Do rates still fit the bill?
Rates bills are set to soar by about 50 per cent over the next decade. Dominic Harris examines how that will hit property owners and asks whether the rating system is sustainable.
Steven Lindsay was quietly fuming as he pored over the rates bill in the kitchen of his Christchurch home.
Fuming, and racking his brain, over how to find the extra money for his ever-increasing obligation to the city council.
Christchurch, like other councils across New Zealand, recently signed off its 10-year plan for how it will run the city – and for some, the pages outlining rates rises make worrying reading.
‘‘You expect a bit of an increase, but when you’re talking 53 per cent over 10 years that’s a really big increase,’’ says Lindsay, a building products salesman whose home had to be rebuilt after the February 2011 earthquake.
For Lindsay and his partner Rebecca Macbeth, the 5.5 per cent increase this year translates to an extra $150 for the bins, water and road repairs in their New Brighton suburb – an annual bill that will be about $4307 by 2028.
‘‘I don’t think many people are going to get a 53 per cent pay increase over the next 10 years,’’ he says. ‘‘That would be fantastic but I don’t think that’s really going to happen.
‘‘So that money will have to come from somewhere. Whether it comes out of the grocery money or what, it’s got to come from somewhere.’’
Rates ‘completely, utterly unsustainable’
Perhaps surprisingly, the concerns faced by the couple and countless other families draw sympathy from one of the very people who approved their rates rise.
Jamie Gough, a businessman in his third term as a councillor in Christchurch, believes the rating system is ‘‘drastically broken’’, built on foundations that are fundamentally flawed.
‘‘The level of rating increases in local government is completely and utterly unsustainable. All you need to do is look at the level of percentage rate increase compared to people’s own incomes and the rate of inflation in New Zealand, and it’s out of kilter.
‘‘Whether the breakdown occurs within one year, five years or 20 years, what is clear is that it’s a house of cards that sooner or later is going to come toppling down because the rate increases are not sustainable over a long period of time.’’
Rates protest
On the West Coast, retired police officer Denis Bergman, 62, went on a hunger strike in May and June to protest against his Buller District Council rates, which he said had risen 70 per cent since 2007.
He planned a petition to Parliament seeking a parliamentary or statutory review of how the council spent ratepayers’ money. ‘‘The current rating system is too high and is forcing people out of their homes. It has to stop and it has to stop now,’’ he says.
Rates rises exceed inflation
But are rates genuinely spiralling out of control?
Analysis by Stuff has found that, over the coming decade, ratepayer bills in five main cities will, on average, increase by 50 per cent. As well as everyday council expenses, these increases will contribute to major projects – for example,
$253 million for a new stadium in Christchurch and $311m for pest and disease control in Auckland.
Exact comparisons are difficult because of variations in the way rates are calculated, what they include, and when rating valuations of properties are carried out.
But indicative figures provided by the councils for average house prices suggest Hamilton and Christchurch ratepayers will see bills surge by around 53 per cent by 2028, and those in Wellington by 48 per cent. Auckland’s will rise 38 per cent, and Dunedin’s 59 per cent.
Rates for 2018-19 rose across the board on July 1, from 2.5 per cent in Auckland to 5.5 per cent in Christchurch and 9.7 per cent in Hamilton, against a backdrop of 1.1 per cent inflation.
In dollar terms, comparisons of average house prices – based on capital valuations – suggest a difference of almost 25 per cent between what people are now paying.
In Dunedin, where the average house is $326,800, rates for 2018-19 are about $2300, while for the average Wellington house, at $574,000, rates are nearly $2900. By 2028, those same homeowners could be paying
$3400 and $4100 respectively. Across the five cities, Auckland is likely to see the smallest rise over the next 10 years, of around $937, while Wellington will face the biggest change, of $1339.
Comparisons based on house prices less relevant
Comparisons based on a property’s price offer less value, because of such variations in what buyers get for their money.
A $1m house in Christchurch will have a rates bill of close to
$5000 this year, more than double the $2351 for the same in Auckland – where the average capital value is actually more, at
$1,080,000.
But while the increases may daunt many, are they likely to strain the average homeowner’s purse strings?
Forecasting the future is not an exact science, but a glimpse backwards sheds light.
According to Statistics NZ, the average annual income of a household in the year to June
2017 was a fraction under
$100,000, an increase of 44 per cent on the $69,000 a decade earlier. Of that $100,000, 16.2 per cent was spent on housing costs – rent, mortgage, rates, insurance and the like – with an average of
$53.80 a week going on rates. While the ratio between income and spending on rates has remained fairly level over the last 10 years, the gap between the change in income over the previous decade and the expected rates rises over the next suggests the increases may stretch many households.
Ten-year rating forecasts are ‘best-case scenario’
Gough has an ominous warning, at least for Christchurch – that the annual increases outlined in the Long-Term Plans are far from fixed in stone.
‘‘Every year we do an Annual Plan, and I have never seen one where the rating increase is less than what’s projected. So 53 per cent is absolutely a best-case scenario and, at worst, fantasy land.’’
What drives rates rises is a complex mix of economic and political challenges, both locally and nationally, according to Dave Cull, Dunedin mayor and president of Local Government New Zealand, which represents the interests of all councils.
Some may have rates that were initially set too low and so need to catch up to fund investments, while staples of council spending – bitumen and steel, concrete and pipes – also get more expensive more quickly than consumer goods.
Billions need to be spent on infrastructure, Cull says, but in recent years funding has fallen short, leaving the bill for future generations.
‘‘Frankly, the funding mechanisms we have at the moment – just property rates – are not going to be sufficient or sustainable on their own.
‘‘The bigger picture is that this pressure resulting in higher rates rises is in a way the canary in the coal mine – it’s telling us we can’t sustain this.’’
Cull believes there is an overreliance on property rates to fill the coffers, the 60 per cent of council income they provide far exceeding that of other developed countries, and that putting them up year after year in the face of sluggish wage rises is not sustainable.
He is a proponent of local taxes as an alternative funding tool – sales taxes, GST, a local income tax or the like.
Local taxes mushrooming
Auckland has just brought in a regional fuel tax to help raise $1.5 billion towards its $28b overhaul of transport infrastructure, while Queenstown leaders are mulling a bed tax so tourism can help fund growth.
Such taxes would mean specific people pay for the services they demand and require, instead of allowing the
financial burden to fall entirely on ratepayers.
In New Zealand, 88 per cent of rates and taxes are collected by central government and 12 per cent by local authorities, Cull says, while in Switzerland the opposite is true.
‘‘If, for instance, a council in Switzerland attracts residents into its area, they get a share of their income tax – quite a big chunk.
‘‘So there’s an incentive not only to attract them but to provide the kind of facilities and services that will attract them, and that’s what they spend the money on.
‘‘The incentives are positive for everybody, whereas the incentives here in New Zealand are perversely negative.’’
Local taxes, however, along with targeted rates, can be a source of great frustration. In Christchurch, residents face a blanket levy of about $6.50 a year to cover the council’s $10m contribution to repair the earthquake-shattered Christ Church Cathedral.
Not all are happy about it. John Collins, a construction project manager, says: ‘‘I’m not religious, and I don’t want my money to go to it.’’
Should councils focus on core services?
Another issue is that local government as a proportion of the economy is growing, believes Jordan Williams, co-founder of lobby group the Taxpayers’ Union – something he says would be justifiable if the extra income went to infrastructure and traditional council services.
‘‘The analysis we’ve done, mostly in Auckland, is that despite the much larger income coming in, the actual increase in investment isn’t that high.
‘‘Where the money is going is operational, and that is because the scope of what local government is doing is becoming wider and wider.’’
Williams suggests the issue should be examined from an ideological point of view. ‘‘Do you think local government should be just about core services, in which case it’s out of control and we desperately need to rein it in, and that would prevent the continued growth; or should we let it expand and effectively turn it into state-type governance, in which case we need to re-look at how they generate income . . .
‘‘Most ratepayers would believe – and I am pretty confident on this one – that councils should be reined in.’’
It is a position Gough understands and shares, advocating instead for a greater role for business – a stance many in the city may find unsurprising, given he has longstanding links to industry.
‘‘Before you can come up with any solutions, you need to actually understand why it’s happening. Why are rates increasing at such a disproportionate rate to income and inflation?’’
He believes the answer lies partly in the scope of local authority roles. He suggests many are taking on ever more responsibilities, and are reluctant to relinquish control.
‘‘The fundamental question that needs to be asked is, ‘Do councils need to be doing as much as they are doing?’ I feel the answer is probably not.
‘‘There’s a propensity for councils to involve themselves in almost everything under the sun, and quite often the private sector will be more than capable of delivering that almost better than councils probably could.’’
He also advocates zero-based budgeting, where spending is regularly scrutinised and justified to ensure it is efficient and effective, and a re-examination of whether basing rates so heavily on capital values of properties is the fairest system.
‘‘I think you need to address a couple of fundamental issues first and foremost – if you don’t address that, nothing is going to change.’’
‘‘I don’t think many people are going to get a 53 per cent pay increase over the next 10 years.’’ Homeowner Steven Lindsay on his rising Christchurch rates