Analysis: Each week KiwiBuild seems to inch closer to chaos. Last week the Reserve Bank appeared to slap down the policy, saying it would crowd out construction that would ordinarily have taken place.
As I had explained to me, the Reserve Banks’ paper was a good opportunity to “re-break” an old story. The Bank had been working to roughly similar forecasts since November 2017, which were well-reported at the time. The paper that garnered so much attention was published to flesh out some of the assumptions that fed into RBNZ’s latest Monetary Policy Statement.
Reserve Bank wonks had noticed the political and media interest in its KiwiBuild forecasting in the November statement, and decided to make things easier for everyone by simply publishing a paper outlining their assumptions.
The key assumption, which Newsroom reported in November, was that the Bank believes KiwiBuild will only deliver 7000-14,000 additional homes to housing supply by 2022.
It arrived at this figure by assessing that KiwiBuild would create $2.5 billion additional construction investment, building 7000 to 14,000 extra houses, assuming each one cost between half and the full value of an average new build home.
In a press conference following the Monetary Policy Statement, the Bank said the pessimistic figures were based on the assumption that there would be some “crowding out”. This means the KiwiBuild programme would take construction away from a development that would otherwise occur.
The crowding out fear is real; Treasury and RBNZ both believe it would depress the overall number of additional houses built by KiwiBuild. This is a problem. New Zealand needs to build roughly 40,000 houses a year to keep ahead of the housing crisis. It currently builds somewhere in the low thirties.
It added further evidence to fears the programme was broken beyond repair.
A little over halfway through its first year, there appear to be two major issues with the programme. First, ironically, is a lack of demand. The houses are too expensive for most people. Second is a concern about houses being built in the wrong parts of the country.
The demand issue can be solved one of two ways. National’s housing spokesperson Judith Collins says the answer lies in RMA reform. This would allow the private market to build houses more cheaply by cutting red tape and potentially allowing intensification.
She’s right. Land is the kicker when it comes to housing; as Mark Twain once said, “buy land, I hear they’re not making it anymore”. RMA reform could make land cheaper by making it more difficult for property owners to protect things like views and sunlight. Of course, it could also go the other way. If RMA reform made it easier to densify, land could become more valuable, but the apartments and flats built on that land would be cheaper.
But allowing the private market to correct itself through RMA reform only gets you so far. Using RMA reform to bring down the price of construction, depressing house prices overall would only ever be allowed to progress to a certain point.
Thousands of people depend on property prices staying high — those thousands of people include those who bank with the four big banks. Minimum capital requirement proposals outlined by the Reserve Bank last year noted that its absolute worst-case scenario financial crisis for our four major banks involved a situation in which property prices crashed by 35 percent.
Fortunately, that scenario saw all the banks survive, but a 35 percent crash would only set Auckland house prices back to roughly 2014, when the KiwiBuild policy was already two years old and designed to address what was even then being described as a housing crisis.
If RMA reform really could bring prices down, it could never be allowed to bring housing to what many would consider an affordable level, not least because if prices collapsed that far, there would be few banks left to offer buyers a mortgage. Remember, during the GFC, house prices only fell by 15.3 percent over the April 2007 to April 2011 period. A crisis of this magnitude would only set prices back to 2016 levels.
Housing Minister Phil Twyford is inching towards a demand solution. At the end of 2018, he adjusted the HomeStart grant and Welcome Home Loan house price caps in areas outside the main centres. This was meant to drum up demand. A shared-equity scheme — when, or if it arrives, would further assist demand.
But demand only works if houses are built in the right areas. The story of KiwiBuild so far is riddled with unsold houses, built in unusual locations. Again, Collins’ argument for allowing the market to determine where development should take place has merit. If a house is going to be sold on the private market (even a restricted market, like the KiwiBuild ballot), it makes sense to allow the market to determine where that house should be built.
Tywford knows this. It’s one of the arguments behind the public-private partnerships he uses in transport: that private capital helps determine where the best investment decisions can be made. KiwiBuild locations aren’t completely at the whim of the state — private developers submit proposals to the KiwiBuild unit, which then decides which ones to progress and which not, but greater market involvement could encourage houses to be built in more desirable areas.
KiwiBuild does have one ace in the hole. The private market, for all its merits, is terrible at building affordable homes. Fewer than 5 percent of new builds are priced in the bottom quartile of house prices.
National’s Special Housing Areas tried to change that by incentivising affordable house construction, but were an epic failure. They built just 100 affordable homes in Auckland over three and a half years, making KiwiBuild look like a runaway success by comparison.
The fact that must be dawning on New Zealanders, if it has not already, is that the housing crisis is just that: a crisis. There is no solution that will not involve some kind of sacrifice: either in the rights enjoyed by property owners through the RMA, or through the costs to the banking system of a downturn.