Wherever new housing developments are proposed - Camden, The Hills, Liverpool, Penrith, Blacktown, Wollongong and Campbelltown - councils are refusing to approve subdivisions. All up, about a dozen councils have united in a development strike aimed squarely at the state government. One western Sydney developer, who did not want to be named for fear of damaging his relationship with councils, said the eight-week stand-off was approaching a critical point. ''There could be a giant black hole in the first half of next year with no land supply,'' he said. ''Our lead-in times are such that, with design approvals and funding, you have to plan 12 months in advance.'' Like most strikes, this one is about money, and how much a new house should cost.

As the biggest state, you would expect NSW would produce a lot of the nation's new homes. Yet the National Housing Supply Council's report for 2010 shows NSW produced just 3373 houses per quarter in 2008-09, less than every other state except South Australia, which is less than a quarter the size of NSW but still produced an average of 2224 houses. The report calculated that the cost of government charges and infrastructure for greenfields housing development in 2007 was $100,000 on a median house in Sydney, $43,000 in Brisbane and just $30,000 in Melbourne. These dramatic differences, mounting pressure from developers, along with Reserve Bank concern about the paltry number of housing starts in Sydney, convinced the NSW government it had to try something radical to cut the cost of new homes. Eight weeks ago the Premier, Kristina Keneally, announced ''sweeping reforms'' to local council charges. She was not exaggerating. Not only were the changes dramatic, they took immediate effect.

What infuriated councils was the sudden imposition of a $20,000 cap on the amount of money they can take from developers for each housing lot in new estates. Further, the $20,000 cap on what is known in planning jargon as ''section 94 contributions'' can be levied only if the money is for ''essential infrastructure''. Just what that means is not clear, although the government says it includes ''open space and community facilities, roadworks and stormwater management''. With many councils used to squeezing developers for $50,000 to $60,000 per lot, the dramatic cut in revenue prompted a furious, united response. All the growth councils have stopped processing land with levies of more $20,000. Liverpool Council has called public meetings to condemn the changes, warning that the cap means, ''no open space and playing fields, no playgrounds and no public buildings or community facilities in new areas''.

The Hills Council has sent a flier to every ratepayer headed ''Charges usually paid by developers will soon be paid by you'' and with a warning that unless the government backs down, rates will leap from $1280 a year to $3116 to pay for facilities developers have funded until now. Camden Council has written to residents telling them it will be forced to build ''second-class communities'' in their semi-rural settings. A front-page story in the Camden Advertiser was headlined ''Slum fears'', reflecting the views of one councillor, David Funnell. The mayor of Camden, Chris Patterson, shied away from the word ''slum'', but only just. ''By taking out parks, football fields, walking tracks, bike tracks, senior citizens' facilities, we are condemning these estates to being second class,'' he said. Now, after eight weeks of largely unproductive talks with the government, the dispute was coming to a head, he said. ''Our staff are working around the clock processing every application and are at the point of release. But we will not release any of these blocks until we get clarity on the section 94 cap. When we took this stance there was land available; land is now running out.''

When Keneally and the Planning Minister, Tony Kelly, announced the cap, they did so without consulting the councils, calculating it was best to try to crash through with a policy they knew was highly contentious. As a sweetener, they offered councils a chance to lift rates beyond the tight limits that have been in place for decades thanks to the government's rate-pegging regime. From June, councils have been free to approach the Independent Pricing and Regulatory Tribunal to apply for special rate increases to pay for the infrastructure that developers can no longer be required to fund. Spring Farm, in Camden, is typical of the new suburbs where section 94 contributions of $55,000 per lot are seen by developers as way too high. Patterson defended the size of the levies, which he said were the result of a state government requirement more than five years ago to provide large areas of open space.

To get the space, the council has to borrow money to buy the land, then pay off the loan as developers make their section 94 contributions. Patterson said about $23,000 of the $55,000 went on buying land and kerbing and guttering, while the remainder was for football fields, parks and community facilities. But developers say councils are squeezing too much money to pay for bells and whistles such as community centres that might improve the quality of the estate but that drive up the cost for homebuyers. ''Many 94 contributions are excessive,'' said the western Sydney developer. ''Councils have used it to get perfect-world development, not necessarily affordable development.'' At the heart of the issue is the push by developers for the cost of community facilities to be paid by the whole community, not just homebuyers in a new suburb.

''The funding balance for infrastructure had clearly swung too far against new homebuyers and crippled the new housing market,'' said Stephen Albin, the chief executive of the NSW branch of the Urban Development Institute of Australia, a group which lobbies on behalf of developers. ''It's unrealistic to expect new homebuyers to pay for infrastructure upfront that will benefit the whole community and won't need replacing for 30 or 40 years.'' Councils take the opposing view. They say it would be unfair to levy existing ratepayers to pay for infrastructure in new subdivisions, especially when ratepayers have already paid their section 94 levies in homes they bought from developers years earlier. ''We will not burden existing ratepayers to make up shortfalls in new communities,'' Patterson said. The Mayor of The Hills, Peter Dimbrowsky, agreed, and said his council would not borrow extra to fund the infrastructure. ''We will not expose our community to hundreds of millions of dollars of liability without a fight,'' he said.

With such diametrically opposing views, it is hard to see a resolution. In an attempt to move beyond this stalemate, the Urban Development Institute commissioned financial modelling to try to persuade councils they would be better off accepting the $20,000 cap and finding other sources of funding to make up the shortfall. One of their models is of a Hills development called Balmoral Road, which has $53,000 levies per lot. Despite these big levies, the institute report says the council will be left with debts of $118 million unless it increases future contributions because it borrowed money to buy land and build infrastructure but sales of lots were much slower than expected and it did not receive the section 94 contributions it expected. Less financially risky, the modelling says, would be for The Hills Council to spread the pain across more ratepayers.

It says the council should impose a $700 annual levy on new Balmoral Road residents on top of their rates and all other ratepayers should pay a 5 per cent levy to help fund the Balmoral Road infrastructure. While the council agrees the old arrangement is risky, and diversifying funding sources would be safer, it says imposing permanent rate increases on all ratepayers and special levies on those in new developments would be too difficult politically. ''Any shift from the developer to the ratepayer is very difficult to achieve politically,'' said Cr Dimbrowsky. ''Rates could be two or three times higher than in a neighbouring suburb … Rates would need to rise to around $3000 to deliver the required basic services to the new community.'' But Albin said it was meaningless to argue whether the developer or council should pay. ''At the end of the day, it is the homebuyer who pays,'' he said. ' 'Whether it's through upfront contributions, or through rates, the homebuyer is picking up the tab, not the council, not the state government.''

''I think most people would agree that, when you consider that to buy a one-year-old $600,000 apartment in Double Bay you pay no taxes or charges, but if you buy a new block of land in western Sydney you're paying up to $100,000 in taxes and charges to the council, to the state government, and to the federal government, something is fundamentally wrong with the system.'' With contributions on Balmoral Road now capped at $20,000, The Hills mayor said he had no idea how the council could recover the money it has already spent. Loading But Dimbrowsky is adamant it will not be by slugging ratepayers - not when he is convinced a $30,000 cut in levies will not lead to a similar fall in the price of land developers take to market. ''The cap will not translate to cheaper land,'' he said. there's no way you can guarantee that saving will be passed on to the new landowner.''