Leaked briefing documents show housing minister Megan Woods has been urged to reject new funding requests from Kāinga Ora as the public housing agency faces an unmanageable debt blowout.
In a June 17 briefing seen by BusinessDesk, the Ministry of Housing and Urban Development (HUD) advised the minister not to accept any specific budget requests from Kāinga Ora until she received HUD’s written strategy on the 2023 budget.
A spokesperson in the minister’s office said no decisions had been made on the recommendations and Woods sought more advice on the matters raised.
The HUD briefing was made to accompany a separate June 17 Kāinga Ora briefing on its long-term financial projections: “We have noted that Kāinga Ora has requested you agree to progressing specific Budget 2023 bids in the Kāinga Ora briefing. We recommend … the Kāinga Ora request is declined at this time.”
The briefing said the cost of delivering the government’s building programme and other Kāinga Ora capital programmes had increased at a greater rate than revenues received.
If Kāinga Ora was to continue delivering government commitments it would need to borrow more than previously planned.
The cost increases were being driven by higher building costs relative to rental revenues, broader government expectations on Kāinga Ora and “headwinds across the construction sector”.
In addition, average interest rates for the next four years were forecast to be 4.6%, rather than 2021’s forecast of 3.3%.
Kāinga Ora’s debt was predicted to reach $20.1 billion by 2026, $3.7b more than earlier forecast, and would peak at $28.9b in 2033 before it started to be repaid.
“This increase in debt is now unable to be completely repaid across the next 60 years,” the briefing said. Kāinga Ora forecasts showed an outstanding $8.9b in debt in 2081, absent any efficiency gains.
With more debt and higher interest rates, Kāinga Ora’s interest payments in 2025-26 would consume 39% of its rental cashflows for the year. This would leave less money available for operating activities and reinvestment in housing, the briefing said.
In addition, the extra $3.7b in debt would not deliver any new outcomes other than what had previously been committed to, the briefing stated.
Kāinga Ora's forecast net deficit after tax continued to worsen over the next four years, with a $662 million deficit projected for 2023-24, compared with a $152m actual deficit in 2020-21.
“This four year view is concerning. If Kāinga Ora cannot cover its depreciation costs, then it will have to issue debt on the same asset again to pay for its replacement or renewal.”
HUD considered that a change to Kāinga Ora’s funding, financing or spending might be needed within the next four years, the briefing said.
“Kāinga Ora may require additional funding, which would likely come from the crown through changes to funding settings or an equity injection.”
At present Kāinga Ora’s capital spending is mainly funded by private debt. The briefing noted that Kāinga Ora would soon be requesting an additional $3.3b for its borrowing protocol limit, to allow it to raise more debt privately.
However, HUD believed the government should instead consider issuing crown debt. HUD was also looking into an equity injection for Kāinga Ora as a possible cheaper option to taking on more debt.
To cut costs, Kāinga Ora indicated it was looking at suspending its whole of home heating programme, removing accessibility improvements from its home refit programme and withdrawing from high-cost remote locations, the briefing said.
“While these trade-offs will result in some cost savings, HUD considers it unlikely they will substantially improve Kāinga Ora’s financial performance in the long run as they do not address the root causes of high capital costs in comparison to funding.”
The HUD briefing to the housing minister said Kāinga Ora needed to be more transparent on its plans for cost efficiencies.
“We recommend you communicate your expectations on this to the chair of the Kāinga Ora board.”
The June 17 briefing advised the minister to query Kāinga Ora’s plan to hire an additional 485 full-time employees by June 2023, given the agency’s financial situation. Last month BusinessDesk reported that Kāinga Ora paused hiring due to rising building costs and supply chain delays.
Kāinga Ora’s debt blowout comes at a time when it is struggling to pick up the pace of an ambitious building programme. According to an April 19 HUD ministerial briefing seen by BusinessDesk, the slow rate of house building led to an excess of cash on its books, as pre-issued debt remains unspent.
The report blamed the covid-19 pandemic for the slower pace of Kainga Ora’s major investment programmes.
The spending shortfall meant that more than $1b in cash and cash equivalents sat on Kāinga Ora’s balance sheet, the report said.
“This represents a liquidity position at 159%, indicating excess liquidity, which Kāinga Ora expects to remain in the next six months.”
Kāinga Ora currently has an $8.3b ceiling that it can borrow from the market under the Kāinga Ora Borrowing Protocol. At December 2021, actual capital expenditure was $1.1b, well below the forecasted full-year spending of $3.6b.
The report said that this excess liquidity could create extra costs for the agency’s financial and debt management.
“HUD and the Treasury are seeking to better understand the appropriate level of liquidity, in line with the level of investment activities, through the next Borrowing protocol review, in progress now.”
The April 19 report noted that the minister had identified delivery as a key issue in her regular monthly meeting with the Kāinga Ora’s chair on April 11.
Last week Woods told the Vote Housing and Urban Development select committee hearing that the government remained committed to building 18,000 public and transitional homes by 2024.
The April 19 HUD report noted that Kāinga Ora would require “a significant uplift in delivery compared to previous years” to achieve its commitments.
At March 31 there were 75,309 public housing homes in New Zealand, made up of 64,312 Kāinga Ora and 10,997 registered community housing provider properties.
Kāinga Ora general manager of strategy, finance and policy Gareth Stiven said in a statement that the agency's position remained strong, despite the operating loss reported in 2022-23. "That is the cost of doing more – building more homes at scale and pace and upgrading the largest residential housing portfolio in the country."
The agency delivered a record of more than 650 houses in June and had already built the largest number of state houses in two decades, Stiven said. He pointed out that covid lockdowns in Auckland, where about 45% of homes were located, had spent several months in levels 4 or 3, severely reducing productivity on more than half of Kāinga Ora build sites.
Kāinga Ora was exploring a number of options to mitigate the impacts of higher interest rates, building costs and labour shortages, including reviewing staff growth, reassessing spending priorities, and changes to its funding model with the crown, he said.
This story has been updated to include comment from Kāinga Ora.