Phil Twyford is being blamed for the failure of KiwiBuild and just lost the housing portfolio. Bernard Hickey argues he was pinned down by an infrastructure funding Catch 22 and then drowned by the Government’s 20 percent debt anchor, both of which Twyford knew he could not fix quickly enough.
The simple view in any reshuffle of ministers or executives because of a policy or business failure is to blame the individual deemed responsible. And Twyford invited the judgment with his bold claims ahead of the election and his aggressive campaigning against National on housing. KiwiBuild was his baby, clearly, and it failed to deliver the promised 1000 houses this year. It has barely coughed before starting along its path to 100,000.
But he never really had a chance, even if he didn’t know it or believe it. Events and policies that were arguably out of his control before and since the election have guaranteed that.
Planning and building 100,000 homes over a decade in our fastest growing cities requires much, much more than just finding people and building materials to build houses. It requires massive capital investment in transport, water, earthworks and other infrastructure, most of which require co-investment from private and council investors if the central Government is not going to step up and use its balance sheet to borrow the money to invest in the pipes and roads and railways and shopping centres and parks and industrial buildings.
And remember, neither the National or Labour-led governments of the last 35 years have seen it as their role to pay for that underlying infrastructure. Their instincts have been to get others to pay for it, unlike during the golden eras of the 1930s, 40s, 50s, 60s and early 1970s when governments of both colours used the national balance sheet to build and subsidise that infrastructure through the Ministry of Works, State Advances Corp and various Group Building schemes and child benefit capitalisation policies. Starting with Labour’s Michael Joseph Savage and ending with Labour’s David Lange and Roger Douglas, the Government built state houses, made low interest rate loans, paid for or subsidised suburban infrastructure and ensured first home buyers could get a deposit and buy a house for less than three times their income. KiwiBuild buyers had to save over $100,000 or one times their income and then borrow another five times their income.
‘It’s not our job’
After the mid 1980s, the Government saw the private sector as the provider of housing and saw any infrastructure as a cost that needed to be borne by those building the new houses and local Government, not the wider taxpaying public. Even now, that thinking is infused through Treasury and into the minds of the current Labour leadership, going from Ardern through Finance Minister Grant Robertson to Twyford.
That’s reflected in their decision to re-sign up to the 20 percent net debt target before the 2017 election. The 20 percent number was born in the bruised aftermath of the New Zealand economy’s near-bankruptcy experience of the late 1980s and early 1990s when bond vigilantes were a real thing to be feared. The 20 percent number coagulated into policy under Labour’s last Finance Minister Michael Cullen and has been adopted reflexively (and I’d say mindlessly) since then by both Labour and National. It has anchored fiscal policy for 30 years and continues to do so.
But it is now horribly out of date
The bond vigilantes have been euthanised by a decade of zero percent interest rates and US$15 trillion of quantitative easing or money printing by central banks in the Northern Hemisphere to buy government bonds. Fund managers all over the world are looking for safe government debt with some sort of yield more than 0.0 percent. The New Zealand Government bond yield fell to a record low of 1.5 percent last week.
Labour fears being accused of being profligate and of raising the net debt of an already indebted nation, but the Government’s net debt is at the bottom of the OECD and the nation’s net debt has fallen 20-30 percentage points of GDP in the last decade. Robertson and Ardern argue we are so vulnerable in the event of another GFC or an earthquake that we have to keep our powder dry. But they’re thinking as if they were in the offices of Helen Clark or Michael Cullen from 1999 to 2008, when New Zealand’s economy and balance sheets were both actually and relatively vulnerable.
They fear an unknown and yet-to-exist crisis in the future when a very present and known crisis exists right now and is right in front of their noses: a massive shortage of affordable and healthy housing that has consigned 250,000 kids to such poverty that 40,000 of them get so sick each year with respiratory and skin conditions they end up in hospital. Their parents are mired in working or non-working poverty that is impossible to break out of without affordable and healthy housing. Our growth cities need re-engineering to improve affordability and reduce carbon emissions. That means creating medium density housing corridors along train lines much closer to city centres that produce hundreds of thousands of new homes.
Urban Development Authorites have to work in tandem with city and transport planners to buy up the land along those corridors and fund the building of the infrastructure and housing to make them work.
Twyford and the Government know that’s where they need to get, but the debt anchor is not just holding them back. It just dragged its first cabinet minister under the waves and drowned him.
A Catch 22 pinned him under the debt anchor
The importance of that debt anchor and the Government’s refusal to abandon it becomes clear when you consider the way KiwiBuild and any large scale house building is completely dependent on a broken system for infrastructure funding.
Put simply, KiwiBuild was doomed from the start unless the Government solved the fundamental problem of finding someone to invest in all that underlying infrastructure. Currently, the Government is dependent on the Auckland Council and the other growth councils (Hamilton, Tauranga, Wellington, Christchurch and Queenstown) using their balance sheets to solve the problem.
Those mayors and councillors are in turn captured by property-owning ratepayers in their leafier suburbs. These older suburbanites are the only ones who vote in council elections and they don’t want all these extra (young and brown) people living anywhere near them, and they certainly don’t want to pay higher rates to fund the debt for suburbs they’ll never visit, let alone live in.
‘We won’t pay for their new suburb’ – Essentially, central Government controls the migration settings and benefits from the population growth through higher GST and income taxes without having to pay for at least half the infrastructure cost of that population growth. Councils, and more importantly their voters, did not vote for high net migration or the infrastructure costs and they don’t have a revenue tool to fund the extra debt.
So councils are restrained by the politics around their balance sheets, and their voters are exercising a not-so-silent protest against high net migration, which they never agreed to. There are also two technical and revenue issues with using council debt to solve the problem.
‘We need a share of GST’
The only revenue tool councils have to pay the interest on debt is rates on property. The lag between investing and getting rates from new residents and businesses is long and uncertain. Essentially, the cost has to be front-loaded and smeared over existing ratepayers. That’s why they revolt. The Council needs a new revenue stream to fund the extra debt, and it has to be more closely connected to population growth. The obvious tools are a share of GST revenues and income taxes, which are currently set and collected and spent by the central Government in Wellington, which of course doesn’t want to give up that power and doesn’t trust councils to spend it carefully.
The technical problem is the Auckland Council is almost at its debt-to-revenue limit ratio of 270 percent, which is the level specified by Standard and Poor’s for Auckland to keep its AA credit rating. This is important because taking on more debt would mean Auckland’s credit rating would be downgraded, which would increase the interest costs on existing debt and force up rates. But it would also breach the rules set by the Local Government Funding Agency about Auckland’s credit rating not falling more than one notch below the Government’s AA+ rating. That’s important because Auckland’s rating essentially sets the base for all local government borrowing through the LGFA. It means there is enormous political pressure locally and financial pressure from other councils (and the LGFA) for Auckland not to borrow much more. Councils beyond the Bombays and north of Orewa would scream blue murder if their interest bills went up because the Auckland Council decided to solve a funding problem the central Government won’t solve.
Catch 22 = slow infrastructure spending
The end result is councils use the Resource Management Act, the Environment Court, their planning processes, Metropolitan Urban Limits and a myriad of building consent policies to slow that infrastructure spending down to a crawl.
The irony is all the restrictions on land use and infrastructure development deliver a juicy dividend for those same property-owning voters in the leafier suburbs. Land prices skyrocket in tandem with migration that is not built for, giving them astonishing tax-free capital gains thanks to leverage and a tripling of land prices in the last two decades. What’s not to love? Unless you’re a renter or aspiring first home buyer…
This infrastructure funding Catch 22 bedevils New Zealand’s entire growth outlook and is at the heart of our housing affordability, child poverty, stagnant productivity and climate change problems.
Twyford knew the score – No wonder KiwiBuild couldn’t get started, but this Catch 22 and the debt anchor are not news to Twyford. He explained it perfectly in this now widely-cited speech on March 22 to a NZ Initiative members’ retreat. It is well worth a read, if you haven’t already.
“Our infrastructure funding and financing system is broken,” Twyford said.
“Some of our high growth councils which provide most bulk infrastructure have tapped out their balance sheets.
And to a large extent local government politicians have been unable to convince their ratepayers to invest in growth, leaving a burgeoning infrastructure deficit for the next generation,” he said.
“The unwillingness or inability to invest in the infrastructure to support development stops cities growing. When a city cannot grow in response to demand, a pressure cooker effect is created, which is what has given Auckland some of the most expensive urban land and housing in the world relative to local incomes.”
‘I have a cunning plan’
Twyford’s solution to this infrastructure funding Catch 22 was to try to create Special Purpose Vehicles independent of the Government and the Council that could borrow money in their own rights to fund the infrastructure project by project. The model is the Municipal Utility District (MUD) bodies used in the United States to fund new suburbs and cities. They raise debt from bond markets, get their own credit ratings, and service the debt with targeted rates or fees on residents.
“The intention is that we create a system where the viability of the project is the determinant of whether to proceed with a particular infrastructure project, and whether private capital can be accessed and utilised,” Twyford said.
“We want to ensure that the costs of growth are properly allocated. So they fall on the beneficiaries of development.”
Ie the Government and the Councils don’t want to borrow to invest. They don’t want to spread the cost of new development across existing ratepayers and taxpayers. They want the private sector to do it. But the private sector doesn’t have the balance sheets or the time horizons or the certainty of income (ie they don’t have the power to tax or rate) to make the big calls involved with the massive urban redevelopment needed.
Hence, KiwiBuild is not getting going: Twyford knew about the infrastructure financing Catch 22 and the debt anchor, but still signed up for the job and committed to the target. His problem is that he thought he could get the new infrastructure funding system up and running faster. Instead his infrastructure bond and SPV ideas are still in the legislative and testing processes. They are years away from happening.
The political and news cycles run on much shorter time horizons than these sorts of legislative and financial reforms.
Twyford ran out of time, and it could be argued he was always going to run out of time.
The only way to short circuit the painfully slow business of building a new financing system was to use the Government’s balance sheet and borrow to give certainty of funding for all these new Urban Development Authorities and transport projects. The borrowing costs are way lower and the global bond markets would give the Government in an instant. Remember, New Zealand’s interest returns of 1.5 percent for 10 year bonds are much better than the negative 0.33 percent on German Government 10 year bonds (ie fund managers pay Angela Merkel to look after their money).
KiwiBuild is now expected to focus on building houses to rent out and helping private developers ‘build to rent’ on Government land, rather than building over-priced houses for first home buyers who can’t afford them, or are worried they are buying at the peak off a Treasury that has yet to revalue the value of Government land lower.
It will limit its ambitions and focus the Government house-building activity on Housing New Zealand. The 100,000 dream is over, and with it the hopes of a supply-led push to make housing more affordable.
It could all have been so different if the Government had chosen to solve the Catch 22 by ditching the debt anchor. And Phil Twyford would not have been dragged under the political water by that anchor until he drowned.
How many more cabinet ministers will get pulled under before Jacinda Ardern and Grant Robertson choose to ditch the debt target orthodoxy that both sides of politics have clung to since the dark days of late 1980s?
True conservatives – So far, their conservatism on this issue and their fear of debt is greater than their dreams of fixing New Zealand’s housing affordability, child poverty and climate change problems.
The public have yet to call them out on it. Largely because it suits the property owning public not to. Renters who vote and their non-voting children have yet to understand or act. Ardern and Robertson will hope that does not change.