By David Hargreaves

Everyone loves a trier.

Therefore, it can come across as churlish in the extreme to criticise someone for trying their best.

However, the counter point to that is we would be foolish to accept what someone does just because the intentions are good. After all, the road to Hell is paved with good intentions.

I think the launching by Housing and Urban Development Minister Phil Twyford this week of the so-called 'Kiwibuild: Buying off the Plans' initiative will likely mark the point at which the much vaunted Kiwibuild initiative started to come horribly off the rails.

I was taken aback when I read the Invitation to Participate (ITP) document prepared by Ministry of Business, Innovation & Employment. I could just see a lot of potential problems ahead with this scheme, which lest the title should mislead you, is a taxpayer underwriting scheme for private developers. That's what it is - and whenever taxpayer money is put up, there is risk.

Under pressure

The shape and style of this scheme demonstrates the pressure Twyford now feels under to start getting 'runs on the board' - or in this case a running tally of house numbers that he can put under the 'Kiwibuild' umbrella.

Twyford would know well that the National Party will have all its researchers constantly framing Parliamentary questions along the lines of 'how many Kiwibuild houses had been built as of...' Expect a torrent of sarcastic media releases.

After all Twyford established a name for himself in opposition with his onslaught on National's (abysmal) attempts at ramping up house construction, through refrains such as "...you cannot live in a consent or a section".

The answer to all National's perceived ills was always the magical Kiwibuild. It was the solve-all. Nirvana. But now he's having to do it, Twyford's being met with the full realisation of just how hard it is in the New Zealand market to ramp up house building activity.

In fairness to him, he did talk about the 'buying off the plans' idea immediately on becoming Minister in order to get the ball rolling, so, this week's announcement shouldn't be a complete surprise.

A bribe

However, I certainly did not picture something quite in the shape of what's been released this week.

In essence, this is a kind of a bribe - a plea to private developers to build more houses.

The Government is imploring developers to throw some low-cost housing into their developments on the understanding that such low cost houses will be underwritten by the taxpayer.

What it effectively means is those low-cost units will be 'pre-sold', so the developer can go to their bank and say: 'We have this portion of properties pre-sold, with a Government guarantee'. Now, your friendly corner banker is going to presumably take kindly to such a proposition. Jam for tea and all that.

I should stress at this moment that the idea of subsidising building activity in order to ramp up activity was probably always necessary. But I think what's being proposed is somewhat different than a mere subsidy as such. And again, if you read closely that 47-page ITP document from MBIE I think it's impossible not to leave with a sense of feeling unnerved.

Problems

I'll go through some of the perceived problems:

The initiative is welcoming two 'tiers' of building operator to apply; essentially the big boys and smaller, even new players. That last bit bothers me a lot. Whenever taxpayers' money is being floated as an incentive there's always people attracted to the idea of a free lunch. Could we get fly-by-nighters setting up, interested not so much in building houses but harvesting taxpayer guarantees? What do you think?

Okay, that then comes back to the monitoriing of this scheme at the outset in terms of who gets approved for one of these taxpayer underwrites.

Now Kiwibuild is very new. The Government agency that will ultimately, ahem, house it, has yet to be created. How well resourced is the unit, currently residing in MBIE? What are the levels of expertise like? Is is possible that a skilled, fast-talking, fly-by-nighter is going to be able to put one over on them? What do you think?

What's covered?

Then we come to another potential fishhook.

The supporting literature on this ITP seems to reasonably spell out that the only thing being underwritten is houses or units that are specifically tagged as low cost ones - 'Kiwibuild' units.

How closely is this going to be policed though?

The scheme as proposed doesn't give any target or limit for the number of Kiwibuild properties that have to be included in a development. The only reference here is the magnificently general word "significant" when talking about the portion of a development that has to be Kiwibuild.

What's significant?

Who is going to go out and physically check which houses are Kiwibuild and which are not? Are the houses going to be 'tagged' in some way? I bet they won't be you know. So, there could be ambiguity about what's covered and what is not.

Enticing developers

Clearly the hope with this scheme is that developers will be enticed to throw some low cost housing into their developments by the relative ease they may find of getting finance, given the Government guarantee.

How widely might that Government guarantee be applied?

Who is going to be responsible for clearly delineating what portions of a development are 'Kiwibuild' and what are 'market' - IE supposedly the bits of the development not covered by the taxpayer underwrite?

What of the situation, possible surely, where a developer gets into financial trouble. Would there be efforts to get that Government guarantee stretched right across the development? Are we going to end up with a situation where the taxpayer in effect could end up underwriting an entire development?

I think it's possible. I certainly think in a situation where a company that had undertaken to do some Kiwibuild houses goes under you could see the Government sued for money by creditors.

Putting a floor on prices

As interest.co.nz commenters have already remarked, this scheme would seem to be putting an artificial 'floor' on house prices, which is a strange position for the Government to put itself in. We know how unaffordable houses are and okay, the aim of this is to provide affordable housing, but if the market's naturally going down, then providing a floor for prices through a taxpayer guarantee is an odd way to go.

The market could potentially make houses more affordable if prices are allowed to drop - but an underwrite ensures that prices will stay up.

There are many more questions about this scheme, but I will just close off with the thought about what this does for the whole development sector.

Anecdotally financing is now quite hard to come by for developments.

What about the banks?

Giving a Government guarantee to developers is clearly going to help those developers get finance.

Does this mean, in effect, that the banks will swing their support behind developments that do have a Government/taxpayer backing - and ignore those that don't?

This looks like a recipe for market distortion.

The other thread to this, and very much related, is that this initiative clearly points toward the Kiwibuild initiative simply replacing other developments that might have been done.

Anybody who had thoughts of doing a development might now simply throw in the minimum amount of Kiwibuild units to get the taxpayer backing and just go ahead with something they had a mind to do anyway. It's not adding to the supply, it's simply re-tagging or substituting it.

Twyford is going to be able to point to charts that show 'X' number of 'Kiwibuild' houses being constructed as some way of suggesting his initiative is working.

Exposed to risk

But the reality is overall numbers of houses being built are not necessarily going to rise.

The only difference potentially is that we now have taxpayers exposed to market risk.

I don't think the housing market is going to crash, or even fall very much. But it IS a risk. Just because something's never happened you can't suppose it could NEVER happen.

This scheme subjects the taxpayer to that additional risk.

It's a bad idea and it shows very clearly that Twyford is not getting the traction he thought he would be with the Kiwibuild initiative. It's a hell of a lot easier in Opposition.