KiwiBuild: definitions, eligibility criteria and the buying off the plans initiative (underwrite)

Transcription

1 In Confidence Office of the Minister of Housing and Urban Development Chair, Cabinet KiwiBuild: definitions, eligibility criteria and the buying off the plans initiative (underwrite) Proposal 1 This paper seeks agreement to: 1.1 the high level definitions, eligibility criteria and associated processes for the KiwiBuild programme; and 1.2 establish the KiwiBuild Buying off the Plans initiative as one of four initial priorities for delivering KiwiBuild. 2 I will shortly lodge a separate Cabinet paper, Housing and Urban Development Strategic Direction, Priorities and Delivery Approach setting out the broader Housing and Urban Development narrative and outlining this work programme in more detail. Executive Summary Programme level decisions 3 I propose that Cabinet agree to the definitions of what a KiwiBuild dwelling is, who is eligible to purchase one, and associated criteria and decisions. These definitions are at the core of KiwiBuild, and will provide greater certainty and confidence to the KiwiBuild Unit s development partners (both public and private/iwi). 4 In turn, this will enable the KiwiBuild Unit to firm up the KiwiBuild dwelling pipeline through finalising a number of pending transactions with iwi under the Crown Land and Land for Housing Programmes [CBC-17-MIN-0100 refers], and commence the approach to market for the Buying off the Plans initiative. It will also assist other public sector delivery agencies, such as Housing New Zealand Corporation (HNZC) to assess how many KiwiBuild dwellings they can contribute to the pipeline from their existing developments. Further Cabinet papers will be lodged, as necessary, for these particular transactions or programmes. 5 The decisions sought in this paper are intentionally high level in nature, reflecting the range of uncertainties associated with the diverse and dynamic nature of the housing market. Transaction-specific outcomes will be sought and agreed on a case by case basis, having regard to local demand, developments economics, and the Government s broader objectives and priorities. 1

2 Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) The Buying off the Plans initiative 8 I propose that Cabinet approve the attached business case (Annex One) to establish the Buying off the Plans component of the KiwiBuild Programme. 9 Buying off the Plans is one of a number of tools that the KiwiBuild Unit, and Housing Commission, once established, will utilise to facilitate the development of 100,000 affordable homes for first home buyers. 10 High land values and increasing construction costs make delivering smaller, more affordable housing extremely challenging in many parts of New Zealand. Developing the medium-and-higher density housing that is more likely to be affordable is particularly challenging. It involves higher levels of risk than standalone dwellings, both from a regulatory and financing perspective. As a consequence developers will generally require a higher risk-adjusted return, and their financiers will require evidence of significant pre-sale commitments before advancing development finance. 11 The Government is uniquely positioned to address these barriers by utilising its balance sheet strength and access to low cost capital to purchase (or underwrite) new homes off the plans, thereby de-risking suitable developments that the private sector, iwi, or others are leading. 12 An intervention through underwriting pre-sales of homes will provide multiple benefits, including: 12.1 Speed of delivery. It will enable developers to commence construction sooner and progress multiple stages at once, through improved access to finance Reduced development costs. Feedback from developers suggests they would be prepared to halve their development margins (representing a cost saving of circa 12.5 percent), in addition to passing on their reduced holding costs Influencing the development mix. Developers are willing to change the mix of their developments to align with KiwiBuild outcomes. 13 The design of the proposed Buying off the Plans initiative has been informed by market sounding with a range of developers, financial institutions and iwi. 14 This business case seeks agreement to the following: 2

3 14.1 To launch the Buying off the Plans initiative in the market, with the expectation that: the principal mechanism expected to be used is an underwrite of the KiwiBuild component of a development, whether through pre-purchase or as a backstop; other approaches to the intervention are still available, depending on specific developer appetite; and, the tool is likely to be used in conjunction with other KiwiBuild tools in some developments e.g. to support partnerships with iwi under the Land for Housing initiative Establishment of two channels for market engagement: Tier one will be targeted at the established developer market. It will be focused on achieving volume (i.e. larger developments and ideally a pipeline of developments run by established developers) Tier two will be open to smaller operators and operate at much smaller scale. It will be focused on innovation and trials of different dwelling types, available to both larger and smaller/newer developers and expected to be for much smaller volumes of dwellings Individual investments will be subject to specific approval mechanisms, on a case by case basis. 15 Joint Ministers (Finance and Housing and Urban Development) will oversee the roll-out of the Buying off the Plans initiative, including: 15.1 Go-to-market approach and all related documentation Selection of developments with which to engage The terms of any underwrite agreed with developers (including volumes of dwellings, underwrite prices, terms of payment, drop-dead dates and other details specific to individual developments). 16 The KiwiBuild Unit will have responsibility for managing delivery under the Buying off the Plans contracts. I am also seeking authority for Joint Ministers to sub-delegate decision making to officials where appropriate. 17 The buying off the plans initiative, by its nature, involves the Crown taking on some risks that the market is currently unprepared to take itself. However, it is expected that the construction risks (including construction cost increases) will rest with the developer. The KiwiBuild Unit will undertake appropriate due diligence to make sure prospective developers are credible, have the capacity and capability to deliver, and that prepurchase/underwrite prices represent value for money at the time of signing. Once the Crown commits to these purchases, it will take some or all of the risk of subsequent housing market price fluctuations, whether up or down. 3

4 Background The KiwiBuild Programme 18 KiwiBuild is a bold and ambitious programme which aims to facilitate the delivery of 100,000 affordable homes to first home buyers over the next 10 years. We have allocated $2 billion of funding for this programme in our Fiscal Plan, which will be leveraged with private (including iwi and institutional) investment, and be recycled as houses are sold. 19 KiwiBuild dwellings are intended to fill an entry level gap in the residential property market. In order to achieve the price points which have been established for the Programme, they are likely, in the short term, to be mainly one and two bedroom units, built in medium to high density typologies, and significantly smaller than the average new house built in New Zealand 1. The role of the KiwiBuild Unit 20 In December 2017, Cabinet agreed to establish a KiwiBuild Unit within the Ministry of Business, Innovation and Employment (MBIE) as an interim measure, pending enactment of the legislation required to establish the Housing Commission and confer cut through planning and infrastructure powers upon it [CBC-17-MIN-0055 refers]. Cabinet agreed that the KiwiBuild Unit s core areas of focus would include: 20.1 identifying and leveraging opportunities to procure KiwiBuild dwellings via: existing government-led housing initiatives, such as those being undertaken by HNZC; acquiring and on-selling vacant and underutilised Crown-owned land, as well as land purchased from the private sector and others, to developers for the delivery of KiwiBuild dwellings (the Land for Housing Programme, which is already underway); purchasing (or underwriting) new homes off the plans, to de-risk suitable developments that the private sector or others are leading; 20.2 undertaking initial due diligence on around five of the signalled 12 to 15 major greenfield and urban regeneration projects that could be progressed by the Housing Commission once established; and 20.3 investigating innovative approaches to addressing current constraints within the development sector, including alternative financing approaches and construction methodologies. 21 It is likely that in certain developments, a combination of different KiwiBuild tools will be used in order to achieve the best outcomes. 22 The absolute and relative success of the KiwiBuild programme will also be dependent on progress with other parts of the Government s housing and urban development work programme, in particular: 1 The average size of new dwellings has increased by more than 50 per cent since 1989, despite declining average household sizes. 4

5 22.1 Changes to the urban and infrastructure planning and development system through the Urban Growth Agenda and Building and Construction work programme (e.g. planning rules, consent processes, building products etc.) A skilled and sufficient construction and development workforce (through the Construction Skills Strategy) Sufficient and timely investment in supporting transport and other infrastructure Support for purchasers (through home-ownership products such as shared equity) 23 A subsequent Cabinet paper, Housing and Urban Development Strategic Direction, Priorities and Delivery Approach, will outline this broader work programme in more detail. Overview of high level definitions, eligibility criteria and associated processes for the KiwiBuild programme Definition of a KiwiBuild dwelling 24 I propose that a KiwiBuild home should be defined simply as a dwelling that: 24.1 is priced at or below the relevant KiwiBuild price cap; 24.2 is sold, or offered in the first instance, to an eligible purchaser (as per paragraph 41 below); and 24.3 has been approved by the KiwiBuild Unit (or its successor, the Housing Commission) for entry in a KiwiBuild register administered by the KiwiBuild Unit. 25 Transaction-specific outcomes (for example with respect to design and materials, build technology, diversity of size and typology across a development, disability access and universal design, energy efficiency and water quality etc.) will be sought and managed on a case-by-case basis through the way KiwiBuild dwellings are delivered or acquired. In doing this we will have regard to local demand, the specific opportunities offered by a location, development economics, and our policy priorities. By its very nature, this will involve trade-offs between house prices, affordability and suitability/amenity. I recognise that achieving many of these outcomes through KiwiBuild will be important for us, and I have directed officials to prepare an outcomes framework and supporting policies Redaction consistent with the Official Information Act 1982, s 9(2)(j) 26 In general, and subject to feasibility, the more active the Government s role (including in terms of investment and risk exposure) the greater the influence we will be able to exert over the final design and outcome, enabling us to achieve our broader policy objectives. However, we will leverage private investment to maximise the number of developments KiwiBuild is able to assist. In doing so, we will need to strike a careful balance between the pursuit of our broader objectives and ensuring that development opportunities are commercially attractive and viable for our partners. 5

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7 Number of bedrooms Price cap 2 One (incl. studio and one+study) $500,000 Two $600,000 Three or more $650, Even with this adjustment we will still be delivering all KiwiBuild dwellings below the lower quartile house price for Auckland, and fulfilling a market segment for new build that is almost completely unrepresented in the market. Nationally, just five per cent of new housing supply is delivered at, or below, the lower quartile price. 36 It is also important to reiterate that these are caps, and in many circumstances we will be able to deliver KiwiBuild homes below these price points. For example, some initial discussions with developers have revealed potential opportunities to build threebedroom townhouses at below $600,000 in some parts of Auckland. 37 I also propose applying the Auckland thresholds to Queenstown, which has recently overtaken Auckland as New Zealand s most expensive housing market and faces high development costs due to both its climate (i.e. higher snow loading and insulation requirements) and constrained geography/limited land supply. 38 I do not propose any immediate changes to the upper price thresholds for other regions, which should be readily attainable. I note that in greater Tauranga, New Zealand s third most expensive region, the median house price is 27 per cent less than Auckland and 30 per cent less than Queenstown. Tauranga is also less constrained in its geography. 39 However, I have directed officials to undertake further analysis to model regional price points to see whether this could be further differentiated by region with a view to introduce a region specific price point in relation to number of bedrooms as I have proposed for Auckland and Queenstown. This will also inform the price points targeted through the market engagement processes, which may be lower in regions where housing development is less expensive. Ideally, my aim is to deliver housing at price points below the lower quartile house price for the relevant region. Given the dynamic nature of the housing market, I seek delegated authority from Cabinet to amend the proposed KiwiBuild price caps (whether up or down) over the life of the programme, in consultation with the Minister of Finance. Definition of an eligible KiwiBuild purchaser 40 Consistent with our overarching objective of ensuring that more New Zealanders are able to access the benefits of home-ownership, I propose that an eligible purchaser be defined simply as a person who: 40.1 is a New Zealand Citizen or permanent resident; and 40.2 is a first home buyer or second chancer in the same financial position as a first home buyer; and 2 Like the HomeStart Grant, I propose that the price thresholds apply to a range of property tenures, including leasehold arrangements. We have already received approaches from iwi who are interested in making their land available on a sub market leasehold basis as a means of improving home ownership affordability for their members. 7

8 40.3 intends to reside in the premises as their principal place of residence. 41 The above criteria are broadly consistent with the eligibility criteria for existing home ownership products. This means that people who currently qualify for a KiwiSaver First Home Withdrawal, KiwiSaver HomeStart Grant or Welcome Home Loan will also qualify for a KiwiBuild Home. 42 However, unlike the existing schemes, I do not propose limiting KiwiBuild eligibility to people who are KiwiSaver members and/or who have a limited income. This is because: 42.1 there is no substantial reason for limiting KiwiBuild access to only KiwiSaver members; 42.2 maximising the number of households able to access KiwiBuild will help reduce development and sales risk (and consequently, holding costs) for the Government and its development partners, and thus increase the total number of new homes built; and 42.3 difficulty in purchasing an affordable first home is something that is experienced by a large number of households, including many who are earning more than the current HomeStart price caps. 43 While the proposed eligibility criteria includes an intention to reside in the premises for a period of time, more work needs to be undertaken before I can advise what that period Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) of time could be, Establishment of a KiwiBuild register 44 The KiwiBuild Unit will establish and maintain a register of KiwiBuild homes (the KiwiBuild Register), and any agency or developer wishing to brand houses within a development as KiwiBuild homes will first need approval from the Unit. The purpose of requiring that dwellings be approved for entry on the KiwiBuild Register is: 44.1 To ensure the policy objectives of KiwiBuild are being met, but also as a means of protecting the KiwiBuild brand, to ensure that new homes carrying the KiwiBuild brand meet our quality requirements As a means of tracking progress against the target of delivering 100,000 KiwiBuild dwellings. It is important that data is robust, so that we can see what is working and what isn t, and adjust policy and implementation settings accordingly. 45 The KiwiBuild Unit will also: 45.1 Establish and maintain a central register of expressions of interest from eligible purchasers, including a record of their preferred locations and typologies; 45.2 Pre-qualify potential KiwiBuild buyers to make sure they meet the required criteria to purchase a KiwiBuild dwelling Match pre-qualified buyers with developers of suitable developments/dwellings entered in the KiwiBuild Register. 8

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10 Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) Further advice on KiwiBuild under development 60 As discussed in paragraph 25, I have tasked officials with developing an overarching outcomes framework for KiwiBuild. This will need to balance the delivery of core KiwiBuild objectives with contributing to broader Government objectives and priorities, such as environmental goals, Māori and regional economic development, and ensuring the that KiwiBuild delivers for a diverse range of households, including Māori and Pasifika, extended families, people with disabilities, and households who have insufficient income or deposits to purchase a KiwiBuild home. Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) 10

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12 of developments. In turn, this would reduce development costs and delays associated with the risk premiums built into development/lending margins, and banks requiring developers to pre-sell dwellings prior to drawing-down development finance. 70 In exchange for helping worthwhile developments overcome the finance constraints being experienced in the residential development sector, this initiative would require the resulting product mix being offered by private developers to better meet the Government s affordable housing objectives. 71 It will be important that through this approach, we are facilitating developments that would not otherwise proceed, or which offer a more diverse product mix, rather than crowding out private investment. Investment objectives 72 Buying off the plans will support the wider KiwiBuild objectives, such as: 72.1 Reducing the price at which housing is developed and delivered to the market; 72.2 Supporting efficient and effective land and infrastructure utilisation through densification; 72.3 Focusing on smaller more affordable houses built at both increased pace and scale; 72.4 Providing confidence to support investment in training, plant and machinery to boost sector productivity; and 72.5 Creating well connected, thriving communities, in existing urban areas, which are already supported by infrastructure and have existing access to amenities, including via the large scale development projects. Development of the business case and testing of possible options 73 The design of the proposed Buying off the Plans initiative has been informed by market sounding with a range of developers, financial institutions and iwi. 74 This involved testing five potential approaches to the Crown de-risking the provision of KiwiBuild dwellings in private sector led developments. These were: 74.1 Underwriting the sale of KiwiBuild dwellings; 74.2 Underwriting specific components or risks of developments; 74.3 Underwriting/guaranteeing some of the debt financing for developers; 74.4 Providing capital directly to developments; and 74.5 Providing grants to developers for KiwiBuild dwellings. 75 The market sounding and associated analysis found that the underwriting approach in paragraph 74.1 was the most effective means of achieving the Crown s policy objectives. A summary of the other approaches that were considered and reasons for not proceeding with them is attached at Annex Three. 12

13 76 Underwriting or pre-purchase of dwellings could be delivered in several ways, possibly on a case-by-case basis given the economics of a proposed development. The variants include: 76.1 Outright purchase of affordable dwellings on completion: The Crown enters into a sale and purchase agreement with the developer to purchase the KiwiBuild dwelling on delivery at an agreed-in-advance underwrite price and on-sells these to entry-level buyers. For given price points and underwrite prices, the Crown knows its aggregate exposure at any one time Backstop purchase of unsold dwellings: The Crown enters into an option agreement with the developer to purchase unsold affordable dwellings (or to pay difference between an eventual sale price and pre-agreed amount) after a defined marketing period and/or unsuccessful sales process Cover the holding cost of unsold affordable dwellings: The Crown enters into an agreement to pay a pre-determined rate after an agreed marketing period and/or unsuccessful sales process to cover the holding costs of unsold dwellings Backstop purchase on market purchaser defaults: The Crown enters into an agreement with the developer to backstop pre-sales where the Crown steps into the shoes of the defaulting purchasers and makes good the transaction. 77 I want this product to be flexible in form and fit for purpose for a wide range of development proposals. This will allow the first underwrites to be adapted to market conditions, and subsequently evolve over time as market conditions move and change 78 In most cases, the likely approach will be that outlined in either paragraph 76.1 or 76.2 above. Whichever variation is progressed, there will be a robust process to ensure these dwellings are sold to eligible KiwiBuild buyers, whether directly by the Crown or by the development partners or third parties. The underwrite could be applied to just the land component of the development as well, to align with some developer business models. Commercial Strategy 79 A detailed commercial strategy has been developed. The business case sets out the high level approach to market. 80 The business case proposes a two-tier go to market structure, which establishes two channels for engaging with the developer market: 80.1 Tier one will be targeted at the established developer market. It will be focused on achieving volume (i.e. larger developments and ideally a pipeline of developments run by established developers) Tier two will be open to the smaller operators and operate at much smaller scale. It will be focused on innovation and trials of different dwelling types, available to both larger and smaller/newer developers and expected to be for much smaller volumes of dwellings. 81 One thing I am aiming to facilitate through the market engagement process is a move to more innovative delivery techniques and use of new technology as a means of lowering costs and reducing timeframes. 13

14 82 Once the parameters of the initiative are agreed and the business case is approved, MBIE will approach the market by issuing an Invitation to Participate (ITP). The ITP will set out: 82.1 The two tier approach; 82.2 The Government s expectation of the criteria for a KiwiBuild dwelling; and 82.3 The process for a developer to participate in the KiwiBuild process. 83 The application process will not have a specific deadline. Developers will be able to bring developments for an underwrite at any time. 84 Having prequalified, MBIE will issue an Invitation to Negotiate. Developers will at this stage bring detailed proposals to MBIE on which due diligence can be undertaken and negotiations completed. Decision making process 85 As proposals are received these will be tested against a set of criteria on a case by case basis. There are also programme wide criteria, which all proposals across the different KiwiBuild tools will be tested against. 86 A key aspect that will need to be taken into consideration is value for money, as we need to ensure that the Crown is able to recover and recycle its $2 billion investment as rapidly as possible over the life of the programme. 87 Ensuring value for money, while having the ability to enter into as many proposed agreements as possible, will rely on a combination of: 87.1 Due diligence and analysis of build costs presented in each proposal; 87.2 Comparison of individual KiwiBuild underwrite proposals over time and the creation of a set of established norms, which will need to be met or exceeded in order to obtain an underwrite; 87.3 Use of specific performance indicators for each development around quality and timeliness of delivery; 87.4 Incentivising developer performance (poor performance means restriction or exclusion from the KiwiBuild processes in the future); and 87.5 Monitoring of prices achieved in the market on sale of KiwiBuild homes, comparison with market prices in those locations and understanding of the net cost of the underwrite; this again can be developed over time into a threshold to exceed for the net costs of future underwrites. 88 For a standard underwrite, the Crown will enter into a Sale and Purchase Agreement with the developer. This will set out: 88.1 Specifics of the underwrite, including numbers and types of dwellings, agreed designs, price points and timing of payments; 88.2 Conditions precedent to activation of the underwrite; 14

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16 96 More generally, the Crown will only be committing to the underwrite on a developmentby development basis. The Crown has the ability to decline an underwrite, which it is able to do on every occasion it evaluates an underwriting opportunity. 97 The table below addresses some of these and other risks in more detail and the expected risk management strategies: Risks Buyer Interest Risk Management Strategies Create recognised and valued KiwiBuild brand, promoted strongly in key markets If interest is weak, consider ancillary products alongside (e.g. shared equity scheme) that support purchasing power Ensure joined up approach to other issues that drive development success/location attractiveness e.g. investment in local schools, crime prevention (i.e. make locations more attractive to live for owner occupiers) Consideration of other tenures if there are not sufficient buyers Developer Interest Underwrite design: use mechanisms and level of commitment that make a material difference to development economics (i.e. make it worth their while) Develop simple and standardised products and clear thresholds for entry to the scheme (i.e. in planning a development, developers will have a high level of certainty as to what will be eligible for the underwrite, and on what terms) Ongoing market engagement to work with developers and financiers to understand current state of the market, development economics etc. (i.e. keep abreast of the market, and adapt to changing market conditions) Working with and supporting smaller developers to enable them to participate in the KiwiBuild programme Align other key initiatives to assist development (e.g. UDA, Housing Commission, minimum affordable homes requirements) Developer Performance Underwrite design: only crystallise the Crown s exposure on delivery of dwellings Due diligence on developers and development proposals Link access to the underwrite on future developments to performance on the current 16

17 Insurable Risks, including natural disasters The Crown will need to have insurance in place for all units that it underwrites, activating as soon as the Crown takes delivery of the units. This insurance risk sits with developers until such time 98 Like any purchaser, we expect KiwiBuild buyers to undertake due diligence and be aware of the potential risks of buying a house, as anyone in the market would need to. Iwi/Māori considerations 99 The KiwiBuild programme, and buying off the plans initiative, will provide opportunities for partnerships with iwi and Māori groups. 100 Iwi organisations have already voiced an interest in the buying off the plans initiative and see it as a vehicle for being able to deliver more houses at reduced prices. Many iwi developers are already trying to target lower quartile price points as a way of increasing home ownership rates among their people. Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) Delegation 103 I propose that Joint Ministers (Finance and Housing and Urban Development) oversee the roll-out of the buying off the plans initiative, including: Approval of go-to-market approach and all related documentation; Selection of developments with which to engage; and The terms of any underwrite agreed with developers (including volumes of dwellings, underwrite prices, terms of payment, drop-dead dates and other details specific to individual developments). 104 It is expected that at the start of the initiative, Joint Ministers will approve all proposed Buying off the Plans investments. I have requested a separate briefing from officials which provides advice on the key information Joint Ministers will require to inform the decision making process. I anticipate that this will include: The proposed purchase price, or backstop price; Market valuation(s); Expected delivery date, location and typology; and 17

18 104.4 An assessment of the Crown s potential risk exposure, informed by actuarial advice where appropriate. 105 After the initial phase, and as market norms and prices become established, subdelegation to officials will be considered for some scale of developments and/or risk exposures. Consultation 106 The State Services Commission, the Treasury, Ministry for Social Development, Te Puni Kokiri, Land Information New Zealand, Homes.Land.Community and Housing New Zealand Corporation were consulted on this Cabinet paper. 107 The Department of Prime Minister and Cabinet was informed. Financial Implications 108 At this stage the level of demand for the KiwiBuild programme is highly uncertain, which means that forecasts of the financial implications can be indicative only. 109 The delivery of the buying off the plans initiative represents a form of property development, which means that the purchase of the off-the-plans houses is an acquisition of inventory with the expense (as cost of goods sold) recognised when those houses are sold. Should the delivery of the buying off the plans initiative transfer to the Housing Commission, once established, MBIE proposes that the Commission s financial needs be funded by way of capital injection. 110 Aspects of the KiwiBuild programme will require a guarantee from the Minister of Finance (under section 65ZD of the Public Finance Act 1989). That guarantee would be triggered when any affordable housing required to be built by a developer did not sell on the open market and was then acquired by the Crown or the Housing Commission. Such housing would be on-sold as a sub-part of the Buying off the Plans initiative. The specific nature of the guarantee will determine its trigger point and when and how it needs to be accounted for. 111 It is envisaged that revenue generated from the sale of affordable houses to first home buyers, as part of KiwiBuild, will be reinvested in the KiwiBuild programme. This reinvestment should reduce the Housing Commission s working capital requirements if there is a steady rather than an increasing demand for the initiative. 112 In order to implement the buying off the plans initiative, four new appropriations will need to be established: a non-departmental output to fund the purchase of affordable houses while the activity is delivered by the Crown; a non-departmental other expense for guarantee and indemnity expenses authorised under Section 65ZD of the Public Finance Act 1989; a non-departmental other expense to recognise impairment/write-down expenses if and when houses have to be sold below their purchase price; and 18

19 112.4 a non-departmental capital expense to provide for capital for KiwiBuild housing. This appropriation will incorporate the existing funding in the Non-Departmental Capital Expenditure: KiwiBuild acquisitions and development appropriation. 113 The fiscal impact of the Crown delivering the KiwiBuild programme before the Housing Commission is established is estimated as transferring $210 million from capital expenditure to operating expenditure, with $1, million capital available to fund the KiwiBuild capital needs. The $210 million operating expenditure is expected to be offset by an increase in operating revenues from the sale of affordable houses acquired by the Crown. 114 The intention is to transfer the KiwiBuild programme and any unsold housing inventory to the Housing Commission once it is established. Further advice will be provided at that time on the appropriation and fiscal impacts. Appropriations for indemnity and impairment/write-down expenses will be sought when reliable estimates of likely costs are known. 115 Funding of $220 million for Land for Housing has already been appropriated, as well as $ million of operating funding to enable delivery of other aspects of the programme. The combination of the funding already appropriated and the new funding requested in this paper adds to $2.1 billion. Human Rights 116 This Policy proposal is consistent with the rights and freedoms contained in the New Zealand Bill of Rights Act 1990 and the Human Rights Act Legislative Implications 117 This paper has no legislative implications. Regulatory Impact Analysis 118 A regulatory impact statement is not required for the proposals in this paper. Gender Implications 119 There are no gender implications arising from these proposals. Disability Perspective 120 MBIE are developing a policy on how the KiwiBuild programme can best meet the needs of a diverse range of household, including people with disabilities. Publicity 121 The office of the Minister of Housing and Urban Development will manage the publicity resulting from any decisions in this paper in conjunction with the Prime Minister s Office. 122 I plan to proactively release this paper and the attached Business Case, subject to the standard withholding provisions of the Official Information Act. 19

20 Recommendations I recommend that the Committee: The KiwiBuild Programme and Unit 1 note that: 1.1 the Government is committed to partnering with the private sector to build 100,000 affordable homes between 2018 and 2028, half of them in Auckland ( KiwiBuild ); 1.2 KiwiBuild will be financed by $2 billion capital allocation in the fiscal plan, which will be recycled as the houses are sold; 2 note that: 2.1 in December 2017, Cabinet agreed that the KiwiBuild Unit s core areas of focus would include: identifying and leveraging opportunities to acquire KiwiBuild dwellings via existing government-led housing initiatives, such as those being undertaken by HNZC; acquiring and on-selling vacant and underutilised Crown-owned land, as well as land purchased from the private sector and others, to developers for the delivery of KiwiBuild dwellings (the Land for Housing Programme); purchasing (or underwriting) new homes off the plans, to de-risk suitable developments that the private sector or others are leading and undertaking initial due diligence on around five of the signalled 12 to 15 major greenfield and urban regeneration projects that could be progressed by the Housing Commission once established [CBC-17- MIN-0055 refers]. Defining a KiwiBuild dwelling 3 agree to define a KiwiBuild dwelling as a dwelling that: 3.1 is priced at or below the relevant KiwiBuild price cap; and 3.2 is offered for sale, in the first instance, to an eligible purchaser; and 3.3 has been approved by the KiwiBuild Unit (or its successor) for entry in a KiwiBuild register 4 agree that transaction-specific outcomes (e.g. with respect to design and materials, building technology, diversity of size and typology across a development, accessibility, 20

21 water quality and energy efficiency) will be sought on a case-by-case basis through the development and/or market engagement process (having regard to local demand, conditions and development economics) KiwiBuild price points 5 agree that the relevant KiwiBuild price caps for Auckland and Queenstown (applicable to both attached and standalone dwellings) are: Number of bedrooms Price cap One (incl. studio and one+study) $500,000 Two $600,000 Three or more $650,000 6 agree that the relevant KiwiBuild price cap for areas outside of Auckland and Queenstown is $500, note officials are undertaking further modelling to identify whether the $500,000 threshold outside of Auckland and Queenstown can be further broken down by bedroom numbers, or adapted to better reflect other regional variations in construction costs. 8 note, Cabinet approval will be sought to amend the KiwiBuild price caps (whether up or down) as appropriate Eligible purchasers 9 agree to define an eligible purchaser as a person who: 9.1 is a New Zealand Citizen or permanent resident; and 9.2 is a first home buyer or second chancer in the same financial position as a first home buyer; and 9.3 intends to reside in the premises as their principal place of residence Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) KiwiBuild register 11 agree that the KiwiBuild Unit will control the conferment of KiwiBuild status through the establishment and maintenance of a register of KiwiBuild homes (the KiwiBuild Register) 12 agree that the KiwiBuild Unit will establish a register of prospective buyers, pre-qualify purchasers, and match these pre-qualified purchasers with developers from the KiwiBuild Register. 21

22 Redaction consistent with the Official Information Act 1982, s 9(2)(f)(iv) Further advice 15 note that MBIE, in consultation with other agencies, is developing an overarching outcomes framework, and supporting papers, to balance the delivery of core KiwiBuild objectives with contributing to broader Government objectives and priorities 16 note that this will include more focused advice on, among other things, how the KiwiBuild programme can best meet the needs of a diverse range of households, including: 16.1 Māori and Pasifika 16.2 Extended families 16.3 People with disabilities 16.4 Households who have insufficient income or deposits to purchase a KiwiBuild home 17 note I will report back to Cabinet on these matters in due course. Buying off the Plans initiative 18 note that this paper and the attached business case, seek agreement to the programme parameters and delegations required to progress the underwriting initiative 19 note that the design of the proposed buying off the plans initiative has been informed by market sounding with a range of developers, financial institutions and iwi. 20 note that as proposals are received these will be tested against a set of criteria on a case by case basis. 21 note that for a standard underwrite, the Crown will enter into a Sale and Purchase Agreement with the developer. This will set out: 21.1 Specifics of the underwrite, including numbers and types of dwellings, agreed designs, price points and timing of payments 21.2 Conditions precedent to activation of the underwrite 21.3 Treatment of any pre-sales of KiwiBuild dwellings after the Crown underwrite comes into effect 21.4 Any value or risk share mechanisms around the prices achieved in the market 22

23 21.5 Conditions to be met by the developer before the Crown takes possession/has the underwrite called 22 note that the Crown will only be committing to an underwrite on a development-by development basis. The Crown has the ability to decline a proposal, which it is able to do on every occasion it evaluates an underwriting opportunity. 23 note that partnerships with iwi will be a key driver for the success of the KiwiBuild programme and we need to work together in order to achieve shared aspirations for housing 24 agree to launch the Buying off the Plans initiative in the market, with the expectation that: 24.1 The principal mechanism expected to be used is an underwrite of the KiwiBuild component of a development 24.2 Other approaches to the intervention are still available, depending on specific developer appetite 25 agree to establishment of two channels for market engagement: 25.1 Tier one will be targeted at the established developer market. It will be focused on achieving volume (i.e. larger developments and ideally a pipeline of developments run by established developers) Tier two will be open to smaller operators and operate at much smaller scale. It will be focused on innovation and trials of different dwelling types, available to both larger and smaller/newer developers and expected to be for much smaller volumes of dwellings. 26 agree that individual investments will be subject to specific approval mechanisms, on a case by case basis. 27 agree that through the Buying of the Plans initiative land is acquired, administered and on-sold under the provisions of the Housing Act

24 Financial implications 28 agree to establish the following four new multi-year appropriations, to run from 1 April 2018 to 30 June 2022, to provide funding for the KiwiBuild programme: Vote Housing and Urban Development Housing and Urban Development Housing and Urban Development Housing and Urban Development Appropriation Minister Minister of Housing and Urban Development Minister of Housing and Urban Development Minister of Housing and Urban Development Minister of Housing and Urban Development Title Type Scope KiwiBuild Housing KiwiBuild Indemnities KiwiBuild Impairment s KiwiBuild Capital Non- Departmental Output Expense Non- Departmental Other Expense Non- Departmental Other Expense Non- Departmental Capital Expenditure This appropriation is limited to the acquisition, construction and provision of KiwiBuild housing. This appropriation is limited to KiwiBuild guarantee and indemnity expenses authorised under section 65ZG of the Public Finance Act This appropriation is limited to KiwiBuild impairment or writedown expenses. This appropriation is limited to capital for KiwiBuild housing. 29 approve the following changes to appropriations to give effect to the policy decision in recommendation 28 above, with a corresponding impact on the operating balance and debt: Vote Housing and Urban Development Minister of Housing and Urban Development Non-Departmental Output Expense: KiwiBuild Housing Non-Departmental Capital Expenditure: KiwiBuild Capital $m increase/(decrease) 2017/18 to 2021/ /23 & Outyears , note that Cabinet has previously authorised $220 million for KiwiBuild acquisitions and development and that this funding can now be transferred to the new KiwiBuild capital appropriation 31 approve the following fiscally neutral transfer, with no impact on debt: Vote Housing and Urban Development Minister of Housing and Urban Development Non-Departmental Capital Expenditure: KiwiBuild acquisitions and development Non-Departmental Capital Expenditure: KiwiBuild Capital $m increase/(decrease) 2017/18 to 2021/ /23 & Outyears ( ) ( )

25 32 note the increase in Non-Departmental Revenue as a result of the decision in recommendation 29, with a corresponding impact on the operating balance: Vote Housing and Urban Development Minister of Housing and Urban Development Non-Tax Revenue: KiwiBuild Housing Sales $m increase/(decrease) 2017/ / / / / /23 & Outyears note that the indicative expense profile for KiwiBuild Housing, one of the new multi-year appropriations described in recommendation 29, above with a corresponding impact on the operating balance: Vote Housing and Urban Development Minister of Housing and Urban Development Non-Departmental Output Expense: KiwiBuild Housing $m increase/(decrease) 2017/ / / / / /23 & Outyears note that the indicative impact on net debt of KiwiBuild Housing and KiwiBuild Capital, two of the new multi-year appropriations described in recommendation 29 above, is as follows: Vote Housing and Urban Development Minister of Housing and Urban Development Non-Departmental Output Expense: KiwiBuild Housing Non-Departmental Capital Expenditure: KiwiBuild Capital $m increase/(decrease) 2017/ / / / / /23 & Outyears * , *In 2018/19 $ million of cash will be used for housing purchases, of which $ million will be sold in the same year, resulting in $ million in revenue, with the balance of $ transferred to a future housing commission as housing stock for sale. 35 agree that the revenue generated from the provision of affordable houses to first home buyers, as part of KiwiBuild, will be reinvested in the KiwiBuild programme 36 note the intention is to transfer the KiwiBuild programme to the Housing Commission once it is established. Further advice will be provided at that time on the relevant appropriation and fiscal impacts 37 note that appropriations for KiwiBuild Indemnities and KiwiBuild Impairments Non- Departmental Other Expenses will be sought when reliable estimates of likely costs are known. 25

26 38 note that funding of $220 million for Land for Housing has already been appropriated, as well as $ million of operating funding to enable delivery of other aspects of the programme. The combination of the funding already appropriated and the new funding requested in this paper adds to $2.1 billion. Delegations 39 delegate authority to Joint Ministers to make the following decisions in regards to the Buying off the Plans initiative, including: 39.1 Approval of go-to-market approach and all related documentation; 39.2 Selection of developments with which to engage; and 39.3 The terms of any underwrite agreed with developers (including volumes of dwellings, underwrite prices, terms of payment, drop-dead dates and other details specific to individual developments). 40 note that MBIE, in consultation with Treasury, will report to Joint Ministers on the information requirements and parameters to support decision making under the buying off the plans initiative. 41 agree that the KiwiBuild Unit will have responsibility for managing delivery under the Buying off the Plans contracts and managing the operation of the Programme. 42 agree to Joint Ministers having authority to sub delegate decision making to officials where appropriate. 43 approve the attached business case. 44 agree that this paper and the attached Business Case will be proactively released at an appropriate time, subject to the standard withholding provisions of the Official Information Act. Authorised for lodgement Hon Phil Twyford Minister of Housing and Urban Development 26

27 Annex One: Buying off the Plans Single Stage Business Case 27

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109 Annex Two: Possible regional distribution of KiwiBuild programme 1. The following table provides an estimate of the housing shortfall that has accumulated in each of the major regions around the country between 2006 and 2017, both in absolute terms and as a proportion of the national shortfall. This was calculated by comparing the number of new dwellings completed since 2006 with population growth (adjusted for household size), giving a total national shortfall of 71,766. These shortages are expected to grow further in the near term. Over ninety percent of the housing shortfall is in the top six areas: Auckland, Wellington, Hamilton, Napier-Hastings, Queenstown-Lakes and Tauranga. 2. The table also provides a breakdown of where the 100,000 KiwiBuild dwellings would be delivered, if they were to be delivered in proportion to the regional distribution of the accumulated housing shortfall. A regional breakdown of the existing lower quartile price is also provided for each region. Area New housing shortfall Possible number of KiwiBuild dwellings Lower quartile dwelling sale price Auckland 44,738 (62%) 61, ,000 Wellington 9,312 (13%) 12, ,000 Hamilton 5,908 (8%) 8, ,000 Napier-Hastings 1,777 (2%) 2, ,000 Queenstown-Lakes District 1,600 (2%) 2, ,000 Tauranga 1,473 (2%) 2, ,000 Whangarei District 1,412 (2%) 1, ,000 Nelson-Tasman 1,180 (2%) 1, ,000 Palmerston North City 1,083 (2%) 1, ,000 Rotorua District 1,012 (1%) 1, ,500 28

110 New Plymouth District 936(1%) 1, ,500 Gisborne District 725 (1%) 1, ,000 Dunedin City 611 (1%) ,000 Christchurch 0 (0%) 1, ,000 Total 71,766 (100%) 100,000 *Based on Statistics NZ numbers of households data and lagged building consent applications 3. The data suggests KiwiBuild should focus heavily on the six urban areas which have experienced the greatest shortfall in dwelling construction, with smaller allocations provided in the other centres. These also tend to be the areas with the highest lower-quartile house prices (with the exception of Napier-Hastings), signifying the relationship between lack of affordability and lack of supply relative to demand. 4. However, in addition to demand, the delivery of KiwiBuild dwellings will also need to be informed by development economics, which may impact feasibility in some regions. For example in Gisborne, the lower quartile price is around $221,000, which is likely significantly below what we can deliver via KiwiBuild. This means that, without additional assistance, an existing house will likely be substantially more attractive and accessible to first home buyers, than what the KiwiBuild programme will be able to deliver. As a consequence, in these regions there is an elevated risk of being left with KiwiBuild stock we are unable to sell to eligible households. 5. For this reason, I expect that the actual regional distribution of KiwiBuild dwellings will need to be informed by a combination of housing demand and opportunities, including site or location-specific development economics. The programme will also need to responsive to changing market conditions over time. This may result in a different distribution than is outlined above. 6. Should the Government wish to pursue new housing supply (beyond social housing) in the regions where the development economics are less conducive to the KiwiBuild development model, then a different approach and/or additional support will be required. 29