The Great Game resumes on public housing

Politicians in government like to think they are strategists engaged in an elaborate game of political and economic chess, but too often they’re randomly rolling the dice in a game of snakes and ladders.

Three steps up one government’s ladder, then four squares sliding down the next’s snake on, for example, health; five steps on one’s ladder on resource management, two squares down again under a new regime; two squares north on debt, two down south on the serpent.

And now the game turns to public housing. The last National administration tried to reform state housing, advancing community organisations and their promises of faster, better social housing and presiding over an era where state houses and properties were sold while others were built, with, Labour says, a net loss of 1500 public houses.

Waiting lists, people living in motels and in cars were political hot potatoes. But within National’s ranks right until its 2017 defeat, the words ‘housing crisis’ could not speak their name.

Enter Labour in 2017 and National’s efforts were shoved down the board and up climbed the ill-fated KiwiBuild home construction mega project and a new Kāinga Ora agency to both develop and manage state housing and work on urban land release and development. It featured a shift away from commercial management of tenancies to a broader ‘wellbeing’ approach.

House building increased, debt and operating costs soared but a vast ongoing commitment to paying for people to live in motels continued and the public housing waiting list of 25,000 remained stubbornly high.

Now it’s National’s turn. It has brought back its financial architect of the 2008-16 era and proponent of long-term social investment, Sir Bill English, to get social housing (which means state housing plus around 13,000 community-provided homes) back on track.

He is, unsurprisingly, recommending his old track – in which the old Housing NZ operated commercially and housing provision was also extended to community organisations and iwi.

But he wants this enhanced and expanded. KO would ultimately become a shadow of itself, confined to social housing construction, renewal, and management of a smaller portfolio and tenant base, and could not operate at a loss.

Labour had from late 2022 been concerned by the debt being taken on by Kāinga Ora as it attempted to meet its political masters’ requirement for 4800 extra public houses by 2025.

The agency certainly took its mandate seriously, with borrowing to pay for these extra houses soaring and its interest costs annually soaring alongside that – not helped by high interest rates and inflation, supply problems in construction and issues from the pandemic.

Kāinga Ora is a $45b enterprise, which has an annual budget of $2.5b plus and manages 70,000 homes for more than 185,000 people.

Under the eyes of then-finance minister Grant Robertson, Labour initiated a high-level joint review by the Treasury and the Ministry of Housing and Urban Development (HUD) of Kāinga Ora’s operating deficits, growing debt and house building and maintenance performance.

It also directed KO to stop commercial borrowing and operate through the central Debt Management Office, with beneficial government rates.

The interdepartmental review, known as the Kāinga Ora Spending, Funding and Financing Review, had by September last year, before the general election, only achieved a “reasonable understanding” of how the housing agency’s capital costs compared with its long-term finance plan and what was expected in the Budget process.

But after the change of government, on December 15, the final review was finished and presented to Finance Minister Nicola Willis and Housing Minister Chris Bishop.

It formed the basis of the National-led coalition’s 100-day promise to review Kāinga Ora, and contained the calculations that KO’s annual deficit would negatively affect the nation’s deficit by $4b over four years and that its debt of $2.7b in 2018, which had risen to $12.3b in June 2023, would reach $25.5b by 2028.

The joint report compared KO’s build costs against those of commercial developers, finding KO’s came in under its own budgets but higher than private builds, in part because of its higher climate, wellbeing and social requirements.

Kāinga Ora’s staffing had doubled, the report said, with more than 2000 additional workers since its creation in 2017/18 – partly because it appointed more managers at a lower ratio of tenants each to provide wrap-around and high-needs attention, and partly because KO added a suite of other housing functions.

Separately, a Department of Prime Minister and Cabinet review recommended KO take immediate action to strengthen its information systems.

Both studies concluded it was hard to get reliable and accurate data from the agency, that the public housing build delivery pipelines were not transparent and value for money could not be easily assessed.

Once National’s new ministers received the joint report, they also sought advice on establishing an ‘independent’ review team to get to the bottom of Kāinga Ora’s challenges and dire fiscal projections. Independent of the housing agency itself, and of the public service.

What English found

Former PM and finance minister English, former investment banker and company director Simon Allen and urban development expert Ceinwen McNeil were to execute a ‘short, sharp’ inquiry and from January to April fed off the joint departmental review’s numbers and analysis and consulted with KO and a list of stakeholders.

The review’s terms of reference listed its objective as being “to identify ways to improve Kāinga Ora performance and value for money, and to manage the impact of Kāinga Ora on debt and [the Government’s fiscal deficits].”

It had five nominated areas of focus, KO’s financial viability, asset procurement and management, tenancy management, its ‘remit’ meaning the laws, rules and political directives it operates under, and “institutional arrangements to incentivise better performance”.

The review under English moved well beyond analysing KO’s performance and structure and ways to improve it. It did recommend changing the board, and a new set of political ‘expectations’ for a new group of directors to operate under, including a “goal of eliminating losses”.

And it said KO should have a narrower scope to social housing alone, not land and urban development and other housing funding instruments it administers for the state.

The review essentially declared Kāinga Ora is too big to survive, in its present form and settings. It recommends stripping the agency of its role in administering housing funding on behalf of the Crown, with that function shifting to HUD, which is currently the monitor ministry for KO.

That would see HUD purchase house-building projects not only from KO but also other community housing associations (CHAs), geographically spread around the country.

KO and these entities would be, crucially, Crown Companies and that would allow them to work in tandem with private investors. “This would allow non-Crown partners to become shareholders.”

The English prescription is essentially a decentralising from KO to local entities under Crown control, presumably with each gaining substantial chunks of the 70,000 KO property portfolio to own and manage in their distinct ways. It mentions “pathways for communities to manage Kāinga Ora housing stock” and that a key choice for government will be “the speed at which parts of the existing KO portfolio are transferred into CHAs”.

“The Government should be ambitious in moving to this approach with several such Community Housing Associations established by the end of 2024.”

As well as the CHAs, existing smaller scale Community Housing Providers (CHPs) should have their way cleared to increase provision of social housing. All housing providers would work under a funding model that would “incentivise delivery where needed”.

The Government’s response

Housing Minister Chris Bishop has immediately backed the call to refresh the board, appointing ex Spark chief executive Simon Moutter as chair and signalling a clean-out of other directors (the chair Vui Mark Gosche, a former Labour MP, walked in April, and four of the seven are either already due or about to be due to leave or seek reappointment).

A new letter of expectation is being written from ministers to arrive on Moutter’s desk when he takes the chair in June and the board will be required to give the Government a “credible and detailed plan to improve financial performance” by November.

Meanwhile Bishop must report back to the Cabinet by August on the English report’s wider push for shrinking KO, taking away its lock on funding and giving that to HUD, devolving its build and manage roles for social housing to regional community associations as Crown companies able to seek private partners, and levelling the social housing field so community providers get equal access to state funding.

In his comments when releasing English’s slight, 37-page plus appendices report, Bishop claimed vindication for National’s criticisms of KO when in Opposition and upon entering Government. “We now know that our serious concerns about Kāinga Ora were valid.”

He said the joint report commissioned by Labour in late 2022, showed “even the profligate Labour administration” was “donkey deep” in the Kāinga Ora financial mess.

He made a political point of figures showing that after building the extra 4800 homes required by 2025, KO would then not add to its total of houses but had forecast to sell 3000 a year.

However it is clear in the English report the agency would be building the same number of homes as it replaced, in a process of eliminating high maintenance 50-to-60 year-old buildings, and thus lowering the age of its portfolio. The money raised ($6b) by selling those old houses or land would be ploughed back into better stock.

Bishop declared: “I can rule out a mass sell-off of state houses. It’s very important that we continue to grow the number of social houses in New Zealand and I use the term ‘social houses’ deliberately because this is a Government that is going to be agnostic as to who delivers social houses.”

And in a nod to English: “One of the legacies of the last National government is the system that was put in place that allows the community housing sector, not just Kāinga Ora but the community housing sector.”

The coalition wanted the community part of social housing to grow, “that does not necessarily mean Kāinga Ora will grow in net terms”.

He said in Parliament this week: “We are far more interested in innovative funding and financing formulas that allow those houses to be built,” and mentioned ACC “and other forms of capital” fund social houses.

The minister’s care in using the words homes and houses might not preclude a sell-off of Kāinga Ora land.

In an undated paper to the Cabinet business committee after the English report had been received, Bishop and Willis quote the review team saying: “We understand that the bar for divestment of property is currently prohibitively high.”

The reviewers say if the land isn’t economically sensible for KO to develop “then consideration should be given to divesting it to enable private development to take place”. And if the market value of individual properties outweighed the benefits of redeveloping them into new social housing they should also be sold.

“In both cases, the proceeds from any individual house sales can be reinvested into more cost-effective provision of social housing.”

At the Monday post-Cabinet press conference, Bishop indicated KO’s head office would be a cost target, signalling it would likely lose its responsibility “for an enormous number of tasks given to it by the previous government”. He listed the extras as progressive home ownership, three shared equity schemes, first home grants and urban development programmes, plus the Infrastructure Acceleration Fund and the Housing Acceleration Fund. He said: “Some of them are worthy, some of them you could have a debate about.”

“It does an enormous number of things and because it does an enormous number of things, it has taken its eye off the ball of the core task of housing New Zealanders. And that’s what we want to get it back to do.”

Back … to 2017. The minister was effusive about what he said were more efficient builds, and better tenancy support from community housing services. But he and Prime Minister Christopher Luxon kept saying community service-provided houses would be “an ‘and’ not an ‘or'” to continued state house building.

Bishop’s debate about the worth of the first home grant scheme didn’t have to wait long.

After Newshub revealed within a day of the report’s release that it would be scrapped, he had to bring forward what was a Budget announcement, saying the $60m-a-year fund that gave some first home buyers $5000 each towards a deposit was “low value expenditure”.

Instead, over two years, cutting the first home grant spending would free up $140m and that would be spent on 1500 new social homes to be provided by “Community Housing Providers, not Kāinga Ora”.

Labour’s response

First, Labour pointed out that the 1500 new social homes the coalition has just promised by scrapping the first home grants was one quarter of the 6000 total it had pledged when in power.

The party’s housing spokesman Kieran McAnulty told Parliament in an urgent debate on Tuesday that Kāinga Ora had replaced a “shell of an organisation” in Housing NZ, which by 2017 under National and English “existed for one reason and one reason only, to sell state houses”.

“It was a shame. It was a disgrace and we had to build that up from nothing.”

McAnulty said Bishop and Luxon seemed surprised it cost money to build new homes. “A lot of houses, 14,000 is the number that public houses increased by in the past six years. That is an astronomical number in the context of what Housing NZ was and what Kāinga Ora has become.”

He chided the Government for repeating the change in KO’s debt (from $2.8b to $12.3b over five years) but failing to say KO’s assets had increased by $20b to around $45b in the six years Labour was in power.

“Why, because they are trying to paint a picture. They are trying desperately to undermine an organisation that had to start from scratch.

“If they want to blame us, they can blame us for housing people, because that’s what we did. We housed people.”

McAnulty said the proposed Community Housing Associations were modelled on a system in the UK. “Of all the European examples to follow on housing policy, the UK is the last one. The number of social houses has gone down, the number of homeless has gone up. It’s the very thing we should not be doing.

“But it’s the very thing they will do, because it’s the thing they did last time.”