Caroline Ritchie: We're in a scary movie, with reason to be unnerved

It's been a week of statistics, and what better way to round it all out with some more unnerving ones. This page can't be nice every single week, though it tries. Today we are talking about how everyone complains that houses are too expensive. Well, they're dead right. New Zealand, in the seventh Annual Demographica International Housing Affordability Survey, is one of the most expensive places to own property. If you take the median house price and divide it by the gross annual median household income, you get something called a Median Multiple (MM). The MM is a widely used measure for evaluating urban property markets and is recommended by the World Bank and UN.
The higher the MM in any given market, the more unaffordable the housing in that market will be. For example, if you live in a house that costs exactly the median income, it has an MM of 1. If your house costs twice the median income, it has an MM of 2, and so it goes on. An MM of 3 or less is considered affordable. If you live in Auckland, chances are you will be paying an MM of 6.3 for the digs you call home. That, says Demographica, is a train wreck. Anything over 5.1 is deemed Severely Unaffordable, punishable by not only a generation of home owners addicted to mortgages and a bad write up in Demographica, but by more serious economic issues.
Housing affordability is a major contributor to the cost and standard of living and a key factor in net worth. Escalating house prices hurt the standard of living if incomes do not increase at the same rate. At the height of the US property boom in 2007, the national median multiple was not over 4. Now, that same market, with arguably further to fall, carries a multiple of 2.3. For those readers still awake, you have to argue what on earth is keeping New Zealand's MM at a whopping 6.3, and whether we are in for a correction of the same scale as the US. One thing seems certain to the Demographica crew - this level of unaffordability can't last forever. Either the median income must rise by an incredible amount (unlikely), or the price of housing needs to come down by a fairly large number of percentage points.
It's also pointed out to us that our dependence, both from a government and personal perspective, on foreign debt is not a sustainable long-term game plan. In fact, New Zealand, and here's the big, scary part I promised earlier, has a debt problem on paper just as terrifying as those Eurozone states we hear so much about.
The solution, at least from a personal perspective, is to save and invest. Repeat - to save and invest money. Just like the old days. But not just in property, perhaps.
Caroline Ritchie is an NZX adviser for Forsyth Barr in Napier and holds an NZX Diploma, BCom and BSc. For sharemarket advice contact her on (06) 835 3111 or caroline.ritchie@forbar.co.nz
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