Tuesday, 25 July 2017

Housing Infrastructure Fund

Will the government's Housing Infrastructure Fund finally make a dent in New Zealand's housing crisis? Probably not. It has elements of being a step in the right direction but, overall, it is way too tentative and doesn't solve the real problem anyway.

The underlying problem

If houses in Auckland were as affordable as they are in the Greater Tokyo Area (the world's largest metropolis and one of a handful of truly global cities) then the median house price would be in the region of $450k - $500k.

The main reason that they are actually double that price boils down to insufficient land being made available for development. What little is available has been bid up to astronomical levels reflecting the incredibly short supply. Unfortunately a speculation bubble has also formed on top of the normal price rise in response to the short supply.

Without going into all the ins and outs, any policy response to the high price of residential housing has to deal with two, inter-related problems: (i) there aren't enough dwellings to house the population of the country and (ii) speculators will keep bidding land and dwellings up out of the reach of normal people as long as they are convinced that authorities cannot or will not make it possible for enough dwellings to be built.

If building restrictions are just lines on maps then why don't councils simply allow more building? That was the theory behind Special Housing Areas. But fast-tracking permission to develop land for housing means nothing when there is no supporting infrastructure. You simply are not allowed to even start building a house in New Zealand unless you can demonstrate that basic services can be supplied.

The fact is that councils cannot find enough funding through normal channels to build enough basic infrastructure to get ahead of the demand curve for development. This is well known to the land bankers who can rely on council funding constraints when assessing the risks of land speculation.

The Housing Infrastructure Fund

Will the HIF break this log jam? Unlikely. Some of the reasons why:

  1. The HIF is a one-off
  2. $1bn would only build enough infrastructure to support a population of about 35,000 people (14,000 houses maybe). Fortunately buyers of sections are expected to contribute a large part of that sum so the HIF should go a lot further. But Auckland is already 70,000 dwellings behind and needs some 400,000 extra dwellings over the next 30 years.
  3. Worst of all it's not a fund, it's financing in the form of interest-free loans. The actual contribution of government is about $12.5m a year for ten years in the form of foregone interest.
By itself, the contestable $1bn fund is simply not enough to break deeply held beliefs about the inadequacy of our housing development system.

Hamilton's Big Project

Hamilton City have been awarded the right to borrow $273m to open up an area to the south of the city across the Waikato River. This will involve building a new bridge as well as many other roading and water projects. The bridge alone is likely to cost about $100m. To give some context to the size of this project the total value of all of Hamilton's existing bridges and large culverts is $86m.

The bridge has been signalled in the 30-year Infrastructure Strategy (2015) very conveniently timetabled to be built sometime after Year 11. In other words it's outside the scope of the current Long Term Plan and the Council has not yet had to indicate how they think it will be paid for. There would be enormous challenges funding this bridge. It can't be done solely from development contributions which really only leaves making a special levy via rates and/or debt. Borrowing from the HIF does not make this decision any easier; in fact it puts the pressure to make decisions sooner.

What HCC will have to do is pay the government back within ten years of drawing down the money. In the first instance the government will offset the repayments against what HCC would have received by way of subsidies from NZ Transport Agency for their existing roading programme. Currently HCC budgets for subsidies totalling about $4.4m for road maintenance and $4.8m for roading capital works each year. This is for a programme that is mapped out and running today.

If HCC's subsidy rate is dropped to near zero then $9m p.a. will be retained by the government to pay back the HIF loan. If HCC wish to continue the operational activities (maintenance) that the subsidy currently pays for then they will have to lift rates immediately to cover the funding hole. All the subsidised capital works they programmed for this period will also be postponed indefinitely.

All of the NZTA subsidy money combined will not pay back the loan. At the end of the ten years HCC will have to find the residual balance from some other source and fast. Let's be clear: it will be all Hamilton ratepayers who will end up paying for these new bridges and roads not just the new residents. So all Hamilton ratepayers can look forward to some rapid increases in rates to pay for the government's "largesse".

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