Build-to-rent - it’s all about tax
Phil Twyford said built-to-rent could be a part of the solution to the housing crisis, he's probably right - but does he have the power to make it work?
ANALYSIS: Wellington worked itself into a lather this week over Housing Minister Phil Twyford’s comments that a “build-to-rent” scheme could be on the cards, alongside a complete “recalibration” of the KiwiBuild programme.
It pays to put his remarks in context. He made them under pressure during an estimates hearing in select committee, where MPs have the opportunity to quiz ministers over their departments’ spending. The remarks did not constitute an announcement, or even a hint of an announcement. They were more like “I’m thinking about it”.
Indeed Twyford has fallen into a version of the pickle that the Government found itself in over the Tax Working Group. Having promised a KiwiBuild “recalibration” since January, the Minister has been unable to commit firmly to what that will actually look like. Instead he’s forced to play the dreaded “rule in, rule out” game in which journalists fling ideas at the minister who must then, on the spot, decide whether they’re definitely out or possibly in.
After six months of this, KiwiBuild now looks like, well, everything and nothing. Actually, the more Twyford talks, the more KiwiBuild starts to look like it’s going to be streamlined and brought into closer alignment with other parts of the housing portfolio, like Housing New Zealand, which is currently functioning quite well, building nines times as many public houses as it did three years ago.
KiwiBuild was always meant to dovetail closely with Housing New Zealand. The forthcoming Urban Development Authority brings KiwiBuild alongside Housing NZ in large-scale developments like the redevelopment of Unitec land in Auckland, which will build between 3000-4000 homes including KiwiBuild, Housing NZ and open market. This is quite different to the majority of current KiwiBuild developments, which are small-scale initiatives undertaken with developers on the basis of the Government underwriting houses to remove developer risk from individual projects.
KiwiBuild was always going to end up with the UDAs delivering most of the houses - now it looks like “recalibration” will signal this more strongly.
As for the other big piece of news from the meeting - the Government was looking at build-to-rent as a solution to the housing crisis. Again, this isn’t new. It’s been talked up for a while, alongside a rent-to-buy scheme and shared equity as a back burner idea that will be looked at in greater deal when an already stretched Government gets round to it.
Indeed, the build-to-rent palaver said more about the lack of news that came from the much over-hyped committee, which delivered some engaging wordplay from Twyford and Judith Collins, but little else.
Nevertheless, build-to-rent is probably worth looking at. A scheme would basically involve allowing developers to use government land for developments that would encourage long-term renting, generally looked on favourably as it provides both security of tenure for renters and security of income for investors.
Build-to-rent has been successful in the UK, where it is seen as contributing to a national construction boom. But the UK model is different to what Twyford appears to be talking about. There, tax settings were changed to encourage investors to build rental properties and discourage buying existing stock with a view to renting it. This has two benefits: the first being it encourages the building of new houses, adding to existing supply, and not over-inflating the price of existing stock out of the hands of buyers who actually want to live in their homes.
But such a scheme would be impossible in New Zealand, where housing transactions are not subject to stamp duty, or any other kind of transaction tax. Twyford couldn't even implement these changes if he wanted to, with tax being the responsibility of Finance Minster Grant Robertson and Revenue Minister Stuart Nash. Twyford would probably agree with some kind of stamp duty, a charge levied each time a house is sold, often used by local governments to fund the construction of new infrastructure. He's been a proponent of using targeted rates in new developments, which are essentially another way of funnelling money into much-needed infrastructure. But targeted rates are a long way from a broad tax on all property transactions.
One thing that could be done, says Economist Shamubeel Eaqub, would be to allow foreign investors further freedom from foreign investment restrictions, allowing New Zealand developers to access nearly limitless lines of foreign capital. New Zealand is already quite welcoming of foreign investment. Foreign investors are allowed allowed to invest in multi-dwelling units and new builds.
But that doesn’t appear to be what the Government has in mind. Twyford’s comments gestured towards a scheme that would see government land used for build-to-rent developments. This would limit the scale of any scheme and constrain the developments to where the Government owned land.
But Twyford might be better served by incentivising the private sector to do his work for him by creating tax incentives for developers. However, tax exemptions would require that the housing sector be subjected to anything like a conventional tax regime to begin with: stamp duty, capital gains tax, land tax — anything. Twyford’s best bet might be kicking this challenge to Finance and Revenue Ministers Grant Robertson and Stuart Nash — he’s got enough on his plate already.