KiwiBuild a ‘massive political distraction’

“The government could lower unit construction costs in many ways, as it is well aware,” former Business Roundtable economist Bryce Wilkinson says in a new research note today. It could ease up on red tape, improve the supply of urban land by removing regulatory restrictions, and encourage high-rise construction to improve economies of scale.

Indeed, all of these were the focus of other government policies, such as creating an Urban Development Authority this year to bypass normal Resource Management Act processes to fast-track housing developments in high-cost areas like Auckland.

“None of these initiatives would require the government to be a house builder,” says Wilkinson. He argues that, “if KiwiBuild makes no difference to the future land-inclusive cost of building a new home beyond year 10, it makes no difference to house prices in the long run.”

Housing and Urban Development Minister Phil Twyford took advice from the NZ Initiative when in Opposition and was persuaded by its argument that artificially creating urban boundaries was pushing up the cost of land for housing within those boundaries. He convinced the Labour Party to adopt policy abolishing urban-rural boundaries.

He is also pursuing long-term bond financing for essential infrastructure, the up-front cost of which is often blamed for making new houses unaffordable.

However, KiwiBuild was failing on the objectives it was established for, while being the flagship initiative for housing affordability solutions.

“KiwiBuild cannot hope to materially increase home ownership proportions – the original 2012 objective,” the NZ Initiative report says. “Additional housing, if achieved, will likely lift renting and ownership more or less in tandem.”

In other words, focusing on rates of home ownership as a measure the policy’s success was setting it up for political failure.

KiwiBuild was also now “for the relatively well-off”, now that the price of a KiwiBuild home was around twice the $300,000 target set in the original policy.

It was “not about social housing to help those at the bottom” or “about helping struggling first-home buyers”.

As the policy has morphed from actively building new homes to underwriting the construction of homes by private developers at a certain price, KiwiBuild had also effectively become a subsidy scheme, the report says.

“It cannot hope to increase housing stock sustainably. Only enduring lower property prices can induce people to own more dwellings than otherwise. KiwiBuild reduces neither land values nor constructions at the margin.” As a result, its main effect is to change “the composition of the housing stock by decree rather than by public demand”.

KiwiBuild constituted “a massive political and bureaucratic distraction from what is really needed – direct action to reduce land values and construction costs”.

“The government is ensnared by incompatible commitments to help relatively well-off first home buyers without subsidising them and to deliver homes that people would not want to buy if unsubsidised. Either outcome is politically embarrassing.

“KiwiBuild has become Housing Minister Phil Twyford’s tar baby,” the report says.