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Demotion, or a second chance?

Is Phil Tywford really the biggest loser in the latest Cabinet reshuffle? Dr Eric Crampton argues the portfolio shift could be a win for both Twyford and housing

Cabinet shuffles provide great journalistic set-pieces.

For the politics-as-sport contingent, it provides all the narrative arc of changes to the Black Caps line-up for the World Cup: winners and losers, who’s in and who’s out, and whether the changes will do more to help the team score political runs or to defend against the Opposition’s bowling attack.

As expected, the Government’s changed the housing line-up. Megan Woods became Minister of Housing; Kris Faafoi took over public housing; Nanaia Mahuta took responsibility for Māori housing; and Phil Twyford took up Urban Development and Economic Development. Sporting commenters framed it as a loss for Twyford. But is it a loss for housing?

In last week’s column, I urged the Government to give Minister Twyford the chance to see through his housing supply agenda. I have argued that no one in Parliament better understands the underlying failures in local council incentives, regulatory settings, zoning, and infrastructure financing. And solving that complicated mess is what is required if New Zealand is to build its way back to affordable housing.

When it comes to housing, it isn’t just the batting line-up that’s out of order, it’s the selection process, the training system, and the club system generating the talent that might be picked. It needs fixing from top to bottom.

An optimistic read of the cabinet changes is that this is not a demotion for Minister Twyford, who maintains his ranking within Cabinet, but rather an unshackling. The Government’s housing supply agenda has not made necessary progress, at least in part because the Minister and the Government have been distracted by impossible-to-achieve Kiwibuild targets. Twyford will be able to focus on the areas where he can make the most difference.

But let’s step back to the mess of problems that yet needs solving and consider the way forward.

Ultimately, urban housing affordability problems stem from a conflict of incentives facing central and local government.

Population growth helps central governments’ coffers, and what analysis is out there on the topic suggests that migrants improve central government’s fiscal position. Migrants arrive already having been educated at their home-country’s expense and are vetted against the kinds of things that tend to be costly for central government: health problems and criminal offending.

Local government winds up bearing the resulting infrastructure costs. While a growing city enjoys a larger ratings base, most of the increased rates revenue from new residents is eaten up in infrastructure costs. That leaves city governments with little to provide as compensation to those locals who wish to preserve things as they are. Since growing cities see little of the benefit of growth, they find little reason to push back against those who oppose increased density, or who oppose suburban growth. Attend any local town hall meeting where a council proposal to increase local density is on the agenda if you would like to see how that process plays out.

In government, National pointed to the Resource Management Act as culprit. But nothing in the RMA compelled councils to enact restrictive urban plans – though changes in standing made it harder to enact good ones. Councils ultimately enacted restrictive plans because central and local governments faced different incentives. Changing the framework within which local councils make decisions is important, but without changing the incentives councils face, it simply invites pouring old wine into new bottles.

Bernard Hickey’s column earlier this week described infrastructure financing as a Catch-22. A housing crisis increases property values and you cannot get out of a housing crisis without building infrastructure. Since those homeowners who benefit from the housing crisis through higher property values can veto council infrastructure spending, it is difficult to get out of the trap. Hickey then argues for using the Crown balance sheet to set things right.

While it’s true that the Crown has capacity to take on additional debt for capital expenditure, that underplays the opportunities in Minister Twyford’s proposed reforms, and misconstrues the constraints.

Minister Twyford’s supply agenda, on the surface, begins with a change to infrastructure finance. Rather than falling onto Council balance sheets, or onto homebuyer mortgages, the cost of new infrastructure will be covered by levies on the housing benefitting from the new infrastructure over the life of that infrastructure. Targeted rates on new developments will pay off the bonds issued to finance new infrastructure.

Separating infrastructure financing decisions from political processes helps set a longer-term platform for urban development. Even if a substantial Crown infrastructure push over the next few years was able to get around the very real capacity constraints in a sector already under strain, it would not set the foundation necessary for long term growth. It would instead help to perpetuate the boom-and-bust cycle that has bedevilled the construction sector for ages.

Infrastructure bonds whose financing depends less on political interest than on the commercial viability of the underlying development can set the stage for greater longer-term urban growth that is responsive to changes in demand. When demand for more housing makes it profitable to build more housing, the developer can issue infrastructure bonds and start building without having to convince the Crown to take on new infrastructure debt. It is a way of sustaining infrastructure investment beyond the current crisis.

But it also requires the buy-in of those who will be paying the levies. And here, I think, Minister Twyford may need to do a bit more work.

This kind of infrastructure finance, in the United States, typically has the assent of those who will be footing the bill. Property owners setting a new development establish infrastructure boards that will own the infrastructure, that will be responsible for paying off the debt through a tax on the properties within the development, and that will be governed by those who buy properties in the new development. Taxation is coupled with representation.

Here, so far, proposals for new infrastructure bonds do not require the assent of the levied. In greenfield sites, where the land’s owner or development partner might set the bond, that kind of assent process will matter less. But it will matter in brownfield sites where an Urban Development Authority might seek an infrastructure bond to allow for upzoning. Homeowners who do not redevelop in response to the zoning change would still be on the hook for contributions toward the new infrastructure.

And while that may be fair enough where the infrastructure increases the value of those properties, it can also be a problem. If an Urban Development Agency seeks a new infrastructure bond without some credible demonstration that the bond issue is supported by most of those who will be paying the levy, political opposition to the process can stymie development.

New Zealand’s business improvement districts may provide a useful model. Business improvement districts allow businesses in a village centre, for example, to levy themselves for the provision of amenities that are to their mutual benefit. But that requires the assent of the affected owners through a ballot. A double-majority requirement is there in place. A majority of business owners is required, as well as the assent of owners whose combined holdings represent a majority of the capital value of the businesses in the proposed district. That double majority requirement prevents a large number of smaller owners from preying upon a small number of wealthier businesses, and also prevents a small number of large owners from imposing too high of costs on smaller owners.

A similar double-majority threshold could provide democratic legitimacy to new infrastructure districts, while leaning on an established body of New Zealand practice.

It is all rather complicated, and hits only onto the infrastructure financing part of the work ahead for Minister Twyford. Unwinding the mess is not a small job.

Focusing on the ballsports parts of politics suggests the cabinet changes were a loss for Twyford. But if it allows him to focus on the parts of the portfolio that play to his strengths, it may instead be a win both for Twyford and for housing. Carving out the parts of the job that can be well handled by others, like social housing, makes a lot of sense. Letting Minister Woods take over Kiwibuild should let Minister Twyford make progress in the parts of the housing agenda that will matter the most over the longer term.

But we will need to see progress now that the barriers and potential excuses are out of the way.

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