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KiwiBuild will crowd out other home building: RBNZ

KiwiBuild will crowd out as much as 75% of other home building: RBNZ

By Jenny Ruth

Feb. 14 (BusinessDesk) - The Reserve Bank estimates that for every 100 houses built under the government's KiwiBuild programme over the next three years, between 50 and 75 other houses may not be built because of capacity constraints.

Talking to parliament's Finance and Expenditure Committee yesterday, Reserve Bank governor Adrian Orr pointed to the separate paper the central bank published on Wednesday outlining its assumptions about the KiwiBuild programme.

“The construction sector is currently facing capacity constraints, which means KiwiBuild developments may crowd out other private developments, particularly in the near term,” it says.

“The bank has assumed that half to three-quarters of what KiwiBuild contributes to residential investment will be offset by crowding out of other private investments over the forecast horizon.”

The central bank says it needs to factor KiwiBuild activity into its forecasts because it may have a significant impact on inflation and employment.

“It is important that the bank makes judgements about how the KiwiBuild programme will affect the economy so that the bank can meet its policy targets."

The Reserve Bank is factoring the net contribution to demand into its forecast because KiwiBuild will be competing for resources.

“There will be some crowding out” of capacity that would otherwise be used for building homes not connected to KiwiBuild and “there's a significant resource challenge.”

Orr noted that the assumption is based on numbers of houses because the central bank can't know the value of houses that might otherwise be built.

The central bank has a working assumption that there will be a slow build-up to the programme, so it is assuming between 7,000 and 14,000 homes will be built in the next three years. That means most of the activity associated with the government's target of building 100,000 affordable homes under the KiwiBuild programme will occur beyond the central bank's three-year forecast horizon.

The Reserve Bank has included $2.5 billion of additional net spending on housing over the next three years and the KiwiBuild houses will cost between half to the full cost of other houses.

It is assuming the programme will ramp up to 12,000 houses a year by 2022 and the central bank acknowledges a number of government initiatives designed to increase capacity in the construction sector. But those measures will take time to take effect.

The Reserve Bank says officials visited a number of construction firms in late 2018. “Construction firms noted that they were facing strong demand for their products, but a range of capacity-related issues meant that they could not expand production enough to keep up with demand,” it says.

“Shortages of skilled and unskilled labour were the main issues holding back firms' production, in addition to the cost of land for developments, and obtaining financing for projects.”

That means the ability of the construction sector to meet demand will depend on the extent to which these constraints can be eased.

Residential investment is about 6 percent of real GDP and about 7.5 percent of nominal GDP and both measures are above historic averages.

The Reserve Bank says it expects the construction sector will continue to face robust demand and constrained supply.

“However, if the housing market were to soften and residential construction slow or decline, then KiwiBuild may help to prop up demand in the sector, resulting in a larger net contribution,” it says.

Forecasts of KiwiBuild's impacts are inherently uncertain and a wide range of outcomes is possible and the Reserve Bank will continue to monitor the industry, Orr said.

(BusinessDesk)


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