Houses just 'as affordable'
Houses are just about as affordable now as they were 25 years ago. Yeah, right, might be your reaction but that's the findings of the latest research by the New Zealand Property Investors Federation.
The body feared that political parties would ramp up the rhetoric on house prices in the runup to the election and thought it would try to counter the idea that houses are unaffordable.
"Some commentators have stated recently that potential first-home buyers are being forced from the market," said federation executive officer, Andrew King. "Their reasoning is that the ratio of incomes to house prices has increased from 3.4 in 1985 to 7.3 in 2014.
"Similarly, they point to the ratio of rental prices to house prices, which has nearly tripled since 1985."
But King dubbed these ratios "simplistic", as they didn't take into account changes to mortgage rates or that the average size of new homes has increased from 125sqm in the 1970s to nearly 200sqm today.
The Federation (NZPIF) researched changes in housing affordability from 1985 to today (see table, Tracking Mortgage Affordability), and said that once interest rates were factored in, the average monthly cost of buying a house over 25 years on a principal-and-interest mortgage had barely increased since 1985, as mortgage interest rates have fallen from 18 per cent to 6.3 per cent.
"As a percentage of income, the amount spent on a mortgage has barely changed over the past 30 years," King said. "It actually requires less of the average household income to own a home today than it did in 1985."
"New Zealanders have more or less maintained their spending on home ownership, and to some extent have sacrificed potential cost savings obtained through interest rate reductions to buy bigger homes," he said.
King said because of the way the economy was now managed, he did not expect interest rates to ever return to the levels seen in the 1980s.
And, he said, it was also comparatively "cheaper" to rent now than it was in 1985, though the deposits needed to buy homes were bigger, making it tough for youngsters to get their foot on the housing ladder.
"New Zealanders deserve better information on something as important as housing affordability," said King. "This study doesn't say that housing in New Zealand couldn't be cheaper, but it does show that it is just as hard to get into your first home today as it was in 1985."
The Federation was worried about law changes that may result in a misguided attempt to fix a problem that "doesn't exist", King said.
But Christchurch property expert Hugh Pavletich was unimpressed by the Federation's claims. "The New Zealand Property Investors Federation has fallen in to the trap of mixing structural housing affordability with mortgage affordability," he said. "They are different subjects."
Mixing the two is "technically unsound. We do not mix the price of fuel with the price of cars when discussing ‘car affordability'."
Pavletich pointed to his Demographia International Housing Affordability Survey, which he argued provided a "clean measure" based on the "median multiple", where median house prices are divided by gross annual household incomes.
"In normal housing markets, where land supply is not constrained and infrastructure is financed properly, house prices do not exceed three times annual household incomes, requiring mortgages of about 2.5 times," he said.
In New Zealand, major metropolitan areas' housing is internationally rated "severely unaffordable" at about 5.5 times incomes.
In Auckland the ratio was around eight times annual household incomes, with Tauranga at 6.6, Christchurch at 5.8, Wellington 5.5, Napier/Hastings 5.4, Dunedin 5.2, Hamilton 4.8 and Palmerston North 4.5.
NZIER economist Shamubeel Eaqub concluded houses had become less affordable in his report The Home Affordability Challenge, published last month: "There is no doubt that there is an intergenerational gap in the ‘purchasing power' of first-home buyers now and 20 years ago."
"Those purchasing homes in the early 1990s could have saved a deposit and paid off the mortgage within 30 years. But for a home purchaser in Auckland now, it will take at least 50 years to buy a home."
Such lengthy periods of debt meant people remained "more vulnerable to financial shocks for a longer period of their working life," he said.
The price gains during 2001-2006 may have reflected a strong economy, rapid debt accumulation and self-reinforcing expectations as well, he found.
But since then, the relationship between housing supply and house prices became more evident, particularly in Auckland, though he saw recent price increases as being in part driven by "a large dose of speculation".
Pavletich was optimistic about policy already introduced by the Government focused on increasing the supply of land for building, infrastructure financing, local government consenting and construction costs.
"The major Housing Accords and Special Housing Areas Act was passed into law in September 2013, allowing the Government, with the local authorities, to solve the housing affordability problem over a reasonable and realistic timeframe," he said.
Eaqub sounded a note of caution in his report.
"The draft Auckland Unitary Plan had extensive options for greenfield developments, and densification through infilling and building up.
However, these proposals were significantly scaled back during the community consultation phase.
"While the planning community is routinely vilified in its resistance to land supply, the actual experience shows that a broader "nimby" (not in my back yard) sentiment against intensification is a greater constraint."
- Sunday Star Times