Kiwibuild's gone and the Government's credibility with it

Kiwibuild's failure and the damage done



Written by Dr Don Brash

Don Brash Opinion Piece

Several months ago, it was abundantly clear that KiwiBuild was a complete failure.

In the 2017 election campaign, the Labour Party’s biggest promise was to “deliver 100,000 quality, affordable houses for first home buyers over the next decade”. It was recognised that it would take some time to crank up the programme to achieve this, but the initial aim was to build 16,000 homes during the Government’s first term in office.

It was also recognised fairly quickly that it was going to take much longer than anticipated to get the programme under way, especially in a situation where the building industry was already under strain, and the target for the year to June this year was a modest 1,000 homes. That modest target was later cut to 300, but even that was not met. That total and humiliating failure cost Phil Twyford his job as Minister of Housing.

Early last month, Megan Woods, the new Minister of Housing, effectively ran up the white flag. Numerical targets went out the window and were replaced with vague statements about building more homes, and with policies to reduce the minimum deposit needed by first home buyers and a few other schemes likely to increase demand for houses far more than increase the supply.

The Coalition Government has failed on many fronts over the last two years, but the failure to deliver on the KiwiBuild promise has arguably been their most spectacular failure.

Nearly a decade ago, the Productivity Commission reported that there are four main reasons why house prices are so expensive in New Zealand. Overwhelmingly the most important of the four reasons is that local government planning rules enormously inflate the price of land by tightly constraining land supply. The second factor is that, because of the price of land, the actual construction of houses tends to be rather inefficient because it is difficult for the companies building houses to get the large parcels of land which would facilitate economies of scale. Third, local governments are notoriously slow and bureaucratic in granting consent to build houses. And finally, the price of building materials is a bit higher in New Zealand than in, say, Australia.

Before the election, the Labour Party seemed to understand this. As a result, when the Coalition Government announced their programme in the so-called Speech from the Throne at the beginning of their time in office, one of the key commitments was to “remove the Auckland growth boundary and free up density controls”. Tragically that hasn’t happened and, as I mentioned in an article on the price of Auckland land a couple of months ago, land prices in Auckland are still outrageous.

Having failed to free up land supply and having failed with KiwiBuild, the new Minister of Housing is now looking around desperately to find other ways of constraining the growth in house prices. She has announced that she is looking at the price of building materials. Fair enough: this was one of the four factors identified by the Productivity Commission as explaining the very high price of houses in New Zealand. But a recent Deloitte study (admittedly commissioned by Fletcher Building) found that building materials make up just 16% to 24% of the cost of a new build, while Deloitte partner Linda Meade told Newsroom in May that “if you stripped out GST, you would find that all types of building in New Zealand were cheaper than they were in Australia”.

Tragically, there is a serious and ongoing problem with the cost of housing in New Zealand, a problem which continues to create enormous stresses and strains for a very large number of families, particularly but not exclusively for low income families. That problem became markedly worse during the nine years of the National Government. For a brief moment, when the Speech from the Throne seemed to indicate that the Government might actually be serious about dealing with the problem, relief looked in sight. No such luck.

Today, most of the anecdotes suggest that, after a brief pause, house prices are expected to continue rising. One broker anticipates house price inflation to “pick up moderately by the end of 2019 and settle around 4.5% over 2020”. In other words, not the slightest improvement in the relationship between house prices and incomes, and indeed potentially some continued deterioration in that relationship. And that deterioration seems likely to be encouraged by some of the lowest interest rates in New Zealand’s entire history.

I well recall a discussion on the AM Show on the high price of housing, with Duncan Garner interviewing Grant Robertson, the Minister of Finance, on the issue. At the end of the interview, Duncan Garner asked Grant Robertson very directly: “Minister, do you want house prices to fall?” As I recall it, the Minister hesitated and replied “We want them to go up more slowly”. But you cannot make housing more affordable in New Zealand unless house prices actually fall. And therein lies the political problem: how to make houses more affordable without antagonising the very large number of people who have most of their household wealth tied up in the value of their home – all of whom vote.

Michael Reddell, an economist with whom I worked throughout my time as Governor of the Reserve Bank and for whom I have a very high regard, has suggested that the political reality is that it may be impossible to move house prices back to where they should be relative to incomes without some form of partial compensation for the “losers” – at least for those who have purchased their homes within, say, the last five or six years. Such compensation would cost literally billions of dollars, but the alternative might mean continuing with the economic and social costs of grossly unaffordable houses for years or decades to come.