Twyford charges ahead to prove Treasury wrong
By Richard Harman (author)
He may be under siege from both the left and the right over his optimistic Kiwibuild projections but Phil Twyford is charging ahead.
No one in the Labour caucus has ever accused Twyford of lacking self-belief but despite all the doubters he is sticking to his guns and remains confident that he can deliver what is Labour biggest promise; 100,000 houses in 10 years.
Twyford’s latest problem is that the Budget documents appeared to say he was already behind on the housing target.
Treasury in its Budget Economic and Fiscal Update halved their estimate of how much capital would be injected into the Kiwibuild scheme by the Government between now and 2022.
At the Half-Yearly Economic and Fiscal Update in December, Treasury predicted Kiwkbuild would bring in $5.4 billion of additional residential investment over 2018-2022. The analysts changed that figure to $2.5 billion in their Budget Economic and Fiscal Update, released on Thursday.
Even though that projection had been signed off by Finance Minister, Grant Robertson, Twyford called the Treasury analysts “kids” who were fresh out of university and disconnected from reality.
The pro-Labour Public Service Association National Secretary Glenn Barclay: said the PSA was “disappointed” that Twyford had chosen to make personalised comments and said he hoped that the Minister “reflected on this incident and chooses not to take this tack in the future."
Though Twyford last night was not keen to talk about the exchange he was happy to release an "aide memoire" from the Ministry of Business, Innovation and Employment (MBIE) which directly challenged the Treasury estimates
MBIE administers the Kiwibuild scheme and its paper more or less accused Treasury of ignoring its advice.
It says it told Treasury that it expected Kiwibuild would bring in $430 million of investment this year; up to $2.1 billion the following year and up to $4.1 billion in 2020/21.
But Treasury received that advice and then adjusted it to a total of $1.164 billion over the same year.
At the heart of the contradiction is a difference in when money will actually be spent.
That is because Kiwibuild will begin by purchasing rather than building houses and the Government does not expect to have to pay for most of them until they are completed.
So the core of the argument is what is now the main initial strategy for Kiwinbuild; buying off the plans.
This way, kiwibuild doesn’t pay for a property until the property is completed.
“Buying off the plans is designed specifically to de-risk and speed up development that are not happening that are currently not happening because of a shortage of liquidity,” Twyford told POLITIK.
"There are dozens of developments that are stranded at the moment because of the lack of liquidity.’
So Kiwibuild will underwrite borrowing by developers which, Twyford argues, should be enough to persuade banks to lend where otherwise they would not.
“So one of the four ways we are delivering Kiwikbuild is underwriting where we basically say you can build the units, and if you can't sell them straight away within a certain time period we will buy them off you or we will just buy them upfront, and you will get the pre-sales."
The MBIE memo says: “Buying off the plans enables the Crown to induce high levels of residential investment from low levels of initial expenditure.
“If committing to actually purchase the house, the Crown can expect to pay a 10% deposit up front and then not have to pay the other 90% until the home is completed. In between, the developer actually builds the new homes.
“Thus, a 10% deposit is enough to induce 100% of the residential investment required to construct a home before the other 90% of the purchase price is required.”
But Kiwi can step into developments that are not selling.
“Alternatively, the Crown can guarantee to purchase a new home if the developer is unable to sell it.
“In this case, the Crown pays nothing up front, but its guarantee still induces 100% of the residential investment for the guaranteed homes.’
The memo is sanguine about the possibility that the underwritten guarantee may be called on if the underwritten houses don’t find buyers.
“ Even if the Crown needs to incur an expense against the chance that the guarantee will be triggered when spread across the total portfolio of homes under guarantee, this provision is likely to be a relatively low proportion of total value (e.g. 10-20%). “
“Assume targeted expenditure of $500 million for the first year of KiwiBuild, with $100 million allocated to the guarantee and the other $400 million to actual purchases.
“If we budget for the Crown to have to purchase 20% of the homes it guarantees, a budget of $100 million underwrites $500 million of KiwiBuild housing.
“Add that to the $400 million of actual purchases, and the result is $900 million worth of housing in the first year.”
But Kiwibuild is going to seel the houses it owns.
“If we then assume that before the end of the year the Crown on-sells $290 million of the
homes it actually buys, the result is that the $210 million of net operating expenses that
Cabinet has noted can actually conceal total sales of $900 million.
“ If we roughly assume that the value of the land is 40% of that total, it suggests total residential investment of $540 million.”
But Twyford is also under attack from the left of politics.
Mike Treen, the National Director of United Union, writing in “The Daily Blog” is critical of that part of Kiwibuild which will ramp up Housing New Zealand construction of state houses.
“The government has decided to increase the building of state housing from their extremely modest target of 1000 a year to the still very modest target of 1600 a year over the next four years," he writes.
“Housing NZ is not being given any extra money to do this.
“They will have to borrow on private financial markets at higher rates than the government can borrow money for.
“The cost to the government will be more as a result.”
Like many on the left who are critical of the budget, Treen, believes that the Government has constructed a straitjacket for itself with its Budget Responsibility Rules and their constraints on how much debt it can incur.
“Housing New Zealand is investing $3.8 billion into the building of more state houses,” said Twyford.
There is another $200 million or so available to them from other sources.
"So $4 billion being invested in new state housing and then $2.1 billion being constantly recycled into the building of Kiwibuild homes, so the capital to invest into the building of new houses is not a constraint at the moment, it’s actually just being physically able to build them.”
And that is a whole separate story which may, in fact, the the biggest obstacle to Twyford delivering his Kiwibuild promise.