GOING, GOING, GONE
Why property prices are even worse than you thought
Afew years ago, an essay in The New Yorker began with this ominous opening line: ‘‘It is, I promise, worse than you think.” That story was about climate change, but the same sentiment applies to Aotearoa New Zealand’s housing market. Anyone who absorbs the reporting of new price records each month will have a vague sense of the problem. Those who are actively trying to buy a house will feel it viscerally, deep in their bone tissue.
Here’s a brief thought experiment to illustrate how extraordinary the situation has become.
At the end of 2008, house prices crashed in some parts of the world. New Zealand was not among the hardest hit, but did not escape unscathed: nationally, house prices dropped by around 10 per cent, putting the value of the average house back about 30 months (they quickly recovered). What if we had a similar correction now? Data from CoreLogic shows the average national house price in May was $890,000. Based on house price growth this year, a 10 per cent drop would put prices back around 150 days, to early January.
Because that data is nationalised, it conceals some extremes.
The same data shows the average house price in Wellington city is around $1.2 million. During the 2008 crisis, average house prices in the city dropped a maximum of 8 per cent. If that happened now, prices would return to their position 100 days ago.
The housing affordability problem in New Zealand is, put simply, among the worst of all comparable developed nations. Bloomberg recently described the country’s housing market as the bubbliest in the world, overtaking Canada. It was based on a series of standard metrics used internationally to show whether a housing market is overvalued, and at risk of a correction.
Breaking down those metrics, and adding a few of our own, we can see New Zealand’s housing affordability is even worse than we might like to think.
It used to be conventional wisdom that buying a house – once the deposit was accumulated – was financially beneficial, even if it cost more than renting.
This is still the case, given the dazzling potential for untaxed capital gains. Between September and December last year, the value of New Zealand’s housing stock rose by $105 billion, slightly more than $1b per day. Since March 1990, New Zealand’s houses have grown in value by more than $1.2 trillion.
As economics commentator Bernard Hickey has previously pointed out, if this was taxed at the top marginal rate for income tax, that would have generated nearly $500b in revenue.
This growth has caused several problems for potential house-buyers. One is the deposit, which now takes the average person many years to accumulate.
The other is more fundamental: whether you can afford to have a mortgage in the first place.
To explore this, we can use a couple of different metrics.
One is the price-to-rent ratio, meaning the difference between buying a house and renting one within a market.
According to the Organisation for Economic Cooperation and Development (OECD), New Zealand’s price-to-rent ratio is running more than double its long-term average.
That is the highest of the OECD’s 38 member countries. (Canada comes second, at 90 per cent higher than its long-term average and the rest trail far behind, averaging 22 per cent higher.)
It’s likely worse than it appears. The latest New Zealand data is from the fourth quarter of 2020, predating much of the recent growth in house prices, while the second-highest, Canada, reflects data from the first quarter of 2021.
No OECD country in 40 years has gone higher above its long-term average than New Zealand is right now.
To drill down further, we can use a methodology developed by Emma Vitz to figure out how much you need to earn to comfortably pay off a mortgage in different parts of the country.
Using average house price data provided by CoreLogic, and average household income data from Infometrics, we can track how much it costs
to pay an average mortgage in each of our territorial authorities.
To explain, let’s use Christchurch as an example.
As of May, the average house price in the city was around $613,000. Based on a standard 20 per cent deposit, the resulting mortgage would be about $490,000.
The monthly repayments on this mortgage, based on a 30-year term and a 4 per cent interest rate, is $2339. That’s about $28,000 over a year.
A general rule of thumb is that you should spend 30 per cent of your income on housing, a standard that emerged in the US and is used internationally in measures of housing affordability.
Putting all this together, paying off an average mortgage in Christchurch requires a household income of around $93,300, which is less than the average household income of $104,000.
This is not the case in other cities.
In Auckland, paying an average mortgage requires a household income of $170,000, nearly $30,000 higher than what the average household earns. Wellington city, similarly, requires an income of $170,000, around $20,000 higher than the average.
The starkest disparities are in two areas: Queenstown-Lakes and Tauranga. For the former, a household needs an income above $200,000 to afford the average mortgage. In Tauranga, the average household earns $52,000 less than they’d need.
There is good news: in large parts of the country, it remains possible to pay a mortgage on a standard household income. In each of the three districts on the West Coast, a household with an average income could, in theory, afford to service two average mortgages simultaneously.
For those wanting to live in a city, Invercargill, Christchurch, Timaru and New Plymouth have markets where an average household can afford an average mortgage.
The problem is that most people do not live in those places. Accounting for population, about twothirds of the population live somewhere where the average household income is lower than what is required to pay off an average mortgage.
It’s worth remembering this is highly generalised. The numbers are averages, so they represent a hypothetical person; they won’t apply to your specific situation, which may be better or worse than average. If you are a first-home buyer you are more likely to buy a house for lower than the average price.
There is also a major caveat: the 30 per cent rule. Someone willing to pay 40 per cent of their income on housing will be able to afford a mortgage in more places, including in Wellington city.
That in itself is a sign of the times; if you want a house, you have to devote more of your income towards it.
This is particularly true for the lowest-income earners, both in terms of mortgage payments and rental costs.
Another statistic collated by the OECD is called the ‘‘housing cost over-burden rate’’, meaning the proportion of people spending more than 40 per cent of their disposable income on housing costs.
New Zealand again outdoes other nations on this measure.
For the lowest income earners, 56 per cent of renters and 43 per cent of homeowners are overburdened, each higher than any other OECD nation.
As we saw above, paying an average mortgage has become unaffordable for the average household in much of the country, despite consistent increases in incomes.
The result is a growing gap between incomes and house prices, which has expanded alarmingly quickly in recent months.
One way to measure this is with a price-toincome ratio, another of the key metrics used by the OECD.
New Zealand is again running well above longterm averages, to an extent worse than comparable developed nations. And, once again, the data ends at 2020, meaning recent stratospheric house price growth is unaccounted for.
For a simpler explanation, we can use a basic formula: the average house price divided by the average household income.
Sometimes called the ‘‘median multiplier’’, this is one of the most striking figures in Aotearoa’s housing market, in large part because it has increased so rapidly.
As an easy benchmark, the International Housing Affordability Survey considers a ratio above 5.1 to be ‘‘severely unaffordable’’, and 3 and under is considered ‘‘affordable’’.
In Aotearoa New Zealand, only two districts meet the ‘‘affordable’’ criteria: Grey and Westland on the West Coast.
The national average, as of May 2021, is 8.
There’s an old saying in real estate: ‘‘Buy land. They’re not making it any more.’’ It speaks to a fundamental human drive towards owning property, but it’s not strictly true. New land can be made available for housing, particularly in cities, through either sprawl or densification.
There’s broad agreement a lack of supply is the major driver of the housing affordability crisis.
One way we can look at this is through residential building consents. Every month, councils report how many consents they have approved. There’s usually a years-long lag between consents and a house being built, meaning a slow pace now will have impacts for a long time.
The latest national data shows the country has finally broken its monthly record for new residential consents, beating a level set in the 1970s (when there were two million fewer people).
Looking at a rolling six-monthly average of new residential consents (a six-monthly average gives us some space from the Covid-19 lockdown) we can see a glaring example of how a lack of supply can fuel house prices.
In the context of the past 30 years, Auckland is approving a record number of residential buildings each month, about double its long-term average. Greater Christchurch has not yet reached the peak of its post-earthquake building boom, but is consistently beating its long-term average.
In Greater Wellington, there has been a barely noticeable increase in new building consents, despite chronic house price inflation. Although it has a similar population to Greater Christchurch, it has issued fewer consents every month for at least 30 years.
Drilling down further, we can see Wellington city itself is causing the problem. Part of this is geography – it simply doesn’t have the capacity to sprawl like Christchurch and Auckland.
But the data shows the city is approving a similar amount of residential consents now as it did for much of the period between 2002 and 2004, when it had 40,000 fewer people and house prices were one-third the level they are now.
This is striking in the past two months. Data shows Wellington city approved just 115 residential consents in April and May, fewer than 12 other authorities including New Plymouth and Whanga¯ rei, and only slightly more than Waipa¯ . Although there are early signs of a slowdown, unless there is a significant drop in prices, affordability will remain worse for the current generation than ones before.