The much-anticipated KiwiBuild scheme has finally launched.
Will this be the end-all cure to New Zealand’s housing crisis?
I doubt it.
If you’re not familiar with KiwiBuild, it’s a recent state-sponsored program designed to solve the housing shortage by subsidising tens of thousands of new homes.
More supply (hopefully) means lower prices.
That’s the idea anyways.
As an American, KiwiBuild is a new concept to me. I’ve been investigating the concept and interviewing local Aucklanders from all political inclinations to get a feel for what people think about it.
And surprisingly (to me at least), it doesn’t seem to matter what party the person supports, nearly everyone describes the programme as a disaster.
Disaster From the Get-Go
Many folks I interviewed described the impossibility of the goals.
Housing Minister Twyford promised 100,000 homes in 10 years. That’s 10,000 houses a year. 833 houses each month. 2.7 each day.
That’s a lot of homes… and more importantly, it means a lot of construction.
This construction is going to need to be done by someone… and if the current shortage of houses is any indicator, NZ homebuilders are already at maximum capacity.
You can bet there’s going to be an update on the project suggesting we look outside of New Zealand for materials and labor.
Importing labor will result in a downward pressure on wages… and if you’re making less, homes will become even more unaffordable.
And we’re back to where we started.
Maybe the solution lies with pre-fabricated homes, manufactured overseas, imported to New Zealand, and put together with minimal labor.
That could work, but it means an outflow of Kiwi tax dollars to some foreign economy. Typically, you’d want your government spending to be directly benefiting the local economy instead. It wouldn’t be ideal.
Whether the work is done here or overseas, Minister Twyford is going to need a creative solution.
Another fundamental problem with KiwiBuild is the target market.
These homes are going to cost between $500k and $650k. Let’s see what that means in practical terms.
Let’s say you opt for the cheaper $500k home.
If you take a 30-year mortgage at a 5% interest rate and put down a 10% deposit of $50,000, your minimum fortnightly payment would be $1,100. That’s a minimum payment of $29k each year.
Now if you take the stance that no more than 1/4 of your income should go to your mortgage payments, you end up with a minimum annual income of $116k.
That’s the bare minimum to get in the door.
What about the other end of the spectrum?
Despite Labour’s promises of no income caps, Housing Minister Twyford has introduced the annual income cap of $180k for couples interested in a KiwiBuild home.
A $180k ceiling and a $116k floor?
That’s a narrow gap.
If you consider that $116k is roughly Auckland’s median income, you’ll realise that this won’t help a majority of younger, low-income home-seekers.
Perhaps the theory is that increased supply at this level will eventually trickle down and help cheapen homes at all levels.
However, even if that does work, it’s going to take years or decades to make a significant impact. It won’t help below-average earning households any time soon.
Maybe There’s Money to Be Made
The greatest opportunity that could come from this programme is for family investing.
Parents or grandparents can help fund their qualified children to purchase these homes, then rent or simply reap the capital gains as the asset appreciates.
It’s an attractive investment and the government seems happy to subsidise it.
Until the state clamps down, you’ll likely see a lot of family wealth getting put to use this way.
Wait a minute… this sounds familiar.
A wave of investors entering the market and buying up homes for the returns.
This the same behaviour that created the affordability issue in the first place!
If you combine a KiwiBuild subsidy with ultra-low interest rates, you’re creating a perfect storm for investors to rush into NZ housing… causing the issue of affordability to get worse, not better.
Again, we’re back where we started.
Let’s See What Happens
Maybe this plan works.
Maybe it doesn’t.
I can’t seem to find any reason why it will, but all of the experts with their fancy degrees in Housing Minister Twyford’s office seem to be optimistic.
Either way, I’m popping popcorn and settling in. It’s going to be a wild ride.
Editor, Money Morning New Zealand