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By Rodney Dickens

Housing affordability can be a complicated issue. It addresses four questions. Does NZ have a housing affordability problem? Does it matter? What caused the problem? And, most importantly, what are the solutions?

To provide answers to these questions this Raving draws extensively on the quality work done by Christchurch-based Hugh Pavletich and US-based Wendell Cox, authors of the annual Demographia International Housing Affordability Survey. Input from Owen McShane, Director of the Centre for Resource Management Studies needs acknowledging because he has also helped me understand the problem of housing affordability, the causes and the solutions. To some landowners and councils Hugh and Owen will be seen as the enemy because of their relentless campaigning for affordable residential section prices, but their tireless efforts may finally be rewarded. The Key Government has set up advisory panels to address the root causes of the affordability problem.

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By Hugh Pavletich

Within this article - The Comprehensive State of the U.S. Housing Market: Learning to Love the Housing Data and Forgetting the Economic Facts. Everything you wanted to know about U.S. Housing Trends. » Dr. Housing Bubble Blog – Dr Housing Bubble (based in California) asserts that of the 129 million residential units in the United States – some 15,950,000 are vacant – and therefore overall the United States has a huge oversupply of residential stock.

There are other United States commentators making the same assertions – for example Colin Barr of Fortune magazine in Housing market still faces a big glut – Nov. 10, 2009.

The US Census Quickfacts (Texas page – with US figures alongside) states that the 2008 US population estimate is 304,059,724 and that the persons per occupied household in 2000 was 2.59.

As societies become more affluent, persons per household should fall (note Texas persons per household is slightly higher on these 2000 figures at 2.74 per household – likely due to the higher Hispanic population with larger families).

Conversely – through these  economic downturns – it is likely that household sizes would increase somewhat.

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By David Chaston,

Publisher of interest.co.nz

Thank you for the opportunity to make this submission. This is a companion submission to the one made by Bernard Hickey.

While I do wish to make some points about the cost of consumer borrowing from banks, especially short term borrowing, it is important to put this subject in to a broader perspective.

Over the past ten years, the economic landscape has changed considerably.

Ten years ago, economic growth was +3%
Ten years ago, 40% of mortgage borrowing was on floating rates
Ten years ago, variable mortgage rates were 6.5%
Ten years ago, house prices were $168,000
Ten years ago, it took 55% of median take-home pay to afford a mortgage on a median house.
Ten years ago, bank profits were $1.75 billion before tax.

But, today we are awash in debt, the result of a binge that will probably take at least one generation to pay back – if we started today. We have fallen in love with houses, pretended they are an investment, and we have taken on massive liabilities to satisfy this addiction.
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By Bernard Hickey

I was speaking last week at an Auckland University seminar on the housing market and someone raised the issue of housing affordability back during the previous booms of 1975 and 1987 when interest rates were higher and incomes were lower. (Correcting details for 1987 mortgage payments, adding details on wage inflation)

I get this quite a lot. Baby boomers and those even older say that the youth of today have it much easier than when they were buying homes. They point to the amazing housing boom of 1974 and the 20% interest rates of 1987 and say that people buying today ‘have it lucky’.

I had my doubts about this so we at interest.co.nz did some research on housing affordability now and then. We have gathered data on wages, after tax incomes, house prices and interest rates (from Stats NZ, IRD and the RBNZ) to work out how much the median or average house cost in 1975, 1987 and 2009 as a percentage of a single average after tax pay.

We found it was vastly more affordable to buy in 1975 than in 2009. The gap was vast. Affordability was almost as bad in 1987 as it was at the peak of the boom in 2007, but only for a short period. Here is the detail below.

Way back in 1975 – 39.2% of income

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The Dominion Post is reporting that the government is considering offering interest free loans of up to NZ$10,000 to first home buyers as a way of kick-starting the housing construction industry.

Documents made public under the Official Information Act show interest-free first-home-buyer loans of up to NZ$10,000 were among proposals put up and worked on by private-sector chairs and senior Government officials in the lead-up to the jobs summit.

Others included a housing upgrade plan to fix leaky buildings, interest-free loans for home owners to improve heating and water efficiency; incentives for early retirement and paying employers a subsidy to hold on to apprentices.

Many did not make it into the jobs summit “top 20″ thrashed out after a brainstorming session on February 27 involving public service and private sector bosses and Government ministers.

But many continue to be worked on by ministers, including loans to people to build their first home or renovate their existing one.

What I think

There is a risk with any sort of handout to first home buyers like this that all it does is pump up demand for existing housing and push prices up ahead of buyers. If it was a handout for new construction only that might make some sense. We certainly aren’t building enough new houses at the moment.

My reflexive view is that government handouts to people who should be able to afford to buy something themselves is a bad idea.

Our measures of housing affordability show first home buyers, particularly those with two incomes and no kids, can afford to buy their own home, albeit in the cheaper parts of town and for smaller houses. The real reason buyers have stood back from buying brand new homes are the relatively high construction and land costs, relative to existing houses.

Section prices need to drop. This measure will not help that.

Your view?

The New Zealand Housing Affordability measure from interest.co.nz stalled at slightly worse levels in March, ending an almost unbroken run of improvement over the last year. A small rise in the median house price and an increase in two year mortgage rates combined to make housing less affordable in March from February.

Tax cuts are expected to improve after tax pay in April, but any further rise in house prices or interest rates is likely to confirm the end of a trend of improving affordability since the beginning of 2008.

The REINZ median house price rose to NZ$335,000 in March from NZ$330,000 in February, while the average 2 year mortgage rate rose back to 6.09% from 5.92%. These two factors increased the proportion of a single median income needed to service an 80% mortgage on a median priced house to 55.5% in March from 54.0% in March.

This measure of housing affordability had improved to its best level in 5 years in February because of a sharp fall in interest rates and a 6% fall in the median house price. Affordability hit its worst level of 82.9% in November 2007 when house prices peaked. See all the regional affordability reports here.

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