A proposal to increase the quality of New Zealand’s housing with respect to energy efficiency and seismic risk.
This paper proposes that $200m/year be allocated by the New Zealand government to a Construction Future Proof Fund for the purpose of building up to 10,000 energy efficient and seismically strengthened houses a year.
If Living Rent: A Twelve Hour Home was about the price of housing for low income earners then this Living Rent: A Future Proof Home paper is about ensuring a good quality standard is provided.
Around the world one of the most exciting responses to unaffordable housing and climate change concerns has been the building of highly energy efficient, warm, dry and well ventilated social housing.
For example the Goldsmith Street social and passive housing scheme in Norwich this October was named the winner of the Royal Institute of British Architects (RIBA) Stirling Prize. The RIBA President described the housing scheme as a “beacon of hope”. Another architect, Piers Taylor writing for Dezeen states, “Goldsmith Street offers a roadmap for precisely the type of housing the UK needs”. A Guardian Journalist suggests that Goldsmith Street is the end of brutalist social housing (think tower blocks and slab block estates), as architects realise streets make communities.
New Zealand should design a housing policy tool that enables it to build social and affordable housing to a high quality standard, including an internationally accepted energy standard, such as passive house.
I was introduced to this international trend of social or affordable housing being built to the passive house standard when I published a previous paper -The Housing Productivity Story -that discussed an economic theory explaining why New Zealand’s unresponsive housing market could be causing poor productivity due to staff recruitment and retention difficulties.
A Interest.co.nz reader contributed with a video that described an innovative project in Heidelberg, Germany that is performing brilliantly by building a large scale 100% passive house standard residential and commercial district.
One of the key features of the German initiative is house builders can access low cost 1% interest loans up to the value of 75,000 euros if they are constructing energy efficient buildings. In the Heidelberg example the whole development of 5000 homes plus the commercial and industrial buildings are all being built to the passive house standard.
This is a good idea because although these energy efficiency features can add 15% to build costs, in the long-term energy efficiency savings outweigh the cost.
If New Zealand implemented a ‘future proofing’ housing construction policy not only would it help the housing and urban development sector meet the countries carbon zero by 2050 target, over time there would be a gradual improvement in the quality of our housing stock, which is notorious for being cold, damp and unhealthy.
Preventing housing financial assistance from being regressive
A difficulty for implementing a subsidy for passive house construction is it would be highly regressive if all the current residential build continuum were eligible to receive the proposed construction grant.
Since the 1980s the building industry has shifted from building for the lower and medium income quartiles to focusing on the upper quartile. The lower two housing stock value quartiles now only contribute about 5% and 10% of the total amount of new builds.
The intent of Kiwibuild was to encourage the building industry to change its business model to be more responsive to housing demand from lower income groups. So far the industry has been reluctant to make this change.
KiwiBuild has had a slow start. The government initiative is widely perceived as not delivering what it promised. Hopefully KiwiBuild will be more successful once the new Ministry of Housing and Urban Development (MHUD) and its Housing and Urban Development Authority (HUDA) is better established. The legislation creating HUDA recently passed on the 1st October and its enabling powers will pass next year.
A Construction Future Proof Fund could help KiwiBuild and the building industry change its business model so it is more responsive to lower quartile income groups housing demands.
The legislative remit of the construction fund would be to issue low interest construction loans or capital grants to housing schemes where there is a mix of housing sizes, types and ownership models, that target the different segments of housing demand. For instance, developments that include subsidised state housing for the lower quartile, affordable build-to-rent housing (ideally with security of tenure) for the lower-median quartile and affordable KiwiBuild owner-occupied housing for median income households.
This approach would fix the regression problem of construction subsidies being taken up by developers and builders whose business model only caters for high income households.
How would a Construction Future Proof Fund Work?
The Construction Future Proof Fund could be an alliance between a bank -say KiwiBank and the Energy Efficiency Conservation Authority.
The government could contribute government expenditure to this fund for the purpose of lending for the construction of energy efficient homes -say a $50,000 zero-interest rate loan repaid over 20 years. A rough calculation of the maths of the difference between market interest rates of around 4% and a fixed 0% interest rate, extrapolated over the lifetime of the loan, indicates $200 million of funding per year could assist in the future proofing of more than 10,000 newly constructed energy efficient homes a year.
Alternatively, instead of giving an interest free loan, the $200m/year Construction Future Proof Fund could distribute 10,000 capital grants each year, for complying housing schemes with an average value of $20,000 per grant.
What are the Cost/Benefit Considerations of the Construction Future Proof Fund?
Some market purists will say this is a subsidy for house construction, but it is a much smaller subsidy compared to the accommodation supplement payments to tenants and landlords which totals $1.5 billion.
The proposed $20,000 per house Construction Future Proof Grant is more comparable in size to the First Home Grant, which can be up to $10,000, per Kiwisaver contributing person in each household, for new-builds. This paper would contend the long term benefits to New Zealand from the Construction Future Proof Grant is far greater than the First Home Grant.
The accommodation supplement is criticised because it benefits landlords more than tenants, as it increases demand but not the supply of housing. The more inelastic (unresponsive) a city’s housing supply is, the more the supplement is capitalised into higher house prices and higher rents.
There is evidence that New Zealand cities have very inelastic housing supply so improving rental conditions by increasing the accommodation supplement will be of little benefit for reducing inequality. Providing a subsidy on good quality construction for lower income housing would help assist in improving housing supply elasticity. This would also have wider benefits, including for productivity, workers and city-based productive firms as detailed in the paper -The Housing Productivity Story.
Construction subsidies should be tied to defined and measurable quality targets. If there is insufficient quality standards then the government risks repeating The Great British Housing Disaster of the 1960s where many government initiated housing complexes had to demolished due to defective building standards, as the UK construction industry responded only to the ‘numbers game’ of quantity targets.
New Zealand currently has very lax energy efficiency building requirements, being able to leapfrog past generations of overseas building standard improvements to one of the most efficient standards could have the same effect as developing countries bypassing landlines and going straight to widespread mobile phone use.
The proposed Construction Future Proof Fund should also be seen as an investment in decreasing housing related health costs and an investment in a just climate change transition for the housing sector.
Housing research shows that housing disadvantage is harmful to mental health in addition to its physical health effects, and these effects can last well after the housing situation has improved. For instance, living in an overcrowded house from birth to early childhood is associated with depression in midlife.
The research indicates New Zealand’s housing crisis and mental health crisis have some causal linkages.
A correctly configured housing policy reform programme could significantly address three issues that most trouble New Zealand. The housing crisis, climate change and the mental health crisis.
The costs of building to passive house standard is likely to decrease over time. That has been the experience in Pennsylvania, whose particular use of the United States Low Income Housing Tax Credit scheme lead to nearly 900 affordable passive house standard housing units being built or under construction in the last three years. These passive houses were part of 26 large scale multi-unit housing projects. The “construction cost premium for passive house versus conventional projects was 5.8% in the first year, 1.6% in the second, and minus 3.3% in the third year, suggesting that learning and innovation by project teams may be driving down costs over time.” (Source P.24)
What About Reducing Seismic Risk?
A similar approach could be taken to future proof seismic risk. The New Zealand building code constructs buildings to a standard that protects life but not the building itself, which post-quake often means the building has to be demolished. Buildings though could be constructed to survive earthquakes with only a little extra expenditure.
Subsidising the construction of ‘quake proof’ buildings would be helpful for transitioning to a greater variety of multi-unit housing typologies. Especially as multi-unit buildings are often considered high risk by the insurance industry.
Insurers in New Zealand have moved to risk-based pricing which means $thousands more in higher premiums for high-risk properties. This has led to a discussion about managing risk, construction standards, climate change altering risk profiles and so on.
In the long-run subsidising the construction of ‘quake proof’ buildings could be a large net saving for New Zealand, as the cost of recovering from earthquakes is reduced.
Economic Stability Benefits
If the government had an established mechanism to subsidise the construction sector, then when New Zealand experiences an economic downturn it would be in a better position to support the construction industry. This mechanism would make it easier for the government during times of economic uncertainty and slowdown, when the private sector is under-investing in construction, to temporarily increase its contribution to the Construction Future Proof Fund to counteract the under-investment from the private sector.
If the previous government had supported the construction industry in the five years of slowed building after the 2008 Global Financial Crisis, New Zealand’s subsequent housing crisis would not have been as severe as it was.
If the construction sector is less subject to economic uncertainty, it is more likely to adopt a business model that makes long-term investments in its workers, supply chains and plant to improve productivity.
Overall, there are clear benefits for New Zealand from future proofing the housing market. A Wellbeing Budget approach which takes a holistic view of societal costs and benefits should be supportive of this proposal.
An earlier version of this paper was published by Interest.co.nz here. Readers were quite supportive in the comment section.
Living Rent: A Future Proofed Home discussed what the quality of build-to-rent housing should be. It is the second paper in the Living Rent series
The first paper in the series is Living Rent: A Twelve Hour home, focused on what the rental price of build-to-rent housing should be.
The third in the series, which has not been written is Living Rent: The Thirty Minute Home will discuss where build-to-rent housing should be located.