But reform of state housing sector has potential for major problems

What if the Government toiled night and day for years to create a market for the right to house the poor and downtrodden, only for no-one to bother to turn up when it finally opened?

Such a scenario may well be the stuff of nightmares for Bill English. The Finance Minister has been a vital and much-needed driving force in the backrooms of the Beehive where ministers and departmental officials thrash out the policy detail so that National's reforms actually work in the way intended.

In particular, English pushed hard for meaningful welfare reform. His other major target is housing - more to the point, state housing.

The latter is a fundamental component of what remains of last century's welfare state. It is a safety net. It is a Labour party icon that has somehow survived National's attempts to dismantle it.

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English has long wanted to replace it with a more market-oriented system which, in theory, should be more responsive, more flexible and thus more cost efficient when it comes to meeting the needs of both tenants and landlords than the current provider, Housing New Zealand, which enjoys a state-sanctioned near monopoly.

But constructing such a market seems to be proving to be far more difficult than envisaged. It has taken four years to reach the point where the Prime Minister could release only broad details of the plan in his first major speech of the political year this week.

What has emerged is not that politically palatable - especially the transfer of tax payer funded housing stock to private providers.

Key has plenty reason to worry. Wading through the ever-growing pile of Cabinet papers written by officials from the Treasury and the Ministry of Business, Innovation and Enterprise, the reader is drawn into a world where theory reigns supreme and it is assumed everything work in the way the economics textbooks say they will. Only very occasionally does the real world penetrate this cloistered atmosphere.

The officials can take some comfort from the fact the model for social housing that they are building works in other countries.

But there seems to be little cognisance of the ever-present danger of policies having unintended consequences - ones that might well hurt National.

What is looking likely is that officials are developing a market for social housing which will require heavy subsidies to attract entrants, thereby defeating the whole purpose of the exercise.

Key and English will be left trying to explain why the current system which seemed to work adequately enough was dumped solely because those promoting its replacement were devout believers in the notion that the only solution to a problem is one which is free market-based.

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Such a major policy failure will also open Key and English to charges that the whole exercise was cover for privatising a major component of the country's social services.

What might be described as Bill's Big Experiment has several forces driving it. These include serious questions of efficiency springing from Housing New Zealand's effective monopoly, forecasts that the increasing amounts being spent on income-related rents and the accommodation supplement are fiscally unsustainable.

A market model of delivery was seen as bringing more contestability by opening up the provision of social housing to more players.

But to work, the model entails selling thousands of houses currently managed by Housing New Zealand to both non-profit and (probably) commercially-driven organisations who will take on the role of "community housing providers".

Those seeking assistance will increasingly be referred to a community housing provider and may end up with a home once a Housing New Zealand property.

Key's concern is clearly that the reform will be viewed by some as National using the model as an excuse for an asset sale. That prompted him to use this week's speech to place a few stakes in the ground limiting how many state houses will be sold to community providers and how soon. But the constraints apply only in the short-term. Sure, the numbers up for sale are markedly lower than the 20 per cent to 40 per cent bandied around in Cabinet papers.

Key's assurance, however, that Housing New Zealand will still have 60,000 houses under its administration in 2017 actually amounts to a 12 per cent reduction in stock nationwide.

Assuming an average price of $260,000 applies to all of the houses in that 12 per cent cut in stock and they all sell at that price, the Government would reap about $2 billion. The sum is larger than the $1.9 billion raised by the sale of 49 per cent of Meridian Energy, the largest of the three state-owned electricity-generating companies designated by National for partial privatisation.

Of course, the Government will not receive anywhere near $2 billion. The community providers simply do not have that kind of cash.

One Cabinet paper notes that the "modest" size of most providers and the consequent shallowness of their capital base "significantly inhibits" their ability to raise capital.

The providers have consequently been lobbying hard for a combination of tax concessions plus Government help in securing loans so they can purchase houses which will be thrust at them by the Government at what will be knock-down prices.

The providers essentials have the Government over a barrel.

If the model is to work they need to be in the market with houses to tenant.

If only a few new providers enter the market, the policy will be deemed an embarrassing failure.

If those houses are priced too cheaply, however, National will face a storm of criticism for being loose with taxpayers' money.

The Government is hoping that the providers will enter partnerships with commercial backers with money to invest in the bottom end of the rental market.

But why would investors risk placing their capital in the most problematic end of the market when it comes to rent arrears and property damage.

All this is a headache Key does not need. But what will have worried him most of all is the unusually frank language of officials in one Cabinet paper.

It says the change in the delivery mechanism will have to be gradual and staged over 10 to 15 years. Moreover, the officials warn that it is "highly unlikely we will get the reforms completely right the first time ... Accordingly, there will have to be some experimentation, some of which will work and some of which will not."

That is okay for bureaucrats. They get a second chance. Politicians do not.