Why Labour’s KiwiBuild policy will create higher house prices

20th November 2012 | By: Dave Smyth

Labour Party LogoLabour are planning to social engineer housing on a huge scale if they get into power in 2014. There is a proposed 10 year plan to build 100,000 houses for less than $300,000 each and borrow the money to do this at Government borrowing rates. Labour leader, David Shearer says that most of the houses would be built in the Auckland area by 2019. Other areas perceived to be expensive and part of the scheme are; Christchurch, Tauranga and the Western Bay of Plenty, Nelson, Wellington and Queenstown Lakes District.

KiwiBuild (because it’s like KiwiBank but with houses)

The plan has been dubbed “KiwiBuild” and the concept is to sell houses as they are built, “so over the full course of the programme there will be no cost to the Crown.” Apparently a Labour Government will become a property developer (irony much?) and plans to rolls the profits (tax-paid, I hope!) into the deposits for the next lot of houses. Is it just me, or does this idea sound spectacularly naive?

Initially, there will be a one-off NZ$1.5 billion investment. Labour say that this is a fraction of the NZ$41 billion National has borrowed over 4 years, and is substantially less than the NZ$12 billion National has committed to the Roads of National Significance. I’m not sure why this is at all relevant, but there you go.

KiwiBuild will be run by Housing New Zealand but construction of the houses will be completed by private-sector builders, with some social housing agencies also participating. I can’t imagine there will be any problems with cost over-runs there!

Labour are claiming that this will not drive prices up but they are wrong in so many ways. I do agree that initially, the extra supply of houses will likely drive prices down. Labour had better hope that all their home-owning voters don’t mind seeing their equity drop away. After all, it’s nice to let the young folks get into their first home cheaply, no matter how hard all the people already in a home had to work to get there. I bet everyone will be really generous about that!

Labour also say that the houses will be sold with only a 1% margin. Given that builders generally aim for something like a 30% margin, we can estimate that the $300,000 house they build would have a normal market value of around $430k. Even if the market dips due to all the extra housing supply, there will still be a sizeable portion of “built-in” equity for anyone who is lucky enough to get in on this insane scheme. The equity will be transferred from current homeowners and taxpayers to the first home buyer. I might see if my daughter can buy one of these places. She’ll be starting primary school when it kicks off and it would be neat if she could have her own place.

So how will house prices go up? Labour say that the first home buyer will be required to live in the house for a period of time and that there would be a penalty if the house is sold within a specified timeframe. I have a few questions.

How will they know if the buyer is living in the house?

Will there be a special “black-ops” KiwiBuild Police force who come and check if the name tag stitched in the Government-issued underwear hanging on the clothes line matches the name on the title? This is wide open to abuse. Not only would it be impractical to police the living arrangements of the home owner but the house could then be rented out to “flatmates”. Labour would then have subsidised an enterprising young property investor. Probably not the outcome they are hoping for!

How will the penalty work?

If the first home buyer is living happily in the house with their first-home-buyer-Government-approved wife or husband, what happens if they want to get divorced, sell the house and go their separate ways? Will Labour penalise them because their marriage didn’t work out or will there be a Governemnt-sponsored marriage councillor available to patch things up? Given that there are many marriages that don’t last as long as the average length of home ownership, I can see problems in this area. In fact, what if they die? Will the estate get access to the full value of the house? If there are other debts that cancel out the equity, what happens then? Minefield…

Will the house really be “yours”?

Assuming that Labour don’t put a raft of other restrictions on the house, can you really treat it as your own? Can your bank hold it as collateral for other loans? Can you borrow on your equity to start a business? Can you build an extension, knock out walls, dig in a pool or open a business in it?

What happens when Labour stop building houses?

At some point, one of the pointy-heads in this theoretical Labour Government will suggest that the housing market has been “fixed”. Prices will have dropped and there are no Labour voters left to bribe with a taxpayer-subsidised house. I’m not sure if this will happen before Labour are voted out for reducing the value in all the existing home-owners’ houses but either way, it will end. What happens then? Let’s say it’s the year 2019 and after 5 years of Labour gifting our money to first home buyers, there are a lot of people sitting on properties with significant equity with other home owners unhappy their values have dropped. When the KiwiBuild scheme is closed, there will be a gradual shift back to normal market conditions. This means the builders will want their 30% margin back. New home prices will sky-rocket again and another shortage will ensue due to the price shock. Also, all the people sitting on that “free” equity in their homes will be out of the period holding any restrictions on them and the banks will be throwing money at them like it’s 2001-2006!

Woohoo, another property boom! You solved nothing Labour!

How to make housing more affordable

It would be great to make housing more affordable but this isn’t the way to do it. It’s another political bribe for votes by people with good intentions but poor foresight! If we want cheaper houses, we need to increase supplies of materials and land and reduce regulation while making the process more efficient and therefore cheaper. It’s not a sexy answer but it’s the only one that will work. Labour’s answer is to hand out money that will end up creating another property boom. You can’t increase the supply of equity and not expect borrowing to increase greatly as a consequence.


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