Crown housing agency may have to bid against private housing providers to secure funding for future state homes

The Government’s housing agency, Kāinga Ora, faces a complete overhaul after a review by former Finance Minister and Prime Minister Bill English found it would need billions of dollars in new funding to continue.

It is likely the Coalition Government will invite charities, such as the Salvation Army, and private investors, like Community Finance, to bid for housing contracts.

English’s report said Kāinga Ora had been governed poorly and was not financially viable without billions in cash infusions from the Government over the next four years. 

Treasury’s Half Year Economic and Fiscal Update forecast its operating deficit was likely to hit $700 million by 2028 due to higher interest on its debt and increased staffing costs. 

Debt levels had been internally projected to grow from $12.3 billion to $23 billion by 2028. 

This would require the Government to provide over $21 billion in cash over the next four years to cover both operating losses and capital expenditure. 

“The rapid escalation of spending and debt, along with other stakeholder issues, has raised concerns about Kāinga Ora’s performance and financial sustainability,” the report said.

While it had increased its ability to build more and better quality homes, and faced a raft of pandemic-related challenges, that didn’t fully explain the cost escalations experienced. 

“Weakened governance, access to debt and low levels of accountability have all contributed to the forecast deficits and debt mentioned above,” the report said.

Bill English and two co-authors said not only was Kāinga Ora financially unsustainable, it was also “not delivering the homes and support people need”. 

Cabinet has already agreed to replace the board, simplify the agency’s instructions, and ask for a credible turnaround plan to eliminate operating losses. 

Further recommendations made in the report will also be considered. This includes throwing open the door to other housing providers to compete with Kāinga Ora. 

This could mean the Ministry of Housing and Urban Development would contract Kāinga Ora or other housing providers based on who could offer the best value for money. 

“This will subject Kāinga Ora to greater contractual tension, with the purchaser able to apply scrutiny to Kāinga Ora funding requests. If [it] is not performing under that contract, the purchaser can allocate funding elsewhere in the system,” the report said. 

Allowing the private and not-for-profit sector into the provision of social housing would help to deliver alternative solutions and force the Crown agency to be more thoughtful. 

However, the Government would have to stop “subsidising” its operating losses in order to level the playing field with these other potential providers. 

Blue blood

Former Labour MP, Mark Gosche served as chairman of the board for the past six years but resigned in February after the Coalition Government took office.

He will be replaced by Simon Moutter, the former chief executive of Auckland International Airport and Spark NZ. The rest of the board will also be “refreshed” in July. 

This new governance team will be expected to present Cabinet with a range of options that could stem the annual losses and avoid racking up so much debt in November this year. 

Housing Minister Chris Bishop said there wouldn’t be a “mass sell off” of state houses as part of the turnaround plan but he wouldn’t commit to growing the total number.

It wanted to increase the total number of “social houses” but was agnostic about who provided these places. It could be Kāinga Ora or community organisations. 

Bishop said the agency was paying more on average to build housing than equivalent developments were costing in the private sector. 

The report said Kāinga Ora’s redevelopment costs were $35,000 per home more than developer-led acquisitions when the cost of land was excluded. 

It may also have been paying above market value for land and holding parcels which are not financially viable to develop — the cost of which has not been factored into decision-making. 

Financial forecasts presented to the board were based on assumptions that more Crown money would be provided to fund any shortfall in its cash needs. 

The report said it was “effectively banking on future government funding to bridge the gap”. 

Over the last five years, it has built on average 2,400 gross homes each year, growing the stock by a net 1,600, but that was short of its target for 4,600 new build homes each year. 

Selling state homes? 

Opposition parties were quick to suggest the Coalition was secretly planning to sell off state homes, despite Bishop saying otherwise.  

Green Party housing spokesperson, Tamatha Paul said the National-led Government was trying to create the social licence to sell down the stock of public housing. 

“Now they are gearing up to put public housing in the too-hard basket, with an arbitrary focus on short term finances, rather than a commitment to use public housing to end homelessness and guarantee everyone a decent place to live,” she said in a press release. 

Labour’s housing spokesperson, Kieran McAnulty said his party had added 14,000 public housing units to the total stock during the six years they were in government. 

“To do that you need funding. It is not cheap to build houses. And in order to solve the housing crisis, the Government has to put money in, they can't leave community housing providers by themselves,” he told reporters. 

Bishop said part of the problem was that Kāinga Ora had been given an “enormous number of tasks” which had distracted from its core business of housing vulnerable New Zealanders. 

He acknowledged costs incurred by the agency were part of meeting the housing crisis, but the projected $23 billion of debt would weigh too heavily on the Crown’s balance sheet. 

Finance Minister Nicola Willis has set a goal of keeping net core Crown Debt between 20% and 40% of gross domestic product — it is currently 43.5% and expected to trend downwards. 

The previous government used a different debt measure and rule but it was equivalent to keeping net core Crown debt below 50%.