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.
It is easy to blame foolhardy investors, driven by tax incentives, greedy landowners or a misguided central bank for experimenting with naively low interest rates between 1999 and 2005 for driving house and section prices to unaffordable levels. These groups have all played a part, but changing property taxation and pointing the finger at land owners or the RBNZ will not solve the underlying problem. To anyone willing to look at the issue objectively the root causes of the housing affordability problem are plain to see. They are government-imposed town planning regulations, often dubbed the "smart growth" approach, and the approach by councils to funding infrastructure that imposes huge, upfront costs on developers. The Resource Management Act (RMA) has made a significant contribution to the problem, which is why the government plans to amend it and the "smart growth" approach. The left chart shows the national median existing house and section prices as multiples of the average employee's gross annual incomes (as distinct from the average household income used by many, including in the Demographia study that is quoted below). At the peak of the housing boom in 2007 the average section cost almost as much to buy in income-terms as did the average existing house with section attached in 2001. Sections are at the heart of the affordability issue because an existing house is largely just a section with a depreciating capital asset sitting on top. The right chart shows that since 1999 the national median section price has increased 120% while the official measure of dwelling construction costs increased 60%, which reinforces the role the surge in section prices between 2003 and 2007 has played in making housing unaffordable. Regulatory changes have played a part in driving up building costs (e.g. double glazing, increased engineering requirements) aside from the changes that inevitably followed the leaking building fiasco that is still playing out. * Rodney Dickens is the Managing Director and Chief Research Officer for Strategic Risk Analysis (SRA), which is a boutique economic, industry and property research company. Rodney produces regular free reports on topical issues and on specific property markets. Find out more about SRA here and sign up to SRA's free reports here. Affordable Housing