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Housing affordability myth

Housing affordability myth

The housing market is continuing to take a battering from well intentioned but misinformed lobby groups and political parties concerned about house prices. Facts do not back up their beliefs however.

The call for a solution to house prices in New Zealand has led the Labour Party to oblige by promising to implement a Capital Gains Tax and building 100,000 new homes over 10 years.  Many people see how house prices have risen and on the face of it, the belief that property prices are too high looks reasonable. However by looking at the situation in detail, there isn’t an affordability crises and those calling for “action” may not like the consequences of their call to action.

The most common rational for people who believe property prices are too high is the income to house price ratio.

The income to house price ratio is a crude measure at best and there are sound reasons why it has changed over the past 25 years from around 3 to around 5.5.

One reason is that our houses are bigger than they were 25 years ago and simply cost more. That is a decision that we as a nation have made over the years and there is a cost to this decision. According to QV, the average size new build in the 1980’s was 142sqm, while houses built since 2010 have averaged 205sqm or 44% larger.

Some people use average income rather than household income to calculate the income to house price ratio. This creates a false impression as there are more two income households now than 25 years ago.

The relative and actual cost of many other goods (cars, travel, household appliances) has fallen over the last 25 years, meaning people have more money to spend on housing. While some people have chosen to spend savings on buying a car to travel more or buy a more expensive car, many others have chosen to spend more on housing which has risen the ratio of income to house prices.

One of the more significant reasons for the change in the ratio is due to interest rate changes, something the crude ratio doesn’t take into account. Interest rates in the 1980’s reached 20% which made it very difficult to purchase property. Since interest rates have fallen over the past 25 years we have been able to afford to spend more on property and have done so.

A more accurate model of housing affordability is the Massey University study which takes into account incomes, interest rates and house price changes. This study has shown that house prices are currently 18.4% more affordable than they were in February 1998.

It is unfortunate that the poor use of statistics have fuelled uninformed believes about house prices in New Zealand. Worse still is that this has led political parties to develop solutions to problems that don’t actually exist. Labours plan to build 100,000 new houses over 10 years will be wonderful for those lucky enough to get one of them, but their luck will be paid for by everyone’s taxes. Worse still is that it may very well lower the value of home owners properties. Will they thank Labour for that?

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