Friday 13 July 2018

Kiwibuild lotteries

I'd put together a few notes on the Kiwibuild lottery last week in advance of a radio slot that got bumped in favour of an interview with Lauren Southern.* I blame all of you who complained about her visit. Nobody would have even known she and that Molyneux guy were coming to New Zealand if there hadn't been the reliable outcry demanding they be banned, and then that makes a story that makes them win regardless of whether they're barred entry to New Zealand. Just silly.

Anyway, back to Kiwibuild.

As background: the government's trying to get a lot more houses built in Auckland, and one of the ways it's doing that is through the Kiwibuild program, which will be building some houses directly and guaranteeing the purchases of others off the plans - the latter part might be a consequence of the government having banned foreign buyers from buying those houses and apartments off the plans to rent out and consequently screwing up the financing of new developments.

The houses are not going to be cheap, but are going to be cheaper than a lot of houses on offer in Auckland. But setting a low income ceiling guaranteeing them to low-income buyers could mean built houses would go unsold because they're still pretty expensive. So they have a high income cap and a lottery if they're oversubscribed.

I'd put together a few notes before the scrubbed interview; they're below.
  1. Kiwibuild is only a very minor part of the real efforts to restore housing affordability. The real action is in changes in infrastructure supply that can enable more land to be brought into use in housing, and that can enable greater density in town. The constraints have been that Council has not been able to run the infrastructure the city needs under its current debt limits. Fortunately, the government’s latest statement on Kiwibuild noted that they’re looking at things like project-based financing that can unlock land for housing.

  2. A substantial part of what Kiwibuild is doing is just displacing other construction that would have happened anyway. Treasury and MBIE disagreed a bit over the figures on this, but Treasury at least was taking displacement seriously while MBIE assumed there would be no displacement. Displacement is very likely when the construction sector is running at or near capacity – workers and materials that would have been used in other developments will get used in Kiwibuild houses instead (whether they’re built directly by government, or bought off the plans by Kiwibuild from existing developers).

  3. Leaving that aside, Kiwibuild provides affordable housing not so much by selling houses below market prices, but rather to the extent that it increases the overall supply of housing. If all that happens is a displacement of existing building and sale at below-market prices, then there is that potential lottery problem. But if it expands housing supply successfully, then overall prices can start easing back and there’s less of the lottery component because house prices ease back. I understand there’s a 3-year ownership rule in place before the owner of a Kiwibuild home can on-sell it. 

  4. The proposal to require Kiwibuild owners only to on-sell their house at below-market prices to another Kiwibuild-qualified buyer, or to let the government take a proportion (half?) of the sale proceeds, risks skewing homeowner incentives around maintenance and upkeep. I own my house, and I pay to keep it up to spec not only because it makes it nicer to live in, but also because it maintains the resale value should I ever want to sell. If I expected that the government would take a pile of the proceeds from any sale, then I’d do a lot less of that. To avoid that problem then starts getting into messy accounting finagling of keeping track of all of your receipts for home maintenance and charging that against the government’s side of any Kiwibuild sale proceeds – and invites inflating those figures with other shenanigans. 

  5. Basically, the hassle doesn’t seem worth it unless the government is really convinced that Kiwibuild and the government’s other initiatives to address housing affordability won’t work. If prices ease back, the lottery aspect does too. But that makes for a bit of a catch-22. The other problem I worry about a ton is that the real cost of Kiwibuild is in bureaucrats’ time and attention. There are only so many folks in the Wellington bureaucracy who can actually manage to do anything. Some of the good ones are working hard on getting things right for infrastructure financing. The more of the good ones that get pulled over to sort out messes around Kiwibuild, which is still far less important than sorting out infrastructure, the less likely we are to get out of this mess.
* At point of queuing this post for ski-holiday-week, I don't know whether the interview is to be rescheduled. 

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