Source: Massey University
By Dr Oscar Lau
The government claims that KiwiBuild homes will be sold “at cost”, implying the scheme will cost the public nothing after the homes are sold. This is misleading. The homes will be sold at deep discounts to their market values so, in reality, the government is foregoing the money the public could have received had the land been auctioned off. As the aim is to sell 100,000 KiwiBuild homes in the next decade, the total cost to the public will add up to tens of billions of dollars. In effect, KiwiBuild will transfer enormous wealth from the public to the lucky few.
You might think: the cost is huge but it’s unavoidable if we want to help families buy their own homes. But let’s first ask how much the government should help families. I think we can all agree it should be just enough for them afford a reasonable home. The goal of the scheme is to help them own a home, not to enrich them.
Here’s an alternative approach. Instead of a lottery, the homes could be sold by auctions, in which only KiwiBuild-qualified buyers can bid. Since the bidding is only open to qualified buyers, and are subject to restrictions, the homes will still be sold for less than their market values.
The buyers bid according to their financial abilities so the system provides adequate, but not excessive, assistance to the buyers. You might protest that auction is unfair because poorer families will never have a chance. But if the goal is to help families own reasonable homes, why do the homes have to be brand sparkling new? New properties inevitably attract high bids, and the poorer families who just want to own a modest home will miss out.
Orderly auctions with eligibility restrictions
Instead of building new homes, the government could buy a wide range of existing properties of different sizes, ages and in different neighbourhoods – and auction them off to qualified buyers. Better-off families bid for the new homes, giving other families the opportunity to bid for more modest homes.
This way the government doesn’t need to meddle in property development. It doesn’t need to struggle with construction schedules. To avoid exciting the market, it would need to buy gradually and orderly, rather than splurge. More importantly, it could release some KiwiBuild land to the market for development, so that new supply will balance its purchases.
There should also be resale restrictions imposed on all KiwiBuild homes. When an owner decides to sell the home, he should be required to sell it through KiwiBuild auction, ensuring the home goes to another qualified buyer, who will also have the opportunity to buy it at a discount to the market price.
Additional eligibility restrictions could be imposed to further discourage wealthier families from participating in the scheme. These include setting asset and income thresholds for all buyers; extending the no-sale period to five years; restricting the type of properties a family is eligible for (for example, only a family of four or more can bid for a three-bedroom home); and requiring all family members to live there and not own other properties in the next five years.
If, for any reason down the track, the house is no longer required for the KiwiBuild programme, the owners should be allowed to sell freely in the open market, but with a specified proportion of the sale profits returned to the government. For example, if the home was bought at a 50 per cent discount, then 50 per cent of the sale proceeds should return to the government.
In this way, discounts get either passed onto another qualified buyer, or rightfully returned to the public coffers. It is ridiculous to allow buyers to buy at a discount and then sell at full market price. An auction plan like this would be fairer, more flexible and will save the public enormously.
But will the government consider it? KiwiBuild may be bad economics but, unfortunately, it’s good politics. To the eligible buyers, the chance of winning a jackpot is luring, while the thought of having to bid is daunting. As for the families who are not eligible, they may not even realise what they’re losing.
Dr Oscar Lau is a senior lecturer with Massey University’s School of Economics and Finance.
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Created: 15/08/2018 | Last updated: 15/08/2018