Housing Infrastructure Fund may be too costly for Hamilton, Rob Pascoe says

OPINION: Has Hamilton City Council jumped the gun in joining the Government Housing Accord to access the Housing Infrastructure Fund without proper process as to all the consequences?

It sounded good at the time, particularly when it was suspected there were too few green-field, developer-ready sections available in the city (this turned out to be wrong), and council saw a cheaper opportunity (an interest-free loan) to fund Rotokauri and Peacocke residential growth cells.

However, as events and facts around the Housing Infrastructure Fund unfold, the consequences could be even more catastrophic on city finances already feeling the pressures of growth.

I suggest council needs to consider and debate the appropriateness of remaining in the Housing Accord and the benefits, if any, of continuing with its application for $240 million from the Housing infrastructure Fund.

It seems to me the financial risk to Hamilton city undertaking this project without full support of central government is far too great, and will quickly destroy the progress made to council finances over the past six years.

Here are some of the reasons:
The impact of a $240m loan, although interest-free, will increase the debt-to-Income ratio (when current city debt is included) upwards of 300 per cent. Currently, it's 173 per cent, with council having a self-imposed limit within its financial strategy of 200 per cent, and council's main funder, the Local Government Funding Agency, having a limit of 250 per cent.

This increase in the ratio to the limits described above will lower Hamilton's credit rating set by international rating agency Fitch (presently AA-) possibly to A+.

Council's external Treasury advisers suggest this downgrade could increase our current loan interest rate by 0.2 per cent. On current debt and current interest rates, this will add up to almost $750,000 to our annual interest bill. Annual interest is funded from rates.

The $240m loan, once uplifted, will convert into assets (bridge, roading, pipes, pumping equipment etc). Assets need to be depreciated. Depreciation is another cost funded from rates. In time, this additional cost will be matched against new and higher rating revenue and development contributions, but the timing of these will be well into the future years, after depreciation and the additional interest on existing debt have been incurred.

This means, in the short term, existing ratepayers will fund all these additional costs.

The Government's interest free loan is for 10 years. Currently, council collects on average around 53 per cent of infrastructure costs from new residential sections created as Development Contributions. The timing of these receipts is unknown and dependant on when the sections are titled (effectively at the point the section is sold).

The timing of the repayment and receipt of around half the amount of the government loan is a risk for council. In addition, the other 47 per cent of the loan (which represents a benefit to the rest of the city) needs to be repaid. If council seeks to continue with balanced annual accounts, the surplus each year would need to be $24m (less any Development Contributions received) just to repay this loan.

We are, of course, forgetting about further annual surpluses needed for repayment on the existing $363m worth of debt.

A solution could be for council to consider as a first option a much smaller loan and focus solely on Rotokauri. This grow cell is already under way. Then, maybe look in five to 10 years' time to review options to open up Peacocke.

Growth councils around the country will be facing the same issues as Hamilton. If the Housing Infrastructure Fund is to succeed, central government may need to make concessions around the loan. It's possible that 10 years is too short for repayment.

To best serve the needs of the country rather than the city alone, central government needs to have some "skin in the game". Possibly the loan could take the form of a suspensory loan that will be written off if councils meet the terms and conditions of their agreement in working to increase the number of new residential sections that go towards meet the needs of the increasing population in New Zealand.
Let's get some wise heads together to discuss what's best for Hamilton.

From Stuff.co.nz