Analysing affordability

Photo / The Aucklander

Ask anyone who has bought a house recently if Kiwi homes are affordable. It's a bit of a no-brainer.

That's not to say that they won't become affordable again. Like every economic cycle, affordability goes in cycles.

Home affordability is measured by Massey University and other organisations. The quarterly Massey report takes average weekly earnings, mortgage interest rate earnings and house prices and crunches them to calculate how affordable the median house is in New Zealand. The lower the index calculation, the more affordable the housing. The good news is that the Massey index has been falling slowly since 2007, which means houses are becoming more affordable, says Professor Bob Hargreaves. The index peaked at 33.86 in 2007 and dropped to 32.31 in November 2008 and 25.76 in November 2009, when the numbers were last crunched.

A large part of the increased affordability is driven by a drop in mortgage interest rates - with floating rates sitting at 5.5 per cent to 6 per cent, compared to over 10 per cent between June 2007 and September 2008. That makes buying a house a lot more achievable - providing you have the deposit or can borrow it from family.

Interest.co.nz takes a different approach to home affordability by looking at the percentage of the median income needed to service the debt on an 80 per cent loan on a median house. In January this year, the figure was 62.1 per cent, which would be highly unaffordable for most people. The good news is that it's slightly down from 63.6 per cent in December.

When talking about affordability, it's worth looking at international comparisons. The annual Demographia International Housing Affordability Survey looks at countries similar to our own. The survey takes the median house price and divides it by the median annual household income. Traditionally, the internationally recognised standard of acceptable affordability is that house prices should not exceed three times annual household incomes.

Yet, in the latest survey, national mean affordability was 6.8 in Australia, 5.7 in New Zealand, 5.1 in the United Kingdom, 3.7 in Canada and Ireland, and 2.9 in the United States.

Our eight major centres were compared with major centres in the other countries. Of ours, three fell into the seriously unaffordable category of 4.1-5.0 times salary, and five in the severely unaffordable category. Only Australia was worse than New Zealand, with one of its main centres in the seriously unaffordable category and 22 in the severely unaffordable category.

Whatever the measure, the fact that property is rated "unaffordable" doesn't mean that people shouldn't try to get a foot on the ladder.

Just because the average house may be unaffordable, a starter home may not be. The median house price in Mt Eden, for example, is $770,000 according to Quotable Value. Yet at the time of writing, Ray White had a one-bedroom property in Mt Eden Road for sale at $199,000. There were plenty more one- and two-bedroom properties listed for sale on Realestate.co.nz in the $200,000 to $300,000 price bracket.

It should be added that not every family has just one income, or wants to buy the median house, says Bernard Hickey, Interest.co.nz's managing editor. As a result, the index also does a calculation based on a family with 1.5 median incomes buying the median house, which currently sits at 40.8 per cent. The calculation takes into account Working for Families tax credits. But for young childless buyers on two median incomes looking to buy a lower-quartile property, such as an apartment, the figure is 26.1 per cent of income to pay an 80 per cent mortgage. In those circumstances, property is affordable, Hickey says. However, "if they want to have kids and a house in the suburbs", forget about it.

Also worth considering is that some people manage to live on the smell of an oily rag and can afford to pay a mortgage where others would be in a financial mire. Likewise, equivalent properties outside the main centres are much more affordable than those in Auckland, Wellington and Christchurch.

An argument put forward by some is that any time is a good time to buy if your horizons are long enough. Over the long term, property prices increase - so even if you buy at the top of a market and prices fall temporarily, they will eventually catch up and overtake what you paid. If you can hold on, such blips won't affect you. But if you're buying to renovate and sell or simply flip, you could be in trouble.

Sadly, affordability may get worse in the short term. Like many, Hargreaves believes it's inevitable that the Reserve Bank will increase interest rates later in the year. Some of the banks have already priced this in, he says.

On the other hand, the spanner in the works is proposed changes to taxes due to be announced in the May Budget, which could put significant numbers of property investors into financial difficulty.

The Government says it will rescind the ability to claim depreciation and may ring-fence losses on investment properties. This will drive some landlords out of business and, in theory, a flood of properties on to the market could drive prices down. There are many other factors that affect affordability. The supply of new land and houses has an impact, as does the cost of building. Last year, then-Property Council chief executive Connal Townsend said the supply of new houses was being constrained by the Resource Management Act and excessive compliance costs for obtaining building and resource consents. Affordability was a key housing policy for National at the last election and the Government has made a number of steps to attain that goal, former housing minister Phil Heatley said in an interview before his resignation.

"The most significant positive changes will come from freeing up the supply of land and cutting the costs of building, which is why we're reforming the Resource Management Act, the Building Act and addressing local government bottlenecks," Heatley said.

Initiatives include a review of the issues around land supply and the cost of sections, a new streamlined building consent system for volume builders and an increase in the Welcome Home Loan limit, making it easier for low-income earners to borrow money.

The change to a super city is likely to help housing affordability in Auckland too, said Heatley. "Rather than having a number of councils, each creating arbitrary lines on the Auckland map inside which housing development is constrained, we will have a single authority with a unified view on land development."