By David Hargreaves
It is very easy to talk about building loads of new houses when the economy's strong and the house market is roaring along.
Such was the situation in New Zealand only two years ago.
Now the fledgling Coalition Government looks like having a fairly big test of character over the Labour-led inititative to construct 100,000 Kiwibuild houses over a 10 year period, with half of these in Auckland.
At the time Kiwibuild was promulgated, with Labour in Opposition, we did have the aforementioned strong economy and roaring house market - particularly in Auckland.
While the economy would not be classified now as anything like a basket case, it is slowing. The anticipation is that GDP may come in at about 2.8% when released by Statistics New Zealand on Thursday. That's not bad but it that's what it turns out to be it could be the slowest pace in nearly four years.
More worryingly perhaps is the fact that the knock to business confidence surveys seen by the formation of the Coalition Government toward the end of last year has not really recovered.
Whatever your view on these surveys - and personally I have a healthy scepticism - there is the concern that they can become self-fulfilling. The only truly relevant thing from my perspective to look at in these confidence surveys are the intentions of businesses regarding their own business. And here the confidence has been knocked too. And obviously that does become self-fulfilling.
So, add to that mix the potential for GDP figures showing a slowing trend and this could further knock confidence.
Construction clearly is one area that could be knocked about by a slowng economy and of perceptions among the business community that things will get slower. The investment lead times are such that if the crystal ball is looking a bit murky two years ahead then there can easily be an inclination to pull back on construction plans.
Add in to this mix the fact that the housing market is now well off the boil. This itself could naturally potentially act as a dampener for those thinking of housing developments depending on how the likely market direction for the next year or two is viewed.
Then you've got the rising interest rate environment coming through from the US (although not showing any sign of being picked up here yet) and then the continued worries of global upheavals, not least the threat of out and out trade wars.
What all this means is that where a few years back it was a no-brainer to build more houses, now you would really have to think about it from a commercial perspective.
Not the time for just thinking
But with Auckland in particularly some tens of thousands short of houses, this ain't the time for thinking.
With the exception of a picky, picky Opposition (that has suddenly found a voice on the housing market and even acknowledges a crisis it denied for years), nobody expected that Kiwibuild could magically produce thousands of houses overnight.
People do want to see movements in the right direction though.
And taken at face value, Housing and Urban Development Minister Phil Twyford's announcement last week in regard to the Kiwibuild 'buying off the plans' initiative (effectively an underwriting scheme) that "almost 100" proposals have been received from developers in response to the tender conducted by the Government, looked encouraging.
But we will need to see how many of those proposals actually pass muster once they've been properly assessed and how many houses might result.
Remember, the Information for would-be applicants that was prepared by the Ministry of Business, Innovation & Employment (MBIE) outlined the following targets for the new underwriting scheme:
- 800 Kiwibuild dwellings in Financial Year 2019;
- 2,500 Kiwibuild dwellings in Financial Year 2020; and
- 4,000 Kiwibuild dwellings in Financial Year 2021.
So, according to those documents, about 80% of the 1,000 Kiwibuild homes planned for the 2019 financial year would come from the Buying off the Plans Scheme.
Across the first three years of Kiwibuild some 7,300 of the 16,000 planned homes would therefore come from this initiative. Twyford's response last week though was that in total the Government had received proposals that "could result in anything up to a few thousand new homes”.
The number of houses that might result from the initiative in 2019 (given that the stated target was 800), was "several hundred".
Taking up the slack
A key question that immediately comes to mind in this, is to what extent might we end up with a situation in which builders simply rebadge existing proposals in order to include some Kiwibuild homes. The advantage for them of course is that they get an underwrite from the taxpayer and the fact they've got that underwrite will likely make it easier for them to get financing from the bank - which is proving problematic, with banks having tightened lending criteria considerably.
So, the real question, as it has really been from when Kiwibuild was launched, is to what extent will it simply absorb all the building activity.
My guess would be that with the falling business confidence and signs of the economy cooling, this is now likely to happen to a bigger extent than might have been the case if things remained buoyant, particulary as the house market is currently subdued though hardly ailing.
Clearly the intention for Kiwibuild is to be an adjunct, to supplement the amount of houses being built with more, and affordable, options.
If it simply ends up replacing existing activity, with no increase in the rate of building activity (and I think this is now more and more of a risk) then we will not be much better off at the end of it.
When $2 billion is not enough
When the Government announced it was tipping in $2 billion to Kiwibuild, this sounded like quite a lot of money.
In reality it isn't and Ministry of Business, Innovation, and Employment officials in calling for tenders for the 'buying off the plans' initiative conceded that there wasn't enough money for the Government to buid all the houses itself.
Tywford has said the $2 billion will be recycled as houses are developed and sold.
But, in a quieter market that might not be as easy done as said.
I think if people have confidence that the Kiwibuild programme has proper backing and momentum then this will feed through confidence into the entire economy and particularly the construction sector.
That's why I think even at this early stage that the whole thing is at something of a crossroads and that the Government should go "all in" and make considerably more money than that $2 billion available (double the amount, at least) and perhaps even increase the number of targeted houses beyond that 100,000 figure.
The concern would be that this is absolutely the wrong time for any kind of 'pause' in construction momentum.
Auckland is suffering
In general terms the Auckland market is suffering now from the fact that a 'pause' in the mid-2000s in terms of the rate of construction was then followed by everyone sprinting in the general direction of 'away' after the 2008 Global Financial Crisis. Then you got the migration boom and that helped dig the big hole that the Auckland housing market is now in.
I don't think Auckland and the country as a whole can afford a situation where, faced with some uncertainty right now, we see the construction sector back right off again.
The housing market will come again, don't worry about that. Particularly when and if the artificial loan to value ratio restrictions put in place by the Reserve Bank are lifted. If we go into the next serious upturn with Auckland 40,000 or 50,000 or 60,000 houses short then things could be far worse even than we've just witnessed.
If the private sector can't look through the 'cycles' and produce a steady flow of new houses (and history would suggest it tends not to) then the Government must.
But equally, we taxpayers have to be prepared to foot for some reasonably serious financial damage while all this is taking place.
I don't think we've got much choice.
Relying on 'the market' has put us where we are now
The vagaries of relying totally on 'the market' to provide the solution have put us in the situation we are now in.
The Government can stabilise the slightly faltering start Kiwibuild has had by fully committing to the initiative.
Twyford is clearly fully committed. I'm not sure the whole of the Government is.
Any backdown or faltering on commitment to Kiwibuild now could have quite bad repercussions down the track.
There's likely to be a big bill to pay for removing our housing shortage. But I think we have to pay. Otherwise we will pay a social price down the track.