Low incomes blamed for affordability crisis

Low incomes rather than high house prices are responsible for this country's international ranking as one of the world's most expensive places to live, a banking economist says.

Anthony Byett, of ASB Bank, said many factors were behind local housing being ranked as some of the world's dearest but one of the main drivers was people's poor earning ability compared with steeply rising house prices.

"Relatively low incomes are a more fundamental problem," he said. "We are not a wealthy country. We have aspirations beyond our current income as a nation, something noticeable in the national savings and current account statistics and also in this housing statistic."

The global housing affordability study was released on Monday by Demographia International. Auckland ranked as the world's 15th most expensive city out of 99 cities, Christchurch ranked 29th and Wellington 39th. Last year, Demographia ranked Auckland as the world's 16th most expensive city. The most expensive housing is in Los Angeles and the cheapest is in Rochester, New York where it takes a little over two years' full income to pay off a house.

The study compared median house prices to median annual household income in Europe, the United States, Canada, Australia and New Zealand.

Byett said steeply rising house prices were a factor in the affordability crisis but predicted this would be corrected when house prices stabilised for a year or two and incomes rose.

Darren Gibbs, chief economist at Deutsche Bank, questioned the report's value.

"This really just confirms numbers that others have put together and commented on showing that, relative to local incomes, local house prices are highly valued in an international context. Whether or not this is meaningful - in the sense that it has any predictive content - is unclear," he said.

"Clearly, at recent interest rates, households have not felt that housing was totally unaffordable. The fact that New Zealand is expensive relative to income means that those people who come to the market fresh will likely need to borrow plenty to enter the market. This obviously exposes them to problems if interest rates rise unexpectedly or house prices decline."

Robin Clements, chief economist at UBS New Zealand, said the report had a valid point to make on regulatory controls and land supply. "The Government has already recognised the difficulty for new entrants to housing and housing affordability but has chosen to deal with the issue by providing assistance to home buyers.

"Land supply is obviously a key element in the demand/supply balance that determines house prices. Local authority zoning and other issues determine the supply of land available for residential development and has a structural long-term impact on the cost of housing.

"Is there a problem? Probably, especially for low-middle income earners, although foreigners still seem to see New Zealand as cheap. Can something be done? Yes, but it is a central/local government policy issue. Would it defuse the housing price boom? Yes, if land supply was increased now."

Praising the report, resource management specialist Owen McShane said he had highlighted the problems a decade ago in a report to the Reserve Bank. "General economic theory and international experience strongly indicate the regulation of the supply of land should be light-handed for reasons of equity and efficiency. Policy-makers must recognise and must explain to their constituencies that heavy-handed regulation of the supply of residential land carries a burden of significant economic and social costs. Such over-regulation affects prices, construction output and finally employment," he said.

"In New Zealand, those same price rises make a significant contribution to the CPI which, in turn, forces a response from the Reserve Bank - these distortions then impact on the competitive performance of New Zealand's trading sector.

"Many of these costs fall most heavily on those least able to deal with them. Those already comfortably settled benefit from the increased capital value of their properties. Those struggling to become established find themselves paying higher prices for housing, or are priced out of the market altogether. A large percentage of the population who have a mortgage on their home or who have borrowed to finance their business or other activities are paying higher interest rates than necessary."

Auckland Regional Council development manager Noel Reardon challenged criticism of the city's land zoning rules. He said the Regional Growth Strategy had not hindered the city's growth or development nor its supply of new sections or housing, citing record levels of new house construction starts since 2001.