Douglas Fairgray: Eligibility for KiwiBuild houses should include an income limit

KiwiBuild is ramping up with the announcement of the first two KiwiBuild projects (Unitec at up to 4000 dwellings, McLennan at 18 dwellings), a new head appointed to the KiwiBuild Unit in the Ministry of Business, Innovation and Employment and ongoing consultation across the sector.

Yet to be finalised is the question of eligibility for KiwiBuild dwellings – who will qualify to buy an affordable dwelling?

While the criteria are still being worked on, the ministry has reportedly confirmed that first home buyers' eligibility will not be based on their household income.

This will be a surprise to many and it suggests a couple of extra challenges for the scheme. One is that it may reduce the opportunity to maximise the benefits of KiwiBuild. The other is public acceptance of that approach.

Effective targeting of KiwiBuild is very important if the strategy is to sustainably deliver the desired outcomes. A core reason for the Government to directly enter the housing market is to fix a specific problem – there are not enough dwellings in the lower price bands, and as a consequence home ownership rates have declined, with associated social and economic impacts.

KiwiBuild is intended to improve affordability, both directly by injecting dwellings in the under-$600,000 price bands, and indirectly by increasing total supply and helping to temper house price growth.

In the Auckland housing market, into which KiwiBuild aims to inject 50,000 affordable dwellings over the next decade, the 2013 Census data is useful to show which segments of the community were "missing out" on ownership. They are those who would very likely been home owners in 2013 but for the effects of the "housing shock" which occurred before and after the global financial crisis.

Auckland has another 63,000 households by 2017 but the same groups in the community are still the most affected.

Unsurprisingly, the medium and medium-low income segments of the community have been hardest hit by the housing shock. If KiwiBuild is indeed a once-off initiative to plug a specific gap, then why would the eligibility criteria not include household income?

The gap between incomes and dwelling prices is at the heart of the problem KiwiBuild seeks to address. Among the first home buyer segments who are trying to become owners, household income is the strongest indicator of whether they can succeed by themselves, or whether they are unlikely to become owners without direct support through KiwiBuild.

The scheme can generally maximise its benefits if all of the owners of KiwiBuild dwellings are households which would not otherwise have become owners. The "success rate" will be the increase in ownership not otherwise achievable, compared with total KiwiBuild dwellings constructed

Fine tuning to get the best success rate is not an easy task. Markets and households' circumstances change. If the KiwiBuild criteria do not take account of income, then the risk is that households may qualify for a KiwiBuild dwelling when they could have become owners in the open market without help from the scheme.

That would reduce the effectiveness of KiwiBuild because some other households not able to become owners by themselves would then miss out.

Equally, placing too much weight on income alone may also cause problems. For example, an income threshold set too low could see households miss out if they are close to becoming owners on the open market, but cannot quite bridge the gap.

The absence of an income criterion is likely to reduce the success rate, however. Some simple number crunching shows this. The Auckland community has around 190,000 households who do not own their dwelling (excluding around 32,000 in Housing NZ dwellings and emergency accommodation).

Becoming a KiwiBuild owner will mean a loan must be serviced in most instances. The target pricing of Auckland KiwiBuild dwellings at $600,000 means that those in the lowest 30 per cent of household incomes (under $80,000) would likely not be able to afford a KiwiBuild dwelling even with additional help.

Auckland households earning above the 70th income percentile are able to afford a dwelling at above the median price, so in theory these households would not need the support of KiwiBuild.

Analysis suggests the Auckland non-owning households which would benefit most from KiwiBuild and be able to afford a dwelling are the 64,000 or so in the middle bands (see graph). Allowing for some of these to not be first home buyers, these numbers are in the same ball-park as KiwiBuild's 50,000 target.

However, a critical point is that if the 65,000 non-owner households in higher income segments are also eligible for KiwiBuild, then by weight of numbers alone they may dilute the success rate and effectiveness of KiwiBuild. They might otherwise have become owners independently of the scheme.

The related challenge is that of public acceptability. KiwiBuild is a bold and large-scale initiative, and plugging the housing supply gap is very important. Nevertheless, KiwiBuild will impose some (tax) cost on those in the community who will not benefit directly.

Policies which redistribute income and wealth are long established in New Zealand, and are accepted because much of the transfer is toward those less well off, especially in income terms.

The possibility that someone in the top 20 per cent of incomes may qualify for a KiwiBuild dwelling is unlikely to sit comfortably with many in the community, especially if someone else in the lower income bands might miss out.

Income should not be the only criterion for KiwiBuild eligibility. However, it should be included as one of the criteria, and an important one at that.

• Douglas Fairgray is director of a Takapuna-based consultancy, Market Economics Ltd.