Double jackpot for KiwiBuild winners is wrong

Thursday, 5 July 2018

Housing Minister Phil Twyford spoke about the KiwiBuild program at the BuildNZ conference in Auckland.

OPINION: Those people lucky enough to win the KiwiBuild lottery will buy their home at a heavy discount.

And when they sell it in the future, they'll receive the full market price. That doesn't make any sense.

To see why, let's keep things simple. Suppose lucky Bob gets to pay only $500k for a KiwiBuild house that's valued at $1 million in the open market.

The public opinions on KiwiBuild have focused on the newly released eligibility criteria.

After three years he decides to sell. If the market stayed flat, he'll pocket a windfall of half a million, a parting gift from the Government. Even if the market plummeted by 50 per cent, he'll break even.

Bindi Norwell is chief executive of the Real Estate Institute and Douglas Fairgray is director of the consultancy Market Economics. They discuss KiwiBuild criteria and people's eligibility.

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Bob's twin brother Todd didn't win the lottery. Yet he somehow managed to secure a loan to buy a similar $1m home in the open market.

Suppose he put down the same amount of deposit as Bob did. So he will have to borrow $500k more than Bob did, which means he'll pay hundreds of thousands more in interest over the life of the loan.

When he decides to sell, of course there will be no parting gift from the Government. If the market plummeted, he'll probably go bankrupt.

So Bob wins a double jackpot: huge savings in loan interest and immediate doubling of house value. Meanwhile Todd gets nothing, all because of his (lack of) luck.

You may say we can't blame Bob, because he didn't intend to profit from the scheme, and he won't realise any profit until he actually sells the house. But that's not the point.

Most people buy a house to live in it, not to flip it for profit. Yet they all have to bear the full risk of fluctuations in their home value.

You might also think that since the Government is selling the house just 'at cost', Bob didn't actually profit. That's incorrect.

Whenever the Government sell someone something below the market price, it's a gift. If crown land is used, the gift is the land value that the Government could have fetched if it were auctioned off.

There's an easy solution to the double jackpot problem. And if the Government had cared to study comparable schemes from other parts of the world, they would have already found it.

It can be found in Hong Kong, which has been running a remarkably similar programme, known as the Home Ownership Scheme, since the late 1970s.

The basic principle is simple: buy at a discount, sell at the same discount.

Here's roughly how it would work. When Bob decides to sell his house, he can either sell it in the open market or sell it to another KiwiBuild qualified buyer in the KiwiBuild secondary market.

In the first case, the new buyer pays the full market price; but Bob receives only half of it, with the other half (the originally discounted proportion) returned to the Government.

In the second case, Bob receives the full payment from the new buyer. But when the new buyer decides to sell in the future, she'll have to follow the same rules as Bob did.

So at least on paper she's only willing to pay Bob half of the open market price. (In reality she probably will pay somewhat more than that if the open market is beyond her reach.)

So the discount either gets repaid to the Government rightfully (perhaps to help more people), or passed on to another first buyer in need.

The goal to make home ownership attainable (at least for the lucky ones) is achieved without handing out unnecessary and lavish gifts.

Of course Bob is still much luckier than Todd, who in reality probably couldn't even secure a loan. But with limited resources, a lottery system inevitably creates winners and losers. Under the new proposal, at least it's less unfair.

The public opinions on KiwiBuild have focused on the newly released eligibility criteria. We can continue to debate on that, or even on the merit of the whole scheme. But let's not ignore the one glaring oversight in the scheme.

* Oscar Lau is a senior lecturer in Economics at Massey University.