Are you and I subsidising Kiwibuild?

David?Hargreaves thinks that there are some fish hooks in the government’s so-called Kiwibuild ‘buying off the plans’ scheme. Quote.

I could just see a lot of potential problems ahead with this scheme which […] is a taxpayer underwriting scheme for private developers. That’s what it is – and whenever taxpayer money is put up, there is risk. […]

In essence, this is a kind of a bribe – a plea to private developers to build more houses.

The Government is imploring developers to throw some low-cost housing into their developments on the understanding that such low cost houses will be underwritten by the taxpayer.

What it effectively means is those low-cost units will be ‘pre-sold’, so the developer can go to their bank and say: ‘We have this portion of properties pre-sold, with a Government guarantee’. Now, your friendly corner banker is going to presumably take kindly to such a proposition. Jam for tea and all that.

I should stress at this moment that the idea of subsidising building activity in order to ramp up activity was probably always necessary. But I think what’s being proposed is somewhat different than a mere subsidy as such. And again, if you read closely that 47-page? Invitation to Participate document from MBIE I think it’s impossible not to leave with a sense of feeling unnerved.

Then we come to another potential fishhook.

The supporting literature on this Invitation to Participate seems to reasonably spell out that the only thing being underwritten is houses or units that are specifically tagged as low cost ones – ‘Kiwibuild’ units.

How closely is this going to be policed though?

The scheme as proposed doesn’t give any target or limit for the number of Kiwibuild properties that have to be included in a development. The only reference here is the magnificently general word “significant” when talking about the portion of a development that has to be Kiwibuild.

What’s significant? […]

Clearly the hope with this scheme is that developers will be enticed to throw some low cost housing into their developments by the relative ease they may find of getting finance, given the Government guarantee.

How widely might that Government guarantee be applied? […]

What of the situation, possible surely, where a developer gets into financial trouble. Would there be efforts to get that Government guarantee stretched right across the development? Are we going to end up with a situation where the taxpayer in effect could end up underwriting an entire development?

I think it’s possible. I certainly think in a situation where a company that had undertaken to do some Kiwibuild houses goes under you could see the Government sued for money by creditors. […]

The market could potentially make houses more affordable if prices are allowed to drop – but an underwrite ensures that prices will stay up.

There are many more questions about this scheme, but I will just close off with the thought about what this does for the whole development sector. […]

Giving a Government guarantee to developers is clearly going to help those developers get finance.

Does this mean, in effect, that the banks will swing their support behind developments that do have a Government/taxpayer backing – and ignore those that don’t?

This looks like a recipe for market distortion.

The other thread to this, and very much related, is that this initiative clearly points toward the Kiwibuild initiative simply replacing other developments that might have been done. End of quote.

Let’s look at a real-world example:

There is a development in Auckland that you can read about on their website. I will not link to it, but there are 42 apartments of which 25 are Kiwibuild.? Because there are similarities between units in terms of size one can make some comparisons.

There are two two bedroom units at each end of the block on each of three levels.? The outer ones have extra windows as they are on the ends and are three square metres larger. The price difference for 3 square metres and extra windows is $30,000 on the ground floor where both are for sale on the open market.

On the other levels, the outer pair is for sale on the open market, the inner pair is Kiwibuild.? The price difference is $115,000.? Less the $30,000 for 3 square metres and no windows leaves a difference of $85,000.

The internal finishes and fittings are identical between the units so the only difference is that the Kiwibuild designated units are $85,000 cheaper in order to meet the maximum price criteria.

Are we to believe that the developer is shaving $85,000 off his profit margin per unit to assist Phil or is something else in play?? Better finance rate from the bank for a government guaranteed purchase?

Are you and I paying for this somehow?