Treasury cuts forecasts of govt spending on KiwiBuild in recognition of private investment; Flags govt exposure to a property market downturn

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It appears Treasury has heeded some of the advice Housing and Urban Development Phil Twyford not so politely gave it in May, when it released its Budget Economic and Fiscal Update (BEFU).

Twyford at the time called Treasury staff “kids completely disconnected from reality,” as he believed their forecasts showed they didn’t understand how KiwiBuild worked.

Treasury more than halved its forecast of the value of additional residential investment it expected KiwiBuild to produce, from $5.4 billion in its December 2017 Half Year Fiscal and Economic Update (HYEFU) to $2.5 billion its May 2018 BEFU:

This put Twyford on the defensive, prompting him to give a Ministry of Business, Innovation and Employment (MBIE) paper that concluded Treasury used the wrong set of assumptions, so its 2017 HYEFU projections were more accurate.

MBIE said Treasury assumed the Government would have to fork out to kick-start KiwiBuild. But actually, most of the inital building was to be done by private development, underwritten by the Government through the Buying off the Plans scheme.

MBIE also said Treasury ignored the impact of houses being on-sold.

No update on Thursday

Fast forward to Thursday’s 2018 HYEFU, Treasury didn’t give an update on its projections of additional residential investment resulting from KiwiBuild.

It couldn’t provide with these figures either, saying the request would have to be made under the Official Information Act.

Treasury, in its HYEFU, did however revise down the amount of capital it expected the Government to inject into KiwiBuild, recognising “a larger portion of the houses to be delivered under the KiwiBuild programme during the forecast period are expected to be funded from the sale proceeds of houses rather than contributions from the Crown…

“Overall the impact of this change has improved residual cash by around $1 billion, compared to the BEFU.”

Asked to explain this, a Treasury spokesperson said in the BEFU it “was assumed the Government would invest $2 billion over the forecast period.

“With the refined information it is still expected the same amount will be invested, however some of this investment will now fall outside of the forecast period.”

So while Treasury didn’t say whether it now believed there would be more additional residential investment in the next five years thanks to KiwiBuild, it did forecast less Government investment during this time.

Asked what he made of Treasury’s updates in HYEFU, Twyford said they better reflected how KiwiBuild operated: “One being that Treasury have now factored in capital recycling.

“The second is that they’ve factored in the fact that through the Buying off the Plans initiative, many of the KiwiBuild homes Kiwibuild is building don’t require the Crown to draw down on the KiwiBuild appropriation.”

Twyford didn’t take the opportunity to link changes in the HYEFU to Treasury’s summation of KiwiBuild in the BEFU. 

How a potential property market downturn could affect KiwiBuild

Elsewhere, in the ‘Specific Fiscal Risks’ section of the HYEFU, Treasury updated its view of KiwiBuild’s potential risks.

“Changes in the housing market and economy may have an impact on the costs of delivering 100,000 homes and associated revenue recycling,” it said.

“If house prices fall, Crown underwrites may be called, and the value of land and buildings held by the Crown might fall…

“The Crown also faces general commercial risks associated with development and with implementing a large and evolving programme.”

Asked by National MP Andrew Bayly in Question Time on Thursday, what the forecasted cost of underwriting private developers through the Buying off the Plans scheme was, Twyford said the net cost was expected to be zero over the first three years of the programme.

“The target for the Buying off the Plans programme over the 10 years is to achieve a net zero cash cost of the underwrite.”

Twyford said his risk modelling, under a number of scenarios, indicated the cost to the Crown could be between $300 million and $700 million over 10 years.

“The Crown will always have the flexibility to reshape the programme if there are material costs over the first few years,” Twyford noted.

“There was no change in the HYEFU to the forecast cost of underwriting private developers through the Buying off the Plans programme.”

Bayly also asked Twyford what he thought of the other comment Treasury made in its ‘Specific Fiscal Risks’ section of the HYEFU: “To achieve programme goals, there may be a need to change policy parameters and provide support to developers and/or homebuyers.”

Twyford responded: “Well, every time Treasury does a HYEFU or any of the other economic statements that it’s responsible for, it considers upside and downside risk scenarios.

“The member’s referred to just one scenario, which includes the possibility of house prices dropping, but I would note that neither Treasury nor the Reserve Bank nor the Government believe that house prices will drop.

“House prices have stabilised in line with our policies, and on this side of the House we think that’s a good thing.”

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