Shamubeel Eaqub: The grim reality of NZ's housing unaffordability is hidden
OPINION: Houses are indubitably expensive in many parts of New Zealand, but how expensive? The answer depends on which flawed measure you look at.
If we measure saving for a deposit and the total cost of paying off the mortgage, houses are the most expensive they have ever been. That is why home ownership in New Zealand has been trending lower since 1991 and is now at the lowest level since the 1950s.
There are several measures that try to measure housing affordability. Most look at the cost of servicing a mortgage at the outset of buying a house, with little attention to saving a deposit while renting, or other costs of ownership like rates, insurance and maintenance.
Using these measures of housing affordability, many are puzzled why home ownership rates are falling. This is because these measures are unrealistic.
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The simplest measures, like house prices relative to incomes, best explain declining home ownership in New Zealand.
The newest kid on the housing affordability-measure block is one from the Ministry of Business Innovation and Employment. The measure was four years in development and it is cringingly called HAM. There is plenty of worthwhile work in there – it has detailed measures of localised incomes, rents and house prices – and shows that most renters cannot afford to buy in their locality.
But it fails the reality test - just like the other measures that look at the first year's servicing costs relative to incomes.
The HAM does not measure the difficulty of saving a deposit, especially when house prices have been rising faster than incomes.
Nor does it measure the cost of servicing a mortgage over the whole of the mortgage – it just looks at the cost of interest rates now. When interest rates are low for a few years in the life of a, say, 20-year mortgage, the picture these measures paint are false.
MBIE found that it is unaffordable to buy a house, but less so than nearly a decade ago, because interest rates are now lower. Tell that to any young home buyer – they will scoff.
Saving a deposit is one of the largest barriers to home ownership. In expensive cities like Auckland, saving a decent chunk of your income after rent and other outgoings is tough.
Even if you forego avocados – smashed or otherwise – and save 10 per cent of your gross income, it would take nearly 23 years to save a deposit for a house if you started in 2017. In 1982, it took around 10 years.
While getting a mortgage is easier now than it was in the 1980s, paying it off is harder. This is because banks are willing to lend at larger amounts for longer periods. It is this larger amount of debt, relative to income that has the biggest impact on debt servicing.
While interest rates matter at the time of buying a house, when accounting for wage increases and interest rates over the whole life of the mortgage, the biggest factor is the starting size of the mortgage.
I calculated the lifetime cost of mortgage repayments. Compared to 1982, it is now nearly three times harder to buy a house. If we measure just the first year's mortgage costs, it's only 1.2 times harder.
My figures are for a very prudent household, that saves 10 per cent of their gross income for the deposit and religiously pays a third of their income every year in mortgage payments. The scenario is that house prices stay at current ratio to income.
My prudent household that started saving for a deposit in 1982, bought a house in 1992, and then paid it off in 2001.
If you start now, you can realistically save a deposit by 2040 and then pay it off in 2056. The time to buy the average New Zealand house by a very prudent family on the average income took 19 years in 1982 and will take 39 years in 2017.
This is the grim reality of unaffordable housing and it is much harder than it has ever been before.
Housing affordability measures are useful. But unrealistic measures that do not look at the real struggles of saving a deposit and look at the cost of a mortgage over its whole life are dangerous.
They give us a false sense of complacency and a reason not to act aggressively to fix what is truly a crisis.