Reserve Bank warns that KiwiBuild will mostly 'crowd out' private investment

Thursday, 14 February 2019

Up to three quarters of what KiwiBuild adds to housing investment will be offset by lower investment by the private sector, the Reserve Bank warns.

On Thursday morning, Reserve Bank governor Adrian Orr told MPs that there was considerable pressure on the construction industry, which meant that where the government built houses, others which would have been built will be 'crowded out' by a shortage of land or labour.

'If they were going to build 100 houses, that means that between 50 and 75 houses elsewhere aren't built,' Orr told a select committee.

In a statement linked to the monetary policy statement released this week, the central bank gave explicit assumptions about the extent to which it will eat in to the amount of house building which would have happened anyway.

Reserve Bank governor Adrian Orr warned MPs that for every 100 Kiwibuild houses, up to 75 houses which would have otherwise been built by the private sector would not be built because of a lack of resources.

'The construction sector is currently facing capacity constraints, which means that KiwiBuild developments may crowd out other private developments, particularly in the near term,' the Reserve Bank said.

'The bank has assumed that half to three quarters of what KiwiBuild contributes to residential investment will be offset by crowding out of other private investment over the forecast horizon.'

The bank warned that because of the time it takes to get going, the short term addition to the housing market would be virtually nothing.

'In the 2019 fiscal year, the Bank assumes that the net contribution of KiwiBuild to residential investment is almost zero, as the KiwiBuild programme is in its infancy and the construction sector is capacity constrained.'

In a statement, Housing and Urban Development Minister Phil Twyford said the Government was 'working with builders and developers' to increase the capacity of the sector, as well as considering proposals to speed up consenting and simplify the building code.

'We are freeing up land and reforming the planning rules to allow our cities to make room for growth,' Twyford said.

'A lack of infrastructure financing is a massive constraint on freeing up more land for housing, so this year we will introduce legislation to reform infrastructure funding and financing.'

In May 2018, Twyford slammed an assessment by Treasury which played down the impact KiwiBuild would have in adding to residential investment.

National's housing spokeswoman Judith Collins said the Reserve Bank analysis was logical based on the nature of KiwiBuild.

'While there is no increase in capacity … all that's going to happen is the cost of housing for people who are building a house themselves is going to go up,' Collins said.

'When the [KiwiBuild] policy was putting in place - and they had it for six years before coming into Government, they didn't really work out what was holding back more houses being built.'

Act leader David Seymour said he was not surprised by the lack of impact of KiwiBuild.

'The Government is just buying existing homes, putting a KiwiBuild logo on them, and adding a set of rules around who can buy them. KiwiBuild is a distraction from the real problem of high land prices which could be alleviated by cutting planning red tape,' the MP for Epsom said.

The Reserve Bank's forecasts for KiwiBuild have not actually changed since November, but the statement about the impact on investment is more explicit than in previous statements.

'The construction sector is currently capacity constrained. It will likely be difficult to expand residential investment without significant crowding out,' the bank said, adding that it had made its assessments after discussions with those in the building sector 'along with the already elevated level of construction activity, and survey measures of constraints in the sector'.