Government faces 60-year debt blowout after building costs explode

Housing Minister Megan Woods has been warned not to grant any future Budget bids to state housing agency Kāinga Ora for a time, after fears of unsustainable debt levels.

A leaked document from the Ministry for Housing and Urban Development shows that spiralling construction costs have led to a debt blowout at Kāinga Ora, with fears the Government will be unable to completely repay the increase in debt over the next 60 years.

The document, dated June 17, says Kāinga Ora is "investigating" cost-cutting measures such as pausing a programme to improve heating in homes or retrofitting old homes with improvements that make them accessible to people with disabilities. Officials said the ideas might result in some "cost savings" but they will not address the root cause of the blowouts.

Woods' office said that "no decisions were made on the recommendations and Minister Woods sought more advice on the matters raised".

National's housing spokesman Chris Bishop said the document shows Kāinga Ora has become a "basket case".

"In the last four years they've spent $24m on their own office renovations, hired 1700 official staff and these documents show they're planning on hiring an additional 485 in 2023 alone," he said.

The document shows Kāinga Ora's deteriorating financial position, largely as a result of spiralling construction costs, which are not offset by increased income.

Officials presented a cost comparison of what Kāinga Ora's building programme will cost using its latest 2022 economic model with costs using its "previous benchmark" from pre-inflation spike 2018.

Using 2018 economic assumptions, the average interest cost per year for each additional state housing place would be $14,457. The revised 2022 model used by Kāinga Ora has the average interest cost of a new place at $29,339.

Using the 2018 assumptions, Kāinga Ora's interest costs would be $571 million in 2025/26 - instead, the most up-to-date assumption expects those costs to be $842m.

Kāinga Ora's debt is now forecast to peak in 2033 at $28.9b - the previous benchmark had debt peaking much lower, at $20.9b.

Officials at the ministry warned that they had "concerns with Kanga Ora's financial performance over the next four years and will be reviewing options on addressing Kāinga Ora's funding".

They said the review would look at "Kāinga Ora's funding, financing, and spending".

The officials said Kāinga Ora's budget bids for next year should not be progressed until the ministry's "strategic approach" for Budget 2023 had been agreed. Kāinga Ora had wanted those bids to be progressed earlier.

Bishop said the blowout had occurred at a time when Kāinga Ora was not adding many new state housing places.

"This has cast serious doubt on the Government's ability to meet its targets," he said.

They said the short term presented a "significant challenge" to Kāinga Ora's sustainability with its deficit increasing fourfold.

"Over the coming four-year period, forecast net deficit after tax continues to worsen with a $662m deficit projected for the 2023/24 financial year (the 2020/21 actual deficit was $152m for comparison). Kāinga Ora will need to use more cash each year to cover interest costs, which leaves less available for operating activities to reinvest through renewals," officials warned.

Kainga Ora's debt is increasing to unsustainable levels, according to officials. Photo / Tom Dillane

It warned Kāinga Ora's debt is now forecast to peak at $28.9b in 2033 before it begins to be repaid and that the new debt will not be repaid by 2081 when $8.9b will still be outstanding.

The many drivers for the blowout include "headwinds" in the construction sector pushing up costs, higher building cost inflation relative to the income Kāinga Ora receives, and "broader" Government expectations of the agency.

The document questions the efficacy of Kāinga Ora's model.

Currently, the agency operates with a significant degree of independence. It issues debt to private investors on its own. It sustains itself with income from tenants and subsidies from the Government.

The briefing considered whether it might be simpler to essentially merge Kāinga Ora's independent borrowing function, and borrow directly through the Crown - with officials noting this makes some sense after the Government changed accounting methods at the Budget to calculate the Government's debt including debt from agencies like Kāinga Ora - previously debt from agencies like Kāinga Ora had been excluded from the Government's main debt figure.

Officials also floated that it might be "cheaper overall" to simply hand over "upfront funding" to Kāinga Ora for building.

"This would require a Budget bid and will be reviewed as part of the Budget 2023 strategy paper."

As Kāinga Ora's debt increases, debt servicing costs will take up a greater and greater proportion of its income.

Current forecasts have interest costs totalling 39 per cent of its $2.1b rental cashflow in 2025/26.

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