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Prepared by: BIS Shrapnel Pty Limited, Level 8, 181 Miller Street, North Sydney NSW 2060 BIS Shrapnel contact: Jason Anderson, Senior Manager – B&C Forecasting Commissioned and published by: Urban Taskforce Australia Ltd, GPO Box 5396, Sydney NSW 2001 © 2008 Urban Taskforce Australia Ltd Cover photo: Zsuzsanna Kilián DISCLAIMER: The findings, interpretations, and conclusions offered in this publication are those of the authors. Except where it is expressly stated, they do not necessarily represent the views of the Urban Taskforce Australia Limited, its directors or its employees. All representations and information contained in this document are made in good faith. The document has been prepared to promote policy discussion and public debate and not as advice for any specific individual or company. The Urban Taskforce Australia Limited, BIS Shrapnel Pty Limited and the authors expressly disclaim any responsibility to any person who may seek to rely on this document for business, investment or similar purposes and advises all such persons to make their own inquiries. BIS Shrapnel welcomes any feedback concerning the forecasts or methodology used in this proposal as well as any suggestions for future improvement. FOREWORD The Urban Taskforce is an industry organisation representing Australia’s most prominent property developers and equity fi nanciers. Our membership also includes key infrastructure providers, economists, planners, architects and lawyers involved in property development. We provide a forum for people involved in the development and planning of the urban environment to engage in constructive dialogue with both government and the community. The Taskforce has been alarmed at Hunter Water’s proposal to fund 60 per cent of the costs of the $406 million Tillegra Dam by levying local development. That’s why we commissioned BIS Shrapnel to prepare this report and sought additional advice from Monteath and Powys, which is included in this document. The burden of development levies is ultimately borne by home buyers. They should not be singled out to subsidise major infrastructure investments, particularly headworks like the Tillegra Dam. We fi nd it odd that this proposal should even be raised. In relation to Sydney’s new headworks – the desalination plant - the NSW Government directed that the costs would be recovered through Sydney Water’s prices. Sydney Water enthusiastically agreed. They said that it’s not appropriate to recover the cost of their desalination project from development charges - because the plant is to secure the water supply for all customers. As this report shows, Tillegra Dam is also about securing the water supply for all customers – not just new customers. The dam is needed to protect the Hunter and Central Coast’s water supply during low and variable rainfall ... and severe and sustained droughts. The main losers from any development charge will be home buyers and renters. This report makes some key points: • Hunter Water projects an increase in demand of 20,000 mega litres by 2031. This amount represents just 17 per cent of the expected annual yield of 120,000 mega litres from existing storages and the new dam. Hunter Water’s assertion that 60 per cent of the dam is attributable to ‘growth’ is inexplicable. • Hunter Water’s own modelling shows that the marginal cost of supplying water for the planned population increase of 160,000 by 2031 is close to zero. This means the entire cost of Tillegra Dam should be attributed to drought security. There is no case for development charges. • A new dam will generate water that can be accessed by anyone in the customer base, irrespective of where they live. New home construction will not directly relate to population growth. The ageing population will be the dominant force for population growth and housing demand over the next twenty years. More than 100,000 established houses in the Hunter are currently occupied by just one or two people. These households are under-utilising the housing stock. The ownership of these established homes will be gradually transferred to younger people - which will facilitate some of the region’s population growth. Retirees will move into newly built medium and high density homes. If a development levy is used to fund the dam, these retirees would be forced to pay for additional water infrastructure they do not use. Younger families moving into a retiree’s existing house would account for the ‘new’ population, but would not pay any development levies. This is clearly inequitable. • There are already insuffi cient homes in the Hunter; with a defi ciency of 2,800 dwellings at June 2008. Consequently, rental vacancy rates have tightened with substantial rises in rents. • Hunter Water has proposed a developer charge of $1,400 for each new home. It is unclear whether there will be variations on this amount between different housing types, e.g. detached house, medium density or high density dwellings. BIS Shrapnel projects new home production at 4,600 dwellings a year – although there is a great deal of uncertainty in forecasting the residential market in the current climate. A total of 4,600 dwellings would generate revenue of about $129 million over 20 years. This amount is less than half of the proposed growth-related cost recovery of $251 million. It seems likely that the proposed $1,400 would prove to be insuffi cient and Hunter Water will seek to impose a levy of more than $2,800 a home. • A charge of $2,800 a home would represent a large proportion of the developer margin. It is unlikely that this could be absorbed. An additional development charge will raise the cost structure of new housing and some developments will not be viable until new home prices rise. The most likely outcome is that the charge will be passed on to home buyers, either through a higher price, or through a reduction in the size of new home lots. • A higher price for new homes would reduce the affordability of residential land. It would extend the period of weakness in the housing market, and prolong the current housing supply defi ciency. The rental market will remain tight, and there would be additional upward pressure on rentals. Using development levies to fund the Tillegra Dam would be the equivalent of having a road toll that only applies to new model cars. We hope both the NSW Government and the Independent Pricing and Regulatory Tribunal study this report carefully and act on its fi ndings. Aaron Gadiel Chief Executive Urban Taskforce Australia October 2008 TABLE OF CONTENTS 1 EXECUTIVE SUMMARY 7 2 COST ALLOCATION FOR TILLEGRA DAM 10 2.1 Current storages can facilitate population growth 10 2.2 HWC’s recommendations on Tillegra Dam cost recovery 12 2.3 HWC proposal for developer charges 13 2.4 IPART’s Drought Proofi ng Precedent – Sydney Water 15 2.5 Proposed value of developer charge 15 3 RELEVANCE OF DEVELOPER CHARGES FOR COST RECOVERY 17 3.1 Relationship between population growth and new dwelling construction 19 3.2 Population growth 20 3.3 Changing trends in dwelling composition 25 3.4 Forecasts of demand for new dwellings 26 3.5 Supply of housing 27 3.6 Defi ciency of housing 30 3.7 Conclusions 31 4 IMPACT OF ADDITIONAL DEVELOPER CHARGE ON HOUSING MARKETS 33 4.1 Summary 33 4.2 Median house prices 33 4.3 Rental market trends 38 1. EXECUTIVE SUMMARY The stated objectives for constructing Tillegra Dam extend to having extra water for drought security, and providing water for the increase in demand associated with future population growth. The new dam comes at a cost of $406m in 2008/09 prices. It is vital that the relative importance of these objectives is carefully evaluated. Hunter Water Corporation (HWC) projects an increase in demand of 20,000ML by 2031. This amount represents just 17% of the expected annual yield of 120,000ML from the combined yield of the existing storages and the new dam. Given this, it seems clear that the great majority of the requirement for the dam relates to protection against climatic variation. In fact, the new dam would provide an additional 105,000 ML of annual yield that can be used for drought security, compared to total current average annual demand of about 70,000ML. However, Hunter Water recommends that the cost allocation for population growth should be 60% of the cost. Drought security notionally receives only 40% of the project cost. We recommend that the costs are allocated on the basis of HWC identifi ed use between drought security and population growth. Of these two needs, it is clear that the population growth requirement is more reliably projected. The projected demand is 20,000ML p.a. by 2031. HWC needs to clearly indicate that the yield of the existing storages is not suffi cient to meet growth in demand associated with population growth. It is surprising that this evidence is not provided in the submission. Even more surprising, previous HWC analysis shows that the current storages can meet the increase in demand associated with population increase out to 2031. Relevant modelling is clearly set out in the ‘Why Tillegra Now?’ report. It appears that HWC’s own modeling shows that the marginal cost of supplying water for a population increase of 160,000 people from current storages is close to zero. As the yield from current storages can meet demand from population growth, then the marginal cost of current storage infrastructure to provide water for this demand is close to zero – and none of the cost for Tillegra Dam should be allocated to the objective of enabling population growth. • On this basis, the entire cost of Tillegra Dam should be attributed to the objective of drought security.