Assets or liabilities? – Local councils and social housing

MartinJenkins consultants Susan Burns and Cathryn Lancaster discuss the challenges and choices facing local-government landlords in a time of big financial pressures. 

A very good recent article by Patrick Smellie highlighted a confluence of factors that are pushing local authorities to look at their asset bases with fresh eyes ("A stampede of local government asset sale proposals”, 12 December, behind the Business Desk pay wall). Smellie has expertly covered these issues for decades, and he also has a way with words – his reference to “groaning under high debts and impossible rates increases” evokes quite the image. 

That’s also an accurate reflection of what we at MartinJenkins are seeing across local government. One of the hardest and most thankless gigs in the country has got to be chief executive of a local authority, and right now we’re seeing some very hard work going in as CEs and other council officers try to get high-quality, evidence-based advice up to councils – which in some cases are made up of almost all first-term councillors.

One of the areas Smellie doesn’t specifically cover in his article is councils’ housing assets. By our count (it changes daily), roughly 80% of councils still provide some form of “social” housing – that is, subsidised rental accommodation. Together, councils are currently the third-largest provider of social housing, sitting just behind community housing providers and a good step behind Kāinga Ora. Councils’ social housing has historically had a particular focus on pensioners and the elderly.  

Councils aren’t on a level playing field with other providers of social housing  

Councils have been under significant financial pressures for several years, particularly as ratepayers have struggled, a problem made worse recently by significant cost of living increases. Councils are feeling it as landlords no less than in other areas of local-government services.  

Rents often aren’t enough to keep the service sustainable in the long term, especially as the housing stock is often older and so more expensive to maintain. And demand for housing support in our communities just keeps on growing.  

Councils are also not on a level playing field with other providers, as councils don’t have access to the Income Related Rent Subsidy (and so their tenants can’t access Income Related Rents). Community housing providers can receive government support for the same type of housing, and their tenants receive subsidised rent.  

Councils are looking to some new delivery models for their social housing 

At MartinJenkins our work includes supporting councils that are looking hard at ways to continue to provide for their tenants while also absorbing the increasing delivery costs. Some are adjusting policy settings such as rents, but some are changing their whole delivery model.  

For example, some have established a new organisation as a community housing provider and then leased their portfolio to it. That way the council can retain a form of ownership while also accessing the Income Related Rent Subsidy. This subsidy caps a tenant’s rent at 25% of their income, with the balance in any residual market amounts paid by the Crown.  

Other councils have established different council-controlled organisations, or sold all or part of their housing stock to other providers. 

Here, we would strike the same note as Patrick Smellie in his article: while it’s right for councils to be looking at their balance sheets with fresh eyes, they also need to do it with a clear strategic frame about what they need to achieve in their communities overall and over time. This includes taking an overall look at all the other housing-related levers that can produce results for their communities. 

The new government may provide some more options for council housing  

The housing market is dynamic, and immigration levels and changes to incentives for landlords will be a factor in the near term. These factors also play out differently across the country with regional and localised effects, including for those areas hard-hit recently by weather events. 

Then add national politics into the mix that local politicians must work with. The new government has signalled a range of policy changes that could provide local government with more options when considering how best to deliver its housing services. 

The Government has committed to unlocking access to capital for community housing providers, giving them more support in the form of capital and operational funding and long-term contracts.  

It will also establish a new procurement function in the Ministry of Housing and Urban Development. This will allocate Crown capital for new social housing, on a contestable basis, to Kāinga Ora, community housing providers, and other providers. The Government will also make use of Social Impact Bonds, in partnership with providers who can shift families out of emergency housing. 

Some councils are reviewing cost-effectiveness, others are refreshing their housing strategies

As councils finalise their Long-Term Plans and consider how to meet the needs of their communities, they’ll need to understand how the shifting political and policy landscape may change their options for providing their housing services effectively. 

Our work sees councils taking different approaches and needing different types of support. Some are taking a traditional approach, doing Local Government Act, section 17A reviews of how cost-effective their current arrangements are. Others are refreshing their housing strategies to confirm what housing outcomes are important for local communities and to help them decide about trade-offs in a strategic and consistent way.  

In our work we’ve also seen the pressures on over-extended council staff and the need for applied financial analysis of the different delivery options, to ensure they’re giving councillors accurate and reliable advice in the context of LTPs with many moving parts. 

There’s a case for some optimistic caution 

From what we’ve been seeing in local government, there are grounds for optimistic caution about council housing.  

The optimism is because we’re seeing signs of better asset-management practices across this important part of New Zealand’s infrastructure landscape. But caution is definitely needed, because the complex challenges involved shouldn’t be approached too simplistically, particularly in light of the dynamic environment.  

About the authors: 

Susan Burns is a Managing Principal at MartinJenkins. She has in-depth knowledge and experience in policy areas related to housing and urban development – she has worked on a range of policies for Te Tūāpapa Kura Kāinga |Ministry of Housing and Urban Development, the Ministry of Business, Innovation and Employment, and the New Zealand Productivity Commission. 

Cathryn Lancaster is a Principal Consultant at MartinJenkins. Cathryn has extensive experience in supporting clients with performance improvement, financial strategy, financial management, and investment decision-making. She has helped a number of clients going through major change, including Auckland Council, Christchurch City Council, the Canterbury Earthquake Recovery Authority, AgResearch, Lincoln University, and Antarctica New Zealand. 

You can receive our insights delivered directly to your inbox.