House values outstrip incomes

This Issue This is a part of the Changing face of New Zealand feature

By - , Build 158

Using World Bank measures, our housing is unaffordable to severely unaffordable in urban areas. With household incomes rising more slowly than house values, this situation looks unlikely to change any time soon.

Figure 2: Geographic indication of housing affordability levels, using the multiple median (see Table 1).
Figure 1: Median household income by location.

RISING HOUSE PRICES have pushed home-ownership out of the reach of many low to middle-income New Zealanders. At the same time, the Reserve Bank has brought in home lending restrictions, limiting loans to borrowers with less than a 20% deposit.

Increases 20% and over

Some territorial authorities (TAs) in New Zealand have experienced growth in house values in excess of 20% over the last 12 months. Areas such as Queenstown-Lakes, Waikato and Western Bay of Plenty have experienced particularly strong increases in house values recently.

Household incomes are not rising at the same rate as house values. The national median household income has risen by 4.3% per annum over the last 5 years. In some regions, such as Northland, Waikato, Gisborne and Canterbury, household income has risen by slightly more than the average. However, house values are increasing far more rapidly than household incomes for much of the country (see Figure 1).

Figure 1: Median household income by location.

World Bank affordability measure

The World Bank recommends a measure of housing affordability called the median multiple. This measure is the ratio of median house prices to median gross annual household income. Table 1 shows the affordability rating by median multiple as defined by the World Bank.

Source: 2013 New Zealand Census.

Table 1
Median multiple rating
RATINGMEDIAN MULTIPLE
Affordable 3 and under
Moderately unaffordable 3.1 to 4
Seriously unaffordable 4.1 to 5
Severely unaffordable 5.1 and over

In New Zealand, the most unaffordable areas are Auckland and Queenstown. Auckland has a median multiple of 13.1 (see Figure 2). Queenstown is even more unaffordable, with a median multiple of 13.4. Given that the World Bank defines anything over 5 as severely unaffordable, this data illustrates the problems currently facing these markets.

Housing affordability issues are not restricted to just those areas with particularly high house values. Using Lower Hutt City as an example, house values now exceed $460,000, compared to Auckland where house values have recently passed $1 million. In Lower Hutt City, the median multiple is currently 5.8, which would also be classed as severely unaffordable.

Figure 2: Geographic indication of housing affordability levels, using the multiple median (see Table 1).

No bright horizon

Given that house values are rising at a faster rate than household incomes, this picture is only likely to get worse, particularly for the already unaffordable areas. This places increased strain on mortgage holders, who are not only having to put down sizeable deposits to secure a housing loan but then pay off large loans.

This is likely to have an impact on the ability of these homeowners to undertake maintenance of their homes. As the amount that a household needs to service their mortgage increases, the amount of their wages or salary left over to undertake maintenance decreases. Flowing on from this, we are likely to see homes of lower quality due to use of cheaper materials. These will require more maintenance and be less fit for purpose, despite the increasing values.

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Figure 2: Geographic indication of housing affordability levels, using the multiple median (see Table 1).
Figure 1: Median household income by location.

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