash rather than borrowings or sales, are simply too much deadweight to bear.

"The only satisfaction to be had," he says, "is that the same people who have caused this mayhem, and presently seem determined to carry on with their destructive policies, will suffer alongside the rest of us when the cash flow to pay their salaries and consulting fees turns from a flood to a trickle.

"Hopefully, councils will learn to love long-term rating revenues rather than up-front levies – which are really 'fines' imposed on those who actually want to create jobs and wealth.

"Unfortunately, those hordes of folk who object to anything and everything, and impose a further round of costs on the productive few, will continue to get a free ride.

"Unless we do something dramatic, we are in for a long period of stagnation before any recovery is possible.

"In the meantime, many more planeloads of our 'best and brightest' will migrate to more cooperative shores" said Mr. McShane, "and who can blame them?".