The first Kiwibuild announcement was made in the weekend, and the Kiwibuild programme – the government’s flagship housing policy – deserves a critical analysis.
Labour’s Kiwibuild policy was first announced in 2012, and the key points haven’t changed much since then:
- The government wants to build or facilitate 100,000 new homes over 10 years;
- At least 50,000 will be in Auckland;
- All Kiwibuild homes will be “affordable”;
- All Kiwibuild homes will be for first home buyers only.
There’s a lot to like about the Kiwibuild program: we like the aspiration behind it, and the focus on affordable homes. For too many years, builders have focused on building large, expensive homes, which simply aren’t a good match for New Zealand’s changing demographic profile.
The Kiwibuild targets are ambitious, and we like that too. For context: New Zealand currently has around 1,850,000 homes. Around 600,000 are rented. More context: New Zealand typically builds around 230,000 homes in a decade. Still more context: Auckland typically builds 76,000 homes in a decade.
Compared with the numbers above, Kiwibuild has huge scale. Of course, there will be “crowding out” – more on that below. But if this wasn’t a factor, Kiwibuild would lift home building numbers by 40% across the country, or by 66% in Auckland. At the same time, it could give tens of thousands of families a better chance of buying a home, and lift the nationwide home ownership rate by several percent.
For the last bit of context: Kiwibuild focuses on ‘affordable’ housing, which has been largely ignored in recent years. Productivity Commission work shows that, by 2010, less than 10% of the new homes being built were in the lower quartile for house prices – i.e. at the cheap/ affordable end of the market. Apparently, this has now dropped even further, to less than 5%. At the same time, those quartiles have shifted, because house prices across the board have rocketed up since 2012.
There’s a huge potential market of people who’d like to own their first home but can’t afford it, but might be able to under the Kiwibuild program – if the government can deliver it successfully.
Although it’s a big shiny idea and has captured the imagination of plenty of people, we still don’t actually have much detail on Kiwibuild. Even with the Unitec announcement in the weekend – 3,000-4,000 homes, with perhaps 1,000-1,500 of those to be Kiwibuild – there is still not much to sink your teeth into. We need more than just a one-page fact sheet.
Suggestions that the government will buy homes ‘off the plan’ and sell them to first home buyers on completion are welcome. It gets developers closer to the presales targets they need to start building. It also recognises that first home buyers struggle to buy off plan, because they find it hard to predict where they’ll be in 1.5 or 2 or years’ time when the development is finished (or because they don’t have a big enough deposit, yet).
So that’s the good part of Kiwibuild, now iet’s look into some of its potential issues by covering off:
- Are its construction targets achievable?
- Will it just ‘crowd out’ other housing?
- How can we avoid potentially perverse incentives?
Are Kiwibuild targets achievable?
Kiwibuild has always been about delivering 100,000 homes in 10 years. But since the policy was unveiled in 2012, the construction sector has gone from post-GFC lows to record levels of activity. Cost escalation has been severe, and this makes it harder to build affordably or achieve the Kiwibuild targets.
Labour always acknowledged that Kiwibuild would take time to scale up, but it’ll be even tougher now. The government wants to deliver 16,000 Kiwibuild homes in the first three years, but MBIE think it will only achieve 8,000.
The 10-year target is 100,000 Kiwibuild homes, but economist Shamubeel Eaqub says we need half a million, and with perhaps a bit of bravado, the Housing Minister replied that he expects to build “far more” than the targeted 100,000.
We think the target will be a real stretch, but that’s no reason to give up on Kiwibuild; if anything, it makes it more urgent. Kiwibuild makes it crystal clear that the government wants homes built at the lower end of the size/ price range, and builders should respond by delivering more, smaller homes. That’s what we need, and we’re not doing it at the moment.
Will Kiwibuild just ‘crowd out’ homes that would have been built anyway?
Critics of Kiwibuild argue that the program won’t result in many extra homes being built. It’s a valid criticism. To be fair, though, Kiwibuild was launched in 2012, before the Unitary Plan was notified, before the Housing Accord or Special Housing Areas, before the government of the day had given much thought to Auckland housing. At the time, it was a sharp contrast between Labour and National.
By the end of its reign, the National government was starting to do a lot more on housing, and the contrast looked smaller. In May 2017, then-Minister Amy Adams “announced that the Government’s Crown Building Project will replace 8,300 old, rundown houses in Auckland with 34,000 brand new purpose-built houses over 10 years”. Kiwibuild continues and extends on this work, but it’s fair to share the credit between Labour and National. Still, it’s unfair for National to blame Labour for not delivering even more homes, given National only started putting effort in after Kiwibuild was first announced.
But homes on Crown land could crowd out private sector activity, and Kiwibuild homes on private land will crowd out even more. It would be stupid politically for Phil Twyford to admit it, but the ‘net’ increase in home building from Kiwibuild will be much smaller than the headline 100,000 number. Still, we’re not too worried about this as long as we get a shift in the type of housing being built: more homes, more affordable, and smaller.
And a point that many have missed: Kiwibuild aims to flatten out the booms and busts of the construction industry. This is a direct contrast with the previous government’s approach, but it’s a move that the industry has called for over many years. Yes, Kiwibuild will ‘crowd out’ some homes, especially in booms like the present one. But it will give much-needed support in the years when private activity is lower.
And lucky last: if Kiwibuild can build three smaller homes with the resources it might take to build two larger homes – and if it can actually coax the market in this direction – then this will give a real boost to headline home building numbers.
Will Kiwibuild fall victim to perverse incentives?
Labour have always fixated on the (relatively) low purchase prices of Kiwibuild homes, and they’re still fixating on it. It’s a “Fistful of Dollars” attitude. Before the 2017 election they said:
The stand-alone KiwiBuild homes in Auckland will be priced at $500,000-$600,000 with apartments and terraced houses under $500,000. Outside of Auckland prices are likely to range from $300,000-$500,000.
Now that Labour is in government, they’re still using these figures. Often, they’re mentioning prices way lower than anything being delivered in the market today.
So how will they achieve these price thresholds? We worry that they have a “perverse incentive” to cut corners. They could make tradeoffs that trim the purchase price of Kiwibuild homes, but increase their ongoing costs – for a higher “total cost of ownership” in the long run. Kiwibuild buyers will pay the price of this, and it could even undermine other government objectives like tackling climate change.
There’s a good argument for shifting some costs out of the ‘purchase price’ and into the ‘ongoing costs’. One example: targeted rates rather than development contributions. We won’t go into the maths here, but this could genuinely save some money and make developers’ job easier.
A little more troubling is the idea of skimping on energy-efficient features, which cost more initially but save money in the long run.
And worst of all: the government has a perverse incentive to take Kiwibuild to the wop-wops. Land in far-flung parts of Auckland is cheaper because it’s far away from everything; far away from schools, jobs, amenities. People living further out tend to drive further and spend more on transport; they have higher costs for petrol, vehicle maintenance and in the value of their time.
Home buyers might be happy to put up with higher transport costs for a cheaper home, but there’s a big externality: greenhouse gas emissions. Living further out means more driving, which means higher emissions. Since the new government wants to take action on emissions, it should really be aiming for more homes in central areas. And it needs to avoid the “perverse incentive” of building homes that are isolated from the rest of the city, just so it can meet its own arbitrary price caps.
Maybe we need to consider “Kiwibuild: For A Few Dollars More”?
Constructive Thought | Unitec Te Puna
Unitec is the focus of the government’s latest Kiwibuild announcement, but it’s also New Zealand’s largest polytech. Around 15,000 students (or 9,000 ‘equivalent fulltime students’) attend courses every year. Unitec is investing in its campus to create more modern, fit-for-purpose learning environments. Two new buildings opened in 2017, including a ‘campus hub’ building, known as Te Puna, and a new Trades, Engineering and Construction facility – very timely in a market starved for construction workers. The Kiwibuild announcement from the weekend cements Unitec’s long-standing plans to consolidate into a ‘denser’ core campus, and sell off excess land for housing.
In the Press
Local Media Highlights Monday 19 March - Monday 26 March 2018
A government announcement that it plans to build up to 4000 houses on just under 30 hectares of Unitec land in Auckland's Mt Albert has done little to comfort sceptics of its KiwiBuild programme.
It was revealed yesterday that 30 per cent to 40 per cent of the homes it planned to build on the land bought from the education provider would be "affordable" - costing $500,000 to $600,000. That would include townhouses, apartments and flats.
It is the first announcement of the KiwiBuild programme, through which the government hopes to build 100,000 new houses over 10 years, half of which will be in Auckland.
Housing Minister Phil Twyford says a new housing development that will see three to four thousand new-builds pop up on Unitec land will tackle Auckland's housing crisis head on.
Twyford and Prime Minister Jacinda Ardern were welcomed onto Unitec's Te Noho Kotahitanga Marae this morning to deliver the announcement.
The development was the first major plan released under the Government's KiwiBuild programme.
Unitec is condensing its campus and 29ha of its land will be transferred from Unitec to the Crown.
Auckland's housing market may have a recent history of second winds, but ANZ NZ's economists are not expecting it to surge forth again from its current slowdown.
In their latest New Zealand Property Focus report, ANZ's economists suggest households are coming to terms with what is sustainable for the Auckland housing market given affordability limits are stretched.
New Zealand businesses are being "left behind at a rate of knots" as their global competitors swiftly adopt artificial intelligence and robotics technology, says the chief executive of Callaghan Innovation, Victoria Crone.
Speaking ahead of the launch today of a discussion paper on innovation through AI, Crone said she was "seriously concerned" by evidence that many New Zealand businesses were "pretending this isn't happening", with ageing ownership of small and privately held New Zealand businesses contributing to the problem.