Ka¯inga Ora borrows more to pay for houses

The Government’s mega-developer is more than doubling its debt to finance new building projects such as state houses.

Ka¯ inga Ora – Homes and Communities, the Government’s Crown entity in charge of building both state houses and Kiwibuild, quietly released a statement this week showing it increased the debt ceiling on its so-called ‘‘borrowing protocol’’ by more than $4 billion on January 1.

According to the Government statement in the New Zealand Gazette, the increase was approved by Finance Minister Grant Robertson and Housing Minister Megan Woods on December 19.

The notice said Housing NZ could increase its debt ‘‘including up to $7100 million from sources other than the New Zealand Treasury’’. Some $3 billion of the increase for the Crown entity was flagged in the 2019 Budget papers.

Housing NZ, which is a subsidiary of Ka¯ inga Ora, already has $2.3b of ‘‘Wellbeing Bonds’’ on offer, and plans to issue another $2.5b this year. Because the Government Crown entity is raising the money itself – as opposed to it being raised through Treasury like normal debt issuance – the extra debt stays off the Government’s core balance sheet.

While the debt still has to be repaid, it does not show up on the Government’s main balance sheet, making it easier for the Government to meet its debt target.

In 2018, Treasury warned the Government – and then-Housing Minister Phil Twyford – that increasing Housing NZ’s borrowing limit was fraught.

At the time, Treasury, the Government’s chief economic department, advised it would be cheaper to borrow through its own own Debt Management Office.

‘‘There is a risk that credit rating agencies and commentators see substantial borrowing by Crown entities as an attempt to circumvent the net core Crown debt target,’’ the paper said.

At that time Treasury estimated that raising money in this manner would see Housing NZ pay an additional $11 million in interest per year and that by 2022 Housing NZ would hold $4.79 billion in debt, some 15 per cent of its total assets.

The December 19 announcement should be expected to increase both the amount and percentage of debt held by Housing NZ.

‘‘Market participants have raised questions about Housing NZ borrowing in their own name rather than through Debt Management Office which is the traditional mechanism,’’ Treasury wrote in a briefing at the time.

The department, then headed by Gabriel Makhlouf, noted that this could risk ‘‘undermining the reputation of New Zealand as a borrower and increasing borrowing costs across Government’’.

Treasury was worried about Kiwibuild at the time, but with the Government house-building programme being drastically scaled back in size, speed and ambition, this concern has likely dimmed.