Why housing affordability hits glass ceiling

For a frightening view of the cost of home ownership, Labour leader David Cunliffe's political director has used figures from last week's Budget to show that a new home buyer on the average wage could be paying more than 60 cents in the dollar to service a mortgage by 2018.

Rob Salmond, who published his calculations on his Polity blog last week, is no slouch. A former diplomat and adviser to prime minister Helen Clark, his calculations look credible enough.

They assume the median New Zealand house price rises from $466,830 this year to $548,361 in 2018, using house-price inflation forecasts produced for the first time by the Treasury for the Budget.

The Budget also forecasts increasing interest rates over that time, from an average floating mortgage rate today of around 6.3 per cent to, say, 8.6 per cent in 2018 - still well below the heights of around 11 per cent reached in 2007.

On that basis, mortgage payments on such a house would rise from $29,700 a year at present to $42,744 in 2018. Assuming the average wage rises, as forecast, from $59,536 a year to $62,075 over the same period, that will take the cost of servicing a mortgage from 49.2 per cent of the average wage at present to 62.4 per cent in 2018.

"This huge hike in mortgage costs will kill off the dream of home ownership for tens of thousands more New Zealand families," wrote Salmond.

"In 2014, the median house price is around 7.7 times the average fulltime wage. By 2018, it will rise to be 8.0 times as much."

This, along with some handily timed OECD tables showing New Zealand has the highest ratio of rents to house price in the world, has given life to Labour and the Green parties' claims this week of a housing "crisis".

Perhaps the only factor they've ignored is that very few first-home buyers service a mortgage on a single income. Since at least the late 1980s, it has taken two household incomes to buy a home.

Gamely yet lamely, Prime Minister John Key also countered that the long-running ROOST housing affordability index shows homes are more affordable today than they were under Labour in 2008.

However, the April ROOST index says it already takes 62 per cent of one median income - a different measure from the average wage Salmond uses - to service a median-priced house. Granted, that figure was 83.4 per cent in 2008, but it doesn't alter the pressure implied on household budgets.

Meanwhile, this week's April sales figures from the Real Estate Institute of New Zealand suggest the slowdown effect of restricted loan-to-valuation ratio lending, imposed last October, may be starting to wear off.

As banks digest the LVR restrictions, they are more able to lend again to at least some low-deposit borrowers, with signs of prices stirring in the sub-$400,000 home market the result.

The biggest single answer to bringing down house prices is for there to be more houses. But that takes time. Even though dwelling permits are roughly three times this year what they were a year ago, they still need to be built.

Making matters worse is a population surge caused by a sudden switch in migration patterns. New Zealanders are staying home in droves, largely thanks to the pastures in Australia looking browner these days than greener. On one hand, it's a sign of success if people want to stay here, but it doesn't helping spiralling home ownership costs.

So the second simple answer to higher house prices is to restrict immigration. Labour has raised that prospect.

But economic consultancy Motu found in research published recently that New Zealanders, rather than foreign buyers, tend to bid up house prices most, while the evidence from the past is that governments generally act too late to have any significant impact when they pull the immigration lever.

Labour runs the risk also of alienating its substantial migrant vote if it suddenly looks like it's jumping into a NZ First-aligned position on migration. So, fewer people is not a simple answer either.

In fact, both parties know the answers are long-acting, difficult to implement, and require action on many fronts: forcing local governments to stop adding delay and cost with quixotic planning rules, allowing both more sprawl and more urban intensification - both of which attract vociferous critics.

National has ambitious social housing policies under way, but they will be very slow-acting, as would Labour's policy to build 10,000 new homes every year for 10 years.

Of course, migration patterns can swing around very quickly. And as more and more houses are built in response to demand, which is starting to happen, the pressure will ease.

In the next five to 10 years, it's conceivable there will be more houses than are needed to meet demand, depending on economic cycles and the rate of new builds.

But that's not going to happen before election day and, in the absence of easy answers, housing affordability remains one of the Opposition parties' more potent political weapons.