Housing through the decades, what is affordable?


Paul Henry received an email, from Jeff in Christchurch.

"Every day we are bombarded with news of how unaffordable houses are now and how the wage gap in relation to house prices is getting wider.  This all appears anecdotal at best.  I would be very interested to see how historically the data stacks up.  Eg. average income and house price for 1950s, 1960s, 1970s, 1980s, 1990s and the associated gaps if any."

The answer is yes, according to economists like Shamubeel Eaqub. He crunched the numbers back to 1957 for his book "Generation Rent".

From 1957 to the late 1980s the average New Zealand house price was between two-to-three times the average annual household income.

The average house price had risen to four times the average household income by the late 1990s.

Prices peaked at around six and a half times the average household income in 2008.

Prices then eased, but are trending up again, and the average New Zealand house price has risen back above six times the annual household income.

Hugh Pavletich, the co-author of the annual Demographia International Housing Study says that three times income is a generally recognised definition for an affordable house.

He told Newshub about a practical example, involving the work of the American construction industry entrepreneur Bill Levitt (who is referred to as "the father of suburbia").

Mr Pavletich says Bill Levitt transformed the residential construction sector post World War II. He developed it from the antiquated horse-and-buggy era, to the modern and disciplined production one that we know today. For US$8000, Levitt supplied housing to young, single-earner (partners didn't need to get employment through that era) American families earning US$3800 a year. That is 2.1 times their single annual household income.

But what about other factors like mortgage rates?

Andrew King, from the Property Investors' Federation says "Falling mortgage interest rates have actually made it easier to fund a mortgage despite house prices rising faster than incomes."

But Shamubeel Eaqub says lower interest rates do not help a person buy a house in the first place. The lower rates help with the ability to make mortgage repayments.

Hugh Pavletich says factoring in mortgage rates to housing affordability is like factoring in the cost of petrol to an analysis of car prices.

He says housing affordability and mortgage affordability are two separate subjects and must be treated as such. The price of housing must be a reflection of the underlying incomes supporting it.

Andrew King says when looking at the issue of housing affordability there are some other important factors to consider.

"If you want to make a case that housing is in a crisis, you would restrict your analysis to statistics that compare incomes to house prices."

But he believes that is too simplistic.

He says that lower rental prices in relation to incomes, lower tax rates and KiwiSaver first home grants and withdrawal options have all made it easier to save for a deposit now compared to 10 years ago.

"It has always been hard to buy your first home, especially at this point in the property cycle. Every decade has had its difficulties and current conditions are nothing new."

But both Shamubeel Eaqub and Hugh Pavletich say that to accurately measure housing affordability the simplest and cleanest measure is to look at the ratio between household income and house prices.

Andrew King argues that lower mortgage rates should be considered when assessing home affordability. He points to Massey University's Home Affordability Report, which compares average weekly earnings with the median dwelling price and mortgage rates.

He says "If I can afford to pay $20,000 in mortgage repayments a year, then at an interest rate of 10 percent I can afford to borrow $200,000 to buy a house. At five percent I can afford a $400,000 house. If interest rates jump back to 10 percent then there will be less demand for houses and prices will fall."

The Massey University Report has shown some improvement in affordability as mortgage rates have come down. However the longer term trend shows it is becoming tougher to afford to buy a house.