A way to make Kiwibuild fairer

Oscar Lau writes in Stuff:

Those people lucky enough to win the KiwiBuild lottery will buy their home at a heavy discount.

And when they sell it in the future, they’ll receive the full market price. That doesn’t make any sense.

To see why, let’s keep things simple. Suppose lucky Bob gets to pay only $500k for a KiwiBuild house that’s valued at $1 million in the open market.

After three years he decides to sell. If the market stayed flat, he’ll pocket a windfall of half a million, a parting gift from the Government. Even if the market plummeted by 50 per cent, he’ll break even.

It’s taxpayer funded lotto.

Bob’s twin brother Todd didn’t win the lottery. Yet he somehow managed to secure a loan to buy a similar $1m home in the open market.

Suppose he put down the same amount of deposit as Bob did. So he will have to borrow $500k more than Bob did, which means he’ll pay hundreds of thousands more in interest over the life of the loan.

When he decides to sell, of course there will be no parting gift from the Government. If the market plummeted, he’ll probably go bankrupt.

So Bob wins a double jackpot: huge savings in loan interest and immediate doubling of house value. Meanwhile Todd gets nothing, all because of his (lack of) luck.

And Labour say they want to help the most needy, when in fact they are giving random people huge windfalls.

There’s an easy solution to the double jackpot problem. And if the Government had cared to study comparable schemes from other parts of the world, they would have already found it.

It can be found in Hong Kong, which has been running a remarkably similar programme, known as the Home Ownership Scheme, since the late 1970s.

The basic principle is simple: buy at a discount, sell at the same discount.

Here’s roughly how it would work. When Bob decides to sell his house, he can either sell it in the open market or sell it to another KiwiBuild qualified buyer in the KiwiBuild secondary market.

In the first case, the new buyer pays the full market price; but Bob receives only half of it, with the other half (the originally discounted proportion) returned to the Government.

In the second case, Bob receives the full payment from the new buyer. But when the new buyer decides to sell in the future, she’ll have to follow the same rules as Bob did.

That seems a lot better than random people gaining huge windfalls.