Matthew Bai and Malcolm McCracken
The Kiwibuild program has generated significant media attention in recent days, so in this piece, we’ll attempt to provide an overview of the program, including specific issues you need to know about before buying.
First, and perhaps most importantly, are the eligibility criteria you need to meet in order to purchase a property under the KiwiBuild program. The basic requirements are as follows:
- You need to be either: A New Zealand citizen, permanent resident, or a person who is
“ordinarily resident in New Zealand” as defined under the forthcoming
amendments to the Overseas Investment Act (“nationality test”); - Either be:
A first home buyer, meaning a person who has never owned a
home before; or - A previous home owner, provided that person—
*no longer owns a home; and
*meets the asset test that applies to the KiwiSaver
HomeStart grant;
*intend to own the home for at least three years;
*intend to reside in the premises as their principal place of residence
(i.e. will not rent out the premises); and
*have income below the following caps:
*$120,000 for a sole purchaser; and
*$180,000 for multiple purchasers.
If you meet the above criteria, the second point to consider is pricing and location. The Kiwibuild program offers houses throughout New Zealand, but prices can differ between regions. For example, Auckland and Queenstown have price caps set at: $500k (NZD) for one-bedroom units, $600k for two bedroom units, and $650k for three bedroom units, whereas all other regions in New Zealand have the price cap set at $500k regardless of size.
At the time of publication, several Kiwibuild projects have already been announced, including in locations such as Mangere, Otahuhu, New Lynn, Te Kauwhata, Queenstown, and Wanaka. From our understanding, more locations are being worked on, and will be announced in due course (we will post updates as they become public).
The goal of the program has been stated as “delivering 100,000 additional affordable houses over a ten-year timeframe, with 50k in Auckland”. This will be done using several different methods, as we will outline below. One of the methods for increasing housing supply is for (KiwiBuild) to purchase a certain percentage of a new development upfront, and subsequently onsell the properties at the original acquisition cost (to first-time buyers), while recycling capital for future purchases. Under this model, it becomes substantially easier for developers to secure bank funding, and the hope is to expedite the project timeframe, (under normal market conditions, it can take anywhere from three months to two years to sell the number of units required for lenders to provide funding). The threshold for development funding is typically between 60-70% of total units, which means the KiwiBuild program could potentially result in significant time savings from a development perspective. The tradeoff for the developer is that they must construct cheaper “more affordable” units (that comply with the aforementioned price caps), which reduces their profitability. Uptake from the development community has been positive (at the time of publication), which suggests developers are willing to accept lower margins in return for funding efficiencies.
A good example of the off the plans model is NZ Livings @340 apartment development on Onehunga Mall. 25 of the apartments are being sold through the Kiwibuild process while the remaining 17 will be sold by the developer on the free market. Developer makes a profit from remaining apartments on the free market while Kiwibuild stepping in means it will be built faster. Kiwibuild units in the @340 development are roughly $100,000 below what the free market units are being sold for. You can check out the price list here to see the difference.
It should be noted that some “off the plan” type purchases have been for projects that were previously announced, and where development funding was already secured (such as the “KiwiBuild” Apartments in Ockham’s Mt Roskill development). We believe that units that were already funded or have not been fast-tracked by government involvement should not be considered additional supply which the government wouldn’t have met.
The “buying off the plans” strategy does have potential drawbacks, however, such as large developers gaining favourable treatment over smaller players.
Although the majority of the first Kiwibuild announcements can fit under the “buying off the plans” or underwriting strategy, the majority longer term is expected to be government-led. This is where the government will act as the developer and partner with the industry to construct the homes. This will be happening on public housing land, where there are already some plans for intensification and smaller social housing units. We will see this occur in Northcote, Mt Roskill and Mangere where third, third, third model will be used. This is where one-third social housing, one-third Kiwibuild and one-third will be sold on the open market. With this model it would seem the profit from the market rate homes will help subsidise the other homes.
This model will likely also be used in redevelopment of underutilised crown land and larger urban redevelopment projects like we will be seeing on the UNITEC Mt Albert site. HUD Minister Phil Twyford has been quoted saying we may need as many as 10 of these larger developments like we have seen at Hobsonville Point.
In terms of the program’s compatibility with other government programs- There are two main ones that you need to be aware of before buying:
*HomeStart
*Welcome Home Loan
Homestart is a government program which provides first-time buyers with a small cash subsidy which can be up to $20k (NZD). The main requirements are as follows;
- You are 18 years or over.
- You have not received the KiwiSaver HomeStart grant or its predecessor the KiwiSaver deposit subsidy before.
- You are a member of a KiwiSaver scheme, complying fund or exempt employer scheme (contact your scheme provider to check your scheme is eligible).
- You meet the stipulated income cap thresholds:
$85,000 or less (before tax) in the last 12 months for a single buyer.
a combined income of $130,000 or less (before tax) in the last 12 months, for two or more buyers.
Then there are individual contribution guidelines which can differ substantially between different people- more information can be found on the Homestart website here.
Welcome Home Loan allows first-time buyers to borrow up to 90% of the purchase price, with eligibility requirements here. It should be noted, that since KiwiBuild properties are “new construction”, the normal LVR rules do not apply, and purchasers are automatically entitled to a 90% loan subject to meeting other requirements.
When the KiwiBuild program was originally announced, it was stated that any capital gains made in the first three years of ownership would have to be forfeited if the property is sold at a gain. We should note that this has now changed- the new rules prohibit the sale of a KiwiBuild property within 3 years of purchase, (sans special circumstances), while stipulating that if a property were to be improperly disposed off within this time period, that the vendor would be liable for a 30% capital gains tax. The same applies for any rental income generated within the three year probation time frame, (enforcement measures have yet to be announced).
The KiwiBuild program is designed to be cost neutral to New Zealand taxpayers. The program is funded via a $2b (NZD) pool of money set aside by the government, which is spent then recovered via the sale of KiwiBuild properties. In effect, the program is designed to have no ongoing costs for taxpayers, other than the initial investment. The validity of this claim is yet to be tested, although some standard attrition can be expected with programs of this nature.
It is too early to tell if KiwiBuild will have a meaningful impact on housing affordability in New Zealand, although if the stated numbers are met, one can expect the impact to be positive for first-time buyers. The program isn’t without its critics- with commentators pointing out the changes to capital taxation as encouraging speculation, while others are unimpressed by the income caps which have been set. Are you a first-time buyer? What do you think of the program? We’d love to hear your thoughts in the comment box below!