The latest Demographia survey of World housing markets (see it here) shows that Auckland’s housing market is the 6th most unaffordable in the world. The average ratio of house prices to incomes in Auckland is 6.4, only marginally under London, and higher than in New York. New Zealand has no affordable housing markets, and not even any ‘moderately unaffordable’ markets by their definitions.
The state of NZ’s housing market is so bad that it even deserves a special mention in their report. I have included the main points below in quotes.
The report states that :
“The deterioration of housing affordability in many of the markets rated in the Demographia International Housing Affordability Survey is unprecedented based upon the available historical data. Australia and New Zealand, for example, which had legendary housing affordability from after World War II to the 1980s and 1990s have seen house prices reach levels that are double to nearly triple their historic ratio to household incomes. The economic evidence indicates that this trend is strongly related to the implementation of more restrictive land use regulations, especially measures that create scarcity in land for housing thus drive up prices.”
“New Zealand: Housing in New Zealand was severely unaffordable, with a Median Multiple of 5.4, nearly three-quarters above the historic affordability norm of 3.0. Housing had been affordable in the early 1990s, with a Median Multiple of under 3.0.
Auckland was the least affordable market, with a Median Multiple of 6.4. Along with Auckland, Christchurch (6.3), Tauranga-Western Bay of Plenty (5.9), Dunedin (5.2) and Wellington(5.1) were severely unaffordable. Three New Zealand markets were seriously unaffordable, Palmerston North (4.1), Napier-Hastings (4.8) and Hamilton (4.8). New Zealand had no affordable markets and no moderately unaffordable markets”
Why is New Zealand Real Estate so expensive?
I don’t believe that restrictive land policies are to blame for the massive increase in unaffordability, as the report states. This is an over-simplification. Do you think prices would have risen if the banks were unable to lend at such high multiples of a person’s income? Of course not. The real truth is that inflation has been under-reported in New Zealand, and there has been no restriction or regulation on how much banks can lend out and under what criterea, it’s completely up to the banks themselves.
If New Zealand had capital controls on lending for housing (for example banks can only lend at 3 times household income), then house prices could not have risen to the level that they are. Also the government needs to change the way they measure inflation to include housing credit effects. In the 1980′s and 1990′s, house prices tracked inflation very closely. In the latest boom, there was a massive divergence with inflation being reported as under 5% while houses went up by 20% a year at the peak.
The real culrpit here is unregulated controls on housing credit, fuelled by banks who had access to cheap money from offshore lending. Add into the mix, that the current way of measuring inflation through the cost of a basket of goods (i.e. the CPI index) does not take into account credit expansion due to housing speculation. It is a shame that NZ faces this problem, as it will hold it back economically for years to come.
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