KiwiBuild Eligibility – More Fine-Tuning is Needed

August 2018

The announcement of the eligibility criteria for KiwiBuild (4 July) generated a lot of interest. Much of the initial public comment focused on the income thresholds for KiwiBuild eligibility. These are currently set relatively high. Couples earning up to $180,000 will be eligible, which is around the 84th income percentile for all households. “Sole purchasers” earning up to $120,000 will be eligible which is around the 65th income percentile. The high thresholds coupled with the ballot process have drawn some criticism, though much of the response has been in the “wait and see” basket.

The small number of eligibility criteria suggests a fairly blunt approach is intended from MBIE. Our review suggests there some inherent difficulties in KiwiBuild eligibility which arise from the combination of using only one set of income thresholds when there are significant regional variations in income, and at the same time adopting only two household types which do not reflect different housing needs. The apparent drive for simplicity is likely to produce some unexpected adverse outcomes for the scheme.

KiwiBuild Aims

The core aim of the scheme remains valid and valuable – it is to enable households to become dwelling owners when they would not otherwise be able to. The objective is to build 100,000 dwellings nationwide, with 50,000 of those in Auckland, which means KiwiBuild is primarily about increasing the supply of dwellings in the lower value bands - something the commercial market has spectacularly failed to deliver.
The sheer scale of the scheme means that the other main objective – that KiwiBuild will facilitate dwelling ownership for households who would not otherwise become owners – has to be a secondary objective. Simply, the scheme’s effectiveness will be maximised first by having all 100,000 KiwiBuild dwellings actually built, and second by those dwellings being sold to non-owner households, all within the targeted 10-year time frame.

The KiwiBuild 'Envelope'

A critical aspect of the scheme is that dwellings will be built and then sold to private owners. As well as getting the 100,000 dwellings actually built, the other big condition for success is that there must be enough households to take up the opportunity. Households must qualify on two counts – first to be within MBIE’s eligibility thresholds, and second to also satisfy a bank that they can service the loan needed to buy a KiwiBuild dwelling. There is an income band between eligibility at the top end (MBIE threshold), and affordability which sets the lower limit (the banks’ threshold).

The band between eligibility (MBIE) and affordability (banks) is the ‘KiwiBuild Envelope’.

Which means that for the KiwiBuild initiative to succeed at the scale highlighted, there must be around 100,000 households in this envelope.

How much household income is required for a KiwiBuild dwelling to be affordable? At a price of $650,000, a 3-bedroom KiwiBuild in Auckland is “affordable” at a household income of around $125,000 (1). The Auckland 2-bedroom KiwiBuild is affordable at an income of around $115,000. And at $500,000 the Auckland 1-bedroom dwelling, and any KiwiBuild elsewhere in New Zealand, is affordable with an income of around $95,000. (These estimates are based on a maximum loan repayment at 35% of pre-tax income, a 20% deposit, a 30-year loan, and interest of 7.5%pa – all of which are fairly standard for affordability estimates. Lower interest rates and longer loan periods will reduce the income required, smaller deposits will increase it). 

So, the KiwiBuild Envelope is between around $95,000 based on affordability, and $180,000 based on eligibility. There are substantial numbers of non-owner households within this envelope, able to meet both the eligibility and the affordability thresholds. But there are also substantial numbers of non-owner households in Auckland and across New Zealand who will be unable to afford a KiwiBuild. 

Which is the key reason why the eligibility thresholds for the scheme have been set quite high. It makes sense strategically to have the eligibility net wide. KiwiBuild needs sufficient numbers of households able to afford a KiwiBuild dwelling to ensure the scheme can start up and keep going. The eligibility threshold of $180,000 can exclude the top end incomes (those who are least impacted by affordability issues). But the lower that eligibility threshold is set, then the greater is the risk of there not being enough households who are both in the envelope and want a KiwiBuild dwelling. 

KiwiBuild’s Large Scale

The scheme is very large scale, and large numbers of households need to be involved. The large scale means the scheme will require considerable momentum and critical mass, throughout a whole decade.

KiwiBuild is not a giveaway scheme. The aim is to get the dwellings built, and (then) to sell them. Those sales will raise the money for the next round of construction. That means the scheme needs plenty of demand in the tank - aka potential purchasers in the envelope - to catalyse and maintain its momentum. 

If there are plenty of households in this envelope, then KiwiBuild’s development of new dwellings can be relatively fast – the dwellings can be built, sold off relatively quickly, and the proceeds can go back into the kitty to fund the next KiwiBuild dwellings. At its peak in the mid-2020s, KiwiBuild will need at least 12,000 households each year including about 6,000 in Auckland in the envelope to take up the annual dwelling output. KiwiBuild in full flight would account for major shares of all new dwellings built - around 32% nationally, and about 29% in Auckland.

If there are not sufficient numbers of households in the envelope, both at the start and throughout the decade, then momentum may be lost, and if uptake slows then the construction may slow as a consequence. Which is why the eligibility threshold has been set high, to sustain KiwiBuild’s momentum and its longevity. It would not be a good look to have 500 or so KiwiBuild dwellings ready for the market, but without enough eligible households who are able to afford them.

How many households in the KiwiBuild Envelope?

Will there be enough non-owner households in the envelope to take up the KiwiBuild target? For Auckland, the 50,000 dwelling target looks to be in the right ballpark over the 2018-2028 period, though with not a large amount of slack. For the rest of New Zealand, where the target is another 50,000, the number of potential purchasers is somewhere north of 80,000 so there is more potential demand. If the eligibility thresholds were set lower, then there would be fewer potential KiwiBuild purchasers.

Strategically, therefore, the relatively high income threshold would seem to offer sufficient critical mass for KiwiBuild, both at the start and into the middle years of the scheme. 

There are both upsides and downsides around this overall picture. On the downside, if KiwiBuild dwellings cost more than expected, or if interest rates increase substantially, then the affordability threshold will creep up and reduce the size of the envelope. 

On the upside, if KiwiBuild can deliver dwellings more cheaply than the maximum price levels indicated, then there would be more households in the envelope, because of better affordability. The same effect would apply if affordability were based on lower interest rates – the Reserve Bank has indicated no change in the OCR before 2020 – as the affordability threshold could extend further into the lower household income bands. Having said that, the main banks commonly take a conservative stance in their housing loans, basing affordability on an assumed 7.0% to 7.5% interest rate, which keeps upward pressure on the affordability threshold.

Although the issue is widely recognised, there is no indication - yet – of any high level challenge to these relatively conservative financing conditions. Such high level discussion may arise because conservative conditions act to squeeze out of the envelope substantial numbers of households, including many with high housing needs. For example, applying a 6.5% interest rate rather than 7.5% would let another 20,000 or so middle-lower income households into the envelope as potential KiwiBuild purchasers.

Eligibility Wobbles

Given the abundant scope for external factors to impact on KiwiBuild scheme, it is very important to get the scheme itself as strong as possible from the beginning. Which is why we have major concerns about the currently proposed eligibility structure.

Potentially significant inequalities and consequent unintended outcomes are already apparent. 

The criteria seem clear enough and simple – only two income thresholds, only two types of household, and the same thresholds across the whole country.

However, in combination those simple criteria create a gap, and a poor deal for “sole purchasers” compared with “couples”. Sole purchasers as currently defined cover both single person households, and one-parent families. While both one-parent families and single person households will have only one “purchaser”, they are quite different types of household, and have quite different housing needs.

The accessibility to KiwiBuild for a one-parent family is much less than it is for a two-parent family or a couple, particularly for those in Auckland. This is because the combination of high Auckland dwelling prices – for KiwiBuild itself – and the lower income threshold creates a real squeeze for one-parent family sole purchasers to get into the envelope. 

Our analysis (naturally we have built a model of the KiwiBuild sector within the housing market, to understand how, where, when, and for whom it will have effect) showed this up very early. Nationally, about 24% of all non-owner households are in the envelope – below the eligibility thresholds and above the affordability limit. In Auckland, the overall share is around 22%, because income levels are higher. 

However, in Auckland only 8% of non-owner one-parent families can get into the envelope. 

This is because the envelope for one-parent families is narrow, between affordability at $95,000 and $120,000 at eligibility. 

This range still gives access to 1-bedroom KiwiBuild dwellings in Auckland. But many one-parent families need more than one bedroom – by definition, one-parent families have more than one person in the household. A 1-bedroom KiwiBuild may not meet the needs of a one-parent family with 3 teenage children, for example.

Simply, the current criteria place a built-in problem for one-parent families seeking a KiwiBuild of 2 or 3 bedrooms. Their sole purchaser upper income threshold of $120,000 kicks in just above the affordability threshold of around $115,000 for a 2-bedroom KiwiBuild. 

And the eligibility limit does not even reach the affordability threshold of around $125,000 for a 3-bedroom KiwiBuild. 

The criteria apply a squeeze to Auckland’s sole purchaser one-parent families who want to own a KiwiBuild. The higher income threshold for two-parent families and couples offers them much wider space in the envelope. While the envelope allows in only a small share 8% of one-parent families, it allows in around 34% of two-parent non-owner households. Simply, couples and two-parent families have about four times greater accessibility than one-parent families.

This disparity does not reflect differences in housing needs – for example, a one-parent family of an adult and a teenage child, and a couple, both two-person households.

The accessibility disparity is much greater for a 2-bedroom KiwiBuild - two-parent families have about ten times greater accessibility than one-parent families.

The disparities are clear in the graph. The figure shows the estimated numbers of non-owner dwellings in Auckland, for each household type. The lower segment on each bar shows the numbers for whom KiwiBuild will be not affordable. The upper segment showing the numbers who earn too much to qualify. The green segments in the middle show the KiwiBuild envelope. For one-parent families, the envelope is very thin, especially for 2-bedroom KiwiBuilds.

This issue is driven predominantly by the income threshold for sole purchasers. While it is a particular issue for Auckland households, it applies to one-parent families right across the country. If the threshold were $150,000 rather than $120,000, for example, the number of one-parent families able to get into the KiwiBuild envelope would double. 

KiwiBuild has considerable potential. However, it is very important that it is carefully set up from the start, and that the eligibility criteria and the combinations are closely thought through, so that the scheme will be able to deliver on its promise.

Given that some structural change is clearly needed to sort out the problems shown above, then there may be opportunity for other fine tuning at the same time. This may take on some of the learnings from comparable schemes in similar economies overseas. For example, might there be higher priority for households with children? Or in time might there be greater prioritisation of eligible households in the lower income bands? Or might there be better recognition of the regional variations in household incomes?

Or even an initiative which does not leave the affordability criterion solely in the hands of the banks, so that more households could get into the KiwiBuild envelope.

For further information or comment on this article, please contact Douglas Fairgray (doug@me.co.nz or 09 915 5514)

Notes:

(1) Gross household pre-tax income, affordability is based on a 20% deposit, loan at 7.5% interest, over 30 years.