Labour’s Kiwibuild policy was first announced in 2012, and is now a flagship housing policy of the new Labour-led government. The key points haven’t changed much since 2012, although the detail has been fleshed out a bit since then. Those key points are:
- The government wants to build or facilitate 100,000 new homes over 10 years
- At least half the new homes 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; I like the aspiration behind it, and I like 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 I 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 very significant scale. If we assume that all Kiwibuild homes wouldn’t otherwise have been built (this is very optimistic, of course) then the program 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 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:
This graph (from the Productivity Commission’s 2012 inquiry into affordable housing) 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. I heard at a talk the other day that we’re now down to less than 5%.
That’s to say nothing of house prices generally, which of course have gone up hugely since 2012, along with deposit requirements.
I reckon 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. Apparently more is coming in the next few weeks.
We’ve seen glimpses – e.g. that the government will buy homes ‘off the plan’ and sell them to first home buyers on completion. I like this idea, by the way. It gets developers closer to the presales targets they need to start building. And it 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. Buying the homes when they’re finished is much easier.
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.
Plus, construction prices have escalated by at least 20%, and land prices have gone up much more than that. This makes it harder to build affordable homes and 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 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.
I think even the original target will be a 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 it’s not the kind of housing we’re building 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 Special Housing Areas were a thing, before the government of the day had given much thought to Auckland housing.
By the end of its reign, the National government was starting to do a lot more. 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 not really fair for National to blame Labour for not delivering even more homes, when it was only after Kiwibuild was first announced that National really got started on this stuff.
So that’s the status for building on Crown land. Kiwibuild was launched early; National came to the party a bit later; and now Labour will implement it. Shared credit.
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 pretty 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, I’m 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.
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. 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. In some cases, they’re mentioning prices way lower than anything being delivered in the market today. And I worry that corners will be cut to get the prices below the Kiwibuild thresholds.
I’m not talking about building defects, or low-grade products or anything like that. Building quality is regulated through the Building Code.
I’m talking about the government making tradeoffs that push down the purchase price of Kiwibuild homes, but increase their ongoing costs – for a higher “total cost of ownership” in the long run. Since the government has put so much emphasis on purchase price, they have “perverse incentives” to take these tradeoffs in the wrong direction.
This could cost Kiwibuild buyers more, and it could even undermine other government objectives like tackling climate change.
I can see three tradeoffs:
- Infrastructure paid up front, vs. infrastructure paid off over time. At present, a good chunk of infrastructure costs are paid up front, as “development contributions” charged by the council. The alternative is to use “targeted rates” that are paid off over time.
- More expensive, energy-efficient homes, vs. cheaper, more basic homes. Even a ‘basic’ new home still beats most older houses. But paying for additional energy-efficient features could save money in the long run.
- Centrally located but expensive land, vs. remote but cheap land. The government might head further out of the city to find cheaper land. For example, it might buy land in Helensville rather than Massey.
I’ve got no problem with #1: there’s nothing wrong with shuffling these costs around. For example, $50,000 of infrastructure costs might be shuffled out of the ‘purchase price’, and instead the buyer would pay targeted rates of $3,000 every year forever. The home might look $50,000 cheaper, but the real cost of the housing hasn’t changed. Banks won’t be fooled, either; they’ll factor the ongoing cost of targeted rates into their assessment of what they will lend the buyer, and the interest rate they charge.**
There could be climate change implications with tradeoff #2, but they’re minor. Most home energy use is now from electricity, and NZ’s electricity is mainly renewable, so this isn’t a biggie. Still, it might be a missed opportunity to provide much better housing, which after all is going to be around for many decades to come. This could cost Kiwibuild home buyers more in the long run.
Taking Kiwibuild to the wop-wops (#3) is a problem. 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 make the tradeoff and 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.
Like any policy, Kiwibuild isn’t perfect. I think it’s pretty good overall, but could do with some tweaks.
- The focus on affordable housing is great, and the ambition is good too. Hopefully it’s enough to stimulate a change in housing generally, so that even the non-Kiwibuild homes are more affordable and better matched to our changing society.
- I don’t like the focus on delivering ‘homes under $X,000’. It’s a short term focus, and I’d want to see more consideration of the long term – especially as we come to grips with the long term problem of climate change.
- I’d like to see Kiwibuild pivot slightly, to retain a focus on affordability but express that in different ways: homes that might cost more than $600,000 up front if that’s what it takes, but that are centrally located and well insulated.
- If I could change just one thing about Kiwibuild, it’d be to acknowledge that most Kiwibuild homes should be well located, inside the city if possible or on the edge of the city if not. They shouldn’t be way out beyond the city edge, and I’d love the government to explicitly reject doing this.
* These stats are based on regional building consent figures from mid-1990 through to 2017.
** Shifting infrastructure costs to targeted rates could actually be a slight improvement. As it stands, the developer pays these costs, and then has to add on their finance costs and profit margin. With targeted rates these extra ‘costs’ should reduce.