Nothing in the KiwiBuild reset to stop the housing crisis
The long-awaited reset of KiwiBuild confirms that the government still doesn’t grasp why the policy went so spectacularly wrong. When KiwiBuild was conceived back in 2012, it was easy to blame the unaffordability of housing on a lack of supply – new dwelling consents the previous year had plunged to a 58-year low of 13,236. But with consents now at a 45-year high of 35,472, it no longer makes sense to suggest that high house prices are due to a lack of construction activity. KiwiBuild remains a policy that has been formulated to treat the symptoms of a problem that the government has failed to properly diagnose or understand.
In that regard, it’s a small mercy that the target of 10,000 homes per year has been abandoned. There’s no way the government could conjure up that amount of additional building activity from an industry where capacity is already highly stretched.
But if the rate of construction is not the problem, yesterday’s announcement shows that the government still hasn’t got any ideas to make a meaningful difference to housing affordability. The announcement features sticking-plaster solutions: a rent-to-buy scheme, a possible shared equity arrangement, and reduced deposit requirements under the renamed “First Home Loan” and “First Home Grant” policies. These policies hint at one of the biggest hurdles for people trying to buy a home: accumulating a deposit. For a few people, the changes will make homeownership more achievable. But they do nothing to address the fundamental question of why housing has become so expensive.
One of the key drivers of the climb in house prices over the last decade has been falling interest rates: repayments on a $500,000 mortgage at today’s interest rates are smaller than on a $322,000 mortgage in early 2008. In other words, if people can scrape together a deposit, they’re willing and able now to pay more for a house because they can service a larger debt – even if the genuine underlying value of the house hasn’t really risen by 50% over the last decade.
There is little the government can do about this apparent side-effect of low interest rates. However, if we look back to the housing boom during the 2000s, interest rates were less of a driving factor behind the lift in property values. Instead, in the lead-up to the Global Financial Crisis, surging land prices played a major role in reducing housing affordability.
The reality is that the limited supply of land available for new development or intensification is not keeping pace with demand and is pricing people out of the market. The government is talking about changes on this front, with David Parker announcing a “comprehensive overhaul” of the Resource Management Act in July and Phil Twyford proposing a National Policy Statement on Urban Development last month. Even if the government progresses from talk to meaningful change in these areas, it will only go part of the way to improving the supply of land. Significant improvements in infrastructure funding and provision are also needed at a local government level. Mechanisms also need to be introduced to avoid councils being captured by self-interested ratepayers, who currently benefit as their own property prices are driven up by constraints on new developments.
These sorts of changes are, of course, much broader than KiwiBuild’s scope ever was, but they reflect the enormity of the housing problem that has arisen.
At a more focused level, the government has missed the chance to shift its building programme from the middle-class welfare of KiwiBuild to concentrate on social housing, where the needs are evident. Data from the Ministry of Social Development shows over 12,300 applicants on the waiting list for social housing, a figure that has climbed rapidly from 3,352 four years ago. That is not to say the government is not working in this space – central government dwelling consents this year have reached their highest level since 1978, as the stock of state houses in Auckland and Porirua is redeveloped. Rather than trying to second-guess the market by continuing to construct KiwiBuild houses, the government should put those resources into expanding the stock of state housing even more quickly, as this area is one where the market is unable or unwilling to meet people’s needs.
Within the construction industry, there were also hopes that the mass construction implied by KiwiBuild would foster the expansion of prefabrication technology in New Zealand. Although the cost of materials is not the main driver of high house prices, there is nevertheless potential for efficiencies and cost savings to be made through more offsite manufacturing and assembly of building components and modules.
To date, firms have been reluctant to invest in this technology given the relatively small size of the New Zealand market and our traditional appetite for bespoke housing. If it chooses, the government could still play a role partnering with businesses in this area, understanding that any success it has in providing a sustainable lower-cost option for new home buyers would help reinforce the changes that need to take place around land prices.
All these other possible actions combine to highlight how underwhelming the KiwiBuild “reset” is, and that it will not deliver significant change to make houses more affordable. The government has missed a chance to take decisive action to free up land supply and focus more resources on social housing. Over the long run, this lost opportunity means that getting on the housing ladder will remain unattainable for many in New Zealand. If we really want to see lower housing costs across the board, the root causes of the problem – land supply and infrastructure issues – are the areas that really need to be addressed.