And now on to Labour’s flagship policy announcement, KiwiBuild.
Announced by leader David Shearer last week, the policy is designed to win votes on housing by enabling fire-home buyers to afford a $300,000 house. This would involve raising $1.5 billion by issuing Housing Affordability Bonds, with two-thirds of the 100,000 homes to be built in Auckland.
Currently only around 4,000 new homes are consented for construction each year, whereas 11,000 dwellings are needed to keep up with demand.. So Auckland is suffering a chronic undersupply of homes, a problem that a bureaucratic state-run scheme is unlikely to alleviate.
Shearer’s problem is a lack of understanding of the economics of housing. The market price of a home is the derivative of a series of non-negotiable costs: land (mandatory), plus materials and labour (mandatory), plus resource consent (if necessary) and building consent (mandatory), plus council-levied development and reserve contribution (mandatory). If the developer borrows from a bank or other lending institution the borrowing cost is also factored in. All of usually tallies up to a figure far in excess of $300,000.
In order for Shearer to build cheap houses he needs cheap land. Good luck finding that in Auckland, especially given Mayor Len Brown’s preference for land containment.
A quick surf on the internet reveals the challenge facing Shearer. The asking price for a vacant 587sqm of residential land in Torbay is $338,000. 658sqm of residential land in Te Atatu Peninsula will set you back $1.68 million. 437sqm in Flat Bush will ‘only’ cost you $400,000.
Any pretence of a nice new affordable house courtesy of Labour Inc. should be treated with caution. Remember, two-thirds of the $300,000 homes are coming to Auckland, arguably one of the most expensive markets in the country.
But Shearer isn’t telling New Zealanders they will have a piece of land in the suburbs. His words very cleverly spun, but the intention is clear: “… the houses will be compact in size. Some will be stand-alone dwellings and others apartments. All of them will be good quality and energy efficient”.
This is coded language for slums. The location? Train stations, bus interchanges, commandeered Housing New Zealand land, and other places far removed from where Members of Parliament and mayors live. Why? Because this is a policy option for other people.
No wonder Shearer phoned Mayor Len Brown to discuss the scheme; it’s as if the whole policy had been coordinated by Conor Roberts.
The problem for Shearer is banks don’t readily lend on apartments and other forms of unit titles properties. The risk of common area land creates a liability that is beyond the financial covenants of most corporate bankers, particularly in light of the global financial crisis. So who will be the alternative funding back-stop for Labour Inc.? The answer is simple, the New Zealand taxpayer.
Shearer’s problem is not so much in the distribution of the Labour Inc. houses. The issue is the economics do not stake up to make most of his homes viable in the first place.
Housing New Zealand’s housing portfolio of 69,000 houses has an estimated value of $15.1 billion. That portfolio has taken nearly 75 years to build, and covers the length and breadth of the country. Shearer is promising 100,000 homes in just 10 years at a cost of $1.5 billion. His figures do not add up.