Developers pay developer charges

Conversion of land to more intensive uses often comes with charges known as impact fees, or developer charges (DCs). Town planning practitioners typically view these charges as economically benign but there remains an academic debate about whether they can increase prices and depress sales volumes. Existing empirical studies of the price and quantity effects of DCs are limited by a lack of naturally occurring variation in the DC size. It is therefore difficult to isolate behavioural effects from the mechanical relationship of DC and price arising from larger dwellings being levied with higher DCs. To overcome this identification problem we use data that incorporates a surprise policy change in Queensland, Australia, that introduced a cap on DCs. Councils responded by changing DCs, both upwards and downwards, for different dwelling types in different local council areas. Our model estimation shows that there are no measurable effects on price or quantity of new dwellings from DCs, supporting the planning practitioner's view of the charge being economically benign and fully incident on the landowner, even when the landowner is a property developer. When we instead include the baseline DC for each sale prior to the policy change, the problem of capturing only the mechanical effect arises once again. Model results using this baseline DC are similar to previous studies that claimed large behavioural price effects from DCs. The results are consistent with a real options view of the developer's economic situation, a view that also predicts that increases in DCs can increase the quantity of new dwelling sales, a pattern also found in the Queensland data. •Developer charges (impact fees) correlate mechanically with new home prices.•Natural experimental conditions are used to isolate the true price effect of developer charges.•Using this identification strategy there are zero price effects, and positive quantity effects.•Real options theory is the appropriate framework to understand these effects.