Is housing more affordable now?

When debating housing issues, there’s a tendency to cherrypick numbers in order to support a particular position or worldview.

Mostly, it’s harmless — except when it influences Government policy and we devote billions of taxpayer dollars to building thousands of homes that we probably don’t need, or when we introduce measures to solve a first home buyer crisis that doesn’t actually exist.

One area where such cherry picking is rife is around the relative cost of housing in recent years. On one side of the debate are those who claim housing is more expensive now than it has ever been — evidenced, they say, by its actual cost which, in a city like Auckland, is over eight times the average income.

On the other side are those who say that a full picture emerges only when interest rates, household income and inflation are factored into the equation. On that basis, housing is much more affordable than it was a generation ago.

So who’s right? Grandparents will probably tell you they bought their first house in the 1960s for less than $10,000. While this may sound unbelievable, the data says it’s right.

In 1966 ( the first year in which the New Zealand Census measured household income), the average house price was a bargain at $8400.

Sixty years later, in 2017, the median house price had risen to $526,000. So case closed, our housing market is a basket case? Surely the market has failed?

Not so fast. Any economics student will tell you that, because of the corrosive effect of inflation, a dollar in 1966 is not worth the same as a dollar today. So these figures need to be adjusted to give a meaningful comparison.

In 1966 the average household income was the inflation adjusted equivalent of around $51,000 today, and the median NZ house price was the equivalent of about $159,000 today.

The average floating mortgage interest rate, at the time, was 6.27 per cent. So if we assume an average mortgage was 80 per cent of the value of a house, the annual interest and principal cost of a 30-year mortgage would have been about $9420 in today’s dollars — or about 19 per cent of household outgoings.

Fast forward 10 years to 1976 and we were in the middle of New Zealand’s first modern property boom. Median house prices had increased to the equivalent of around $202,000 (in today’s dollars) and floating interest rates had jumped to

10.22 per cent.

That meant it was now taking the equivalent of around $17,300 today, or about 30 per cent of household income, to service a 30-year mortgage, even though the median household income had increased to around $58,000 in today’s dollars.

At this point your eyes are probably glazing over from all the numbers. So let’s simplify things a bit. By 1986, floating mortgage interest rates had increased to almost 20 per cent, which meant that the cost of servicing a mortgage was now

52 per cent of the median household income — the highest level it has reached in the modern era.

By 2001, the cost of servicing a mortgage on the median New Zealand house price had dropped back to 34 per cent of the median household income. It currently sits slightly above that, at 37 per cent. This is despite the fact that median house prices have increased dramatically since 1986 and houses now cost almost three times what they did, in inflation-adjusted terms.

So how can this be true? How can it cost less to own a home than it did 33 years ago? The answer is simple. While house prices have been going up, interest rates have been coming down. And that, coupled with a steady increase in wages and salaries, has meant that the latter has more than offset the former.

The cost of owning a home, right now, is as good as it has been at any time since the mid1970s.

Figures suggest housing costs now are the best they've been since the mid1970s