Treasury twice urged the Government not to exclude property investors from a Government loan guarantee scheme, arguing it could stymie rent relief for businesses and run counter to the aim of building more houses.
But the Government appears to have been resolute in its refusal to allow the funding to be used to lend money to commercial or residential property owners or developers.
While the Government says the aim was to provide money to more productive parts of the economy, National says the move is not consistent with its aim of increasing house building.
A commercial property owner said the exclusion is purely ideological and makes landlords equivalent to industries such as tobacco, arms dealers and pornography.
In the lead up to the nationwide lockdown in March 2020, the coalition pledged to underwrite 80 per cent of the $6.25 billion business finance guarantee scheme (BFGS), aimed at continuing the flow of lending to businesses.
Initially intended to provide working capital, a series of the conditions of the BFGS have been removed or relaxed, from allowing the money to be used on capital expenditure, to allowing banks to use the money in part to refinance existing loans, to lengthening the term and maximum size of the loans.
After initially excluding loans to farmers, the sector was later included, while the maximum turnover of businesses able to access the scheme was raised from $80 million to $200m.
But investment in property - either residential or commercial - as well as property development was excluded despite Treasury calling for the sector to be included.
Late on Friday afternoon Treasury released advice it provided the Government in June arguing that while loans to commercial property had historically been a source of losses for banks, credit conditions for the property sector were expected to tighten making speculative loans under the scheme unlikely.
"[The Reserve Bank] observes that in recent years that banks have tightened lending standards to both commercial property investor[s] and developers, given this, and the Government's recent introduction of a Covid-19 rent relief clause into some commercial leases, we recommend removing this exclusion, Treasury officials said.
"Loans to property developers generally have a higher risk of default, however, excluding developers may not be consistent with the Government's objective of increasing housing supply and affordability."
Documents previously released showed Treasury had earlier warned that property investors may have empty buildings, while excluding the sector may mean less is offered to tenants in the form of rent relief.
But Finance Minister Grant Robertson rejected Treasury's recommendation and is now saying the basis for the exclusion was productivity.
"The intention is to keep investment directed towards more productive sectors of the economy," Robertson said in a statement.
"The Government is not looking to provide more advantages for developers."
National's finance spokesman Andrew Bayly said he could understand why investment in residential property might be excluded given the surge in house prices and availability of credit to buy houses, but excluding property developers during a housing shortage did not make sense.
"If you talk to any developer trying to develop property, unless you've got a long, long history, the banks have been saying for the past six to eight months 'we won't lend to you'," Bayly said.
"It's not really consistent with the need for more houses."
Troy Bowker, executive chairman of Caniwi Capital which owns a range of investments including commercial property, said the BFGS treated property investors as "the equivalent of weapons dealers and the tobacco industry".
Bowker was pointing to the relatively small number of industries which are not allowed access to the BFGS. Apart from councils or council-controlled organisations, the only expressly excluded businesses are those which manufacture weapons and tobacco, process whale meat or grow or distribute recreational cannabis or engage in illegal activity.
"It's a direct ideological judgement against commercial property investors, for no particular reason other than political expediency from Labour," Bowker said.
He claimed Labour was upset that NZ First had killed its plans to force rent relief upon landlords, but the structure of the scheme made rent increases more likely.
"The case for rent relief has basically gone completely, and in fact there should now be rent increases across the board. If businesses that are paying rent are getting cheap funding from the Government, but the people owning the buildings aren't, it's going to mean rent increases."
Initially, take-up of the BFGS was slow, but in the six weeks to January 19, the latest figures available, the Crown's exposure to loans under the scheme increased by about $500m to $1.3b.
Almost a quarter of the loans went to wholesale trade and retail businesses, while more than a third of the loans have gone to businesses in Auckland (34.37 per cent) followed by Canterbury (13 per cent) and Manawatu-Whanganui (11.8 per cent).
Treasury says since making changes to the scheme the take up has been "significant" however at the current rate of lending it is unclear whether the Crown's maximum exposure of $5b will be reached by the time the scheme ends on June 30.