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.
Tags: Auckland House Prices, Housing Affordability, New Zealand House Prices
You raise some good points, if housing is holding up now in the midst of all this gloom and doom re Europe, what will it do when all of that is over?
Auckland is a very desirable city and so it will continue to attract immigration, both internally and from overseas. As population growth is a key driver of the Property Cycle (as per the book “Grow Rich with the Property Cycle” by Kieran Trass). So population growth in Auckland will continue to put a floor under prices. Although the effect right now is dampened from people moving to Australia for sure, and there are new houses being built and people subdividing still.
I guess one of the things that’s helping it stay up is lower interest rates, but perhaps by the time they start raising them again it will be because inflation (and therefore house price rises) is running away again, so they are forced to raise rates. By which time, if people have deleveraged, then they won’t be entirely as bad off as if rates rose now.
So the best case scenario for home owners and property investors is rates staying low longer than they should. I still think that to get a genuine property boom again we are going to need affordibility to improve, as there is a limit to how much people can afford. So unless wages rise dramatically, house prices are constrained for the time being. So really we still need to get affordability (through wage inflation) to improve, and or deleveraging of the home-owner, for prices to be able to go up significantly.
How much do you think the “desire” factor holds up housing in NZ, i.e. for a lot of people its a hugely desirable place to live?
A lot of people are heading to Oz but there is also a lot of migration and Auckland is the biggest benefactor of any migration. I think auckland is now getting up to the standards of some of those large overseas cities but with the advantage of it being still NZ and having all those quality of life benefits.
London will always be an expensive place to live, as will New York as will Sydney, Vancouver etc etc, this is what people are attracted to and will continue to be attracted to. Auckland is just becoming one of those large international cities that will continue to thrive and improve and keep attracting people. More people, more services required, more jobs and so it goes on.
If the prices are holding up as they are in the midst of world economic gloom then what will we see when Europe comes out of recession and the US gets going again. Fortunately as a food producing nation we will always have demand for our exports, which is why the Chinese are after all our farms, therefore securing their populations future food sources.
All these measures, do they take into account that its the norm now to have 2 incomes when in the 70′s every mum was a stay at home mum? If we now have 2 income earners in every family then people will continue to be able to afford bigger mortgages.
I reckon you are right re inflation though as in the last 7 years prices on a lot things have doubled whihc is say 15% inflation per year. Supermarket prices are through the roof, we get screwed on our own product as all the quality meats go overseas, and we pay the international prices for the left overs. That really annoys me. Like the UK i dont think we should have GST on food and drink. Tax something else instead.
I guess ome of the other NZ locations are propped up by the older richer NZ’ers moving into retirement and settling in quieter locations therefore creating demand elsewhere by moving out of Auckland??