Will KiwiBuild Meet the Housing Challenge?
March 2018
The new Government has a clear mandate to sort out New Zealand’s housing challenges.
The core of the Government’s strategy on housing is KiwiBuild. Its targeted aim is to build 100,000 affordable dwellings in a decade, with 50,000 of those in Auckland. Twin objectives are to increase the supply of dwellings, and to increase ownership levels, so that more households can live as owner-occupiers, rather than tenants.
It is important that such a major initiative is fully researched and soundly implemented if we are to avoid the sorts of negative effects evident in housing policies over the last decade.
The Journey to 2018
Dwelling ownership is a core aspect of New Zealand’s social structure and community cohesion. However, ownership rates have continued to fall, starting with a pronounced drop over the 1996-2001 period, compounded by further slow decline over the next decade, before worsening significantly in the past 5 years as population growth accelerated dramatically. Rates of ownership are significantly lower in Auckland than in other parts of the country.
Several factors contributed. Dwelling prices rose steadily from 2000 on, in all regions, irrespective of their population growth. By the time the GFC hit in 2008, average prices were double the 2000 figure. The GFC impacted sales, property values and the construction sector, particularly in Auckland. New dwellings had slowed there, following the surge in apartments to 2004 which saw new consents move well ahead of household growth. Auckland’s construction sector struggled to recover from its GFC decimation (1), a situation compounded by competition for resources from the extended Christchurch rebuild.
Any recovery was still emergent when in-migration accelerated quickly from around 2014, with Auckland the main recipient. The region’s population growth rate doubled, and Auckland gained an estimated 120,000 new residents in the 2013-2017 period. These pressures saw Auckland break away more clearly from national trends from about 2013. Its population growth, demand for housing and dwelling prices all raced ahead of the rest of New Zealand. The cocktail of strong demand, continuing price growth, and a liberal regulatory framework, attracted considerable overseas investment in Auckland’s housing sector, alongside spending by domestic investors.
High housing prices and tight supply during 2013-2016 together exacerbated the effects already clear in the 2013 Census statistics – lower dwelling ownership rates, and first home buyers finding it much harder. The Census showed that even before the large in-migration boom that households’ entry to dwelling ownership was occurring later - peaking in the late 30s instead of early 30s - and more difficult for the medium income groups. Ownership overall was kept up by the high levels already achieved by older age groups, but lower ownership rates for the under-40s were clear.
The high prices, and continued price rises made headlines consistently, as did the impacts of homelessness and housing unaffordability. Housing was a significant issue in lead-up to the 2017 election. Concerns were doubtless compounded by the high profile of “overseas buyers” being active in the Auckland market, albeit without any reliable statistics to establish whether or not these buyers had a material impact on price levels.
The Reserve Bank had commented on a number of occasions about the likelihood that strong in-migration affected housing demand and prices, especially in Auckland. Many people did not buy into the strong public efforts to place the blame on urban planning and the RMA. Indeed, post-election, a shift in attitude was reflected at official level – the MBIE Briefing to the incoming Minister of Housing (2) “..the housing market behaves very differently to a general commodity market, and the experience in New Zealand and other similar countries is that market forces alone will not produce socially optimal outcomes.”
Housing remains a key issue. A recent Colmar Brunton poll shows that nearly two thirds of New Zealanders see housing as a major issue, with 24% being “extremely concerned” about housing, and another 41% being “very concerned " (3).
This wide concern about housing suggests some level of acceptance among the community at large that more hands-on Government-level involvement in the housing market would be necessary - not least many in the somewhat maligned Baby-boom cohort worried that their children and grandchildren won’t be able to become dwelling owners even with help from the Bank of Mum and Dad, and even worse - still living in the parental home at age 47.
The effects on the housing market and dwelling ownership are spread nationwide, but are concentrated in Auckland, and it is a logical focus for any action. The MBIE Briefing notes estimated a shortfall of some 45,000 dwellings in Auckland, which translates to an undersupply of around 8%. Obviously coincidental, but this housing shortfall is very close to Auckland’s migration gain over the last four years - 120,000 persons which at around 3 per household implies 40,000 households’ worth.
The KiwiBuild Strategy
Detail on KiwiBuild is still light, but 50,000 of the total 100,000 KiwiBuild dwellings are earmarked for Auckland, to be built in a timeframe of about 10 years.
Such a substantial move in the housing market as KiwiBuild has potential for both positive and negative consequences, including unintended outcomes. The concept of direct action at the lower end of the housing market is sound. The very strong demand and constrained supply situation has pulled up prices across every value band, according to Corelogic’s data. There are simply too few dwellings in the lower price bands to allow first home buyers in the medium and lower-medium income bands to enter the market in the way they did historically.
To repair this gap at the lower end of the market, there are two main options. One is to pursue a widespread fall in prices across the whole housing market, so that a general price retreat sees more dwellings come back down into the lower value bands, and become more affordable. The second option is to leave alone the middle and upper bands of the market, and to increase dwelling supply specifically in the lower value bands – which is what KiwiBuild aims to do.
Neither is risk free, but a strategy of engineering a general price retreat is expected to have more widespread and deeper negative consequences, because to plug the gap in the lower value bands would require a substantial movement across the whole market. The disadvantages of this were quite clear from even preliminary analysis of various proposals (such as “5 by 2030”) to pursue market-wide reduction of housing values – the economic and societal rationale for a very major value drop in real terms, simply on the grounds that first home buyers should be able to afford the “median value” dwelling, was understandably elusive. It was driven in part by simplistic indicators of median price vs median income, rather than rigorous assessment of the whole market. As well as the overall negative effects on intergenerational wealth and security, a key risk of that option is it will dampen construction activity, at a time when substantial capacity catch-up is still required - particularly in the Auckland market, where the long term growth outlook is strong.
If KiwiBuild can achieve the direct positive gains from getting another 100,000 or so households into dwelling ownership without substantial negative impact on the 1,100,000 households who are already dwelling owners, then the downsides would appear to be less onerous. In any case, a supply injection into the lower value bands - assuming it is a net injection of extra capacity and not just displacing new capacity in other levels - will both directly impact those lower value bands, and also have flow-on impacts on price pressures at other levels in the market.
One positive aspect is that KiwiBuild is finite - signalled as being a specific action over a defined time period, for a defined volume of activity, to address a specific problem.
500,000 KiwiBuild dwellings?
100,000 dwellings is a very substantial initiative. Nevertheless, the recent pronouncement that KiwiBuild should aim for 500,000 dwellings rather than 100,000 did initially receive a lot of media attention. However, the shortcomings of that more expansive view were very quickly apparent – building 500,000 would provide enough capacity for all of New Zealand’s total household growth over the next 30 years, with several thousand to spare. More importantly, it would transform KiwiBuild from a specific fix for a major problem to become instead a fundamental long term driver of the economy. And it would mean virtually all of the additional housing supply over the next 30 years would be limited to dwellings in the “affordable” bands, irrespective of what consumers wanted or what they found easily affordable and were able to pay for.
It is particularly important to understand that KiwiBuild is targeting households who would not otherwise be able to own a dwelling. Its rationale – and community acceptability – is that it will fix a specific problem which became urgent in the last decade and directly affects an important cohort in the population. Addressing that direct problem will have flow-on benefits for the population at large. However, there is no basis for extending the solution for one cohort across the whole population - the great majority of dwelling purchasers are not first home buyers just entering the market with a minimum deposit, and there is no strong rationale to orient all new dwellings to that segment.
Getting it Right
Assuming wiser heads have sway, the KiwiBuild target will be demanding. Despite its promise, it is not assured of automatic success, and getting the positives right while avoiding the negatives poses challenges. Three likely critical factors for success are:
to get the targeting right, so that the gains in dwelling ownership deliver benefit to both those not able to enter the market, and to the community at large;
to get the delivery right, so that the improvements in affordability are not limited to those which could be delivered by the commercial market building smaller and cheaper dwellings at the outermost edges of the city;
to minimise collateral damage – seemingly obvious, but the risks are unintended distortions of the wider housing market, and negative effects on urban growth outcomes and urban efficiency long term, especially in Auckland. Distortions are a risk because of the sheer scale of KiwiBuild, while negative impacts on urban growth outcomes may arise if (for example) KiwiBuild initiatives were to pre-empt a substantial piece of Auckland’s Future Urban zone because it is the earliest and easiest greenfield opportunity, or to focus on extending the Rural Urban Boundary for a “KiwiGreenfieldBuild”. The Minister’s opposition to urban boundaries has been widely publicised.
In subsequent articles, we will examine these success factors in more detail, and some of the numbers, to illustrate the scale and significance of KiwiBuild over the next decade, and the scale of the challenges which face it.
Structural Change
In the final section of this Memo, we take a look at how KiwiBuild has the potential to bring about significant change in the structure of the New Zealand housing market.
The Minister’s Briefing document provides a good picture of the housing market, and the tenure patterns, estimated here for the 1,753,000 or so households in the country as at 2016.
Currently, there are some 1,103,000 owner-occupier households (62.9%), with 293,000 in private unsubsidised rental accommodation (16.7%) and 289,000 in rental accommodation with some level of subsidy support (16.5%). The balance are some 66,000 households in social housing (3.8%), and 2,300 (0.1%) in emergency housing.
We have examined the “current without KiwiBuild” and the “future with KiwiBuild” outcome by 2028, to show the potential impacts of the strategy.
Fast forward to 2028, with pro rata adjustments for growth, and allowing for the injection of KiwiBuild and some important changes are apparent. These are shown in the figure below.
First, the number of owner-occupier households would increase by the 100,000 KiwiBuild owners. With the expected pro rata growth in owned dwellings for the population at large (+194,000), this would take the total ownership level to around 67.8%. There would be around 1,397,000 households in their own dwellings.
Second, the unsubsidised private rental market would decrease in size. This assumes that most (80%) of the households able to purchase and move into the KiwiBuild dwellings would otherwise be in unsubsidised rentals. Without KiwiBuild, that sector could be expected to increase (pro rata) to around 345,000 households by 2028. However, with KiwiBuild, the private unsubsidised sector would decrease in size, to around 265,000 households (12.9% of the total).
Third, there would be impact also on the subsidised rental sector. Assuming 20% of future KiwiBuild owners came from that sector, then rather than 340,000 households by 2028 it would have around 320,000 households (15.5% of the total).
However, there will be flow-on effects. Reduced rental can be expected to place downward pressure on private rental levels, both subsidised and unsubsidised. This would in turn have a likely impact on the level and incidence of any rental subsidies required, and as a consequence we may expect a reduction in the share of private tenancies requiring any subsidy. The unsubsidised sector would likely be more than half of the total rental sector.
One further consequence of reduced rental demand would be lower rental returns, impacting on the prices which investors will be willing to pay, and placing downward pressure on dwelling prices especially at the middle and lower value points in the market. A feature of the strong price growth in Auckland during 2014 and 2015 was the strong move by investors into the lower value bands and the lower value locations across Auckland, where they competed very strongly with the first home buyer segment.
Such a price effect would likely act to augment the direct impacts of KiwiBuild on dwelling ownership rates.
What next?
KiwiBuild promises a lot, and promises also a lot of challenges. Let’s hope it is done well.
For further information or comment on this article, please contact Douglas Fairgray (doug@me.co.nz or 09 915 5514)
Notes:
1. Technically, decimation is a 10% loss, whereas Auckland’s residential construction sector lost nearly 30% of its workforce in the 2008-10 period.
2. Briefing for the Incoming Minister of Housing and Urban Development, MBIE, 25 October 2017, p14.
3. Perceptions of the environment - What New Zealanders think. A Colmar Brunton research report for Fish and Game NZ, December 2017.