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What housing crisis?

There has been a high level of publicity regarding housing affordability in New Zealand, with a general consensus that we are in crisis and that something needs to be done. However a look at the facts does not bear this out.

A reliable survey into housing affordability has been carried out by Massey Universities Property Department since 1989. The Massey survey compares mortgage interest rates, incomes and property prices to gauge changes in affordability.

In their latest survey they produced a chart showing their affordability index for Auckland, Canterbury and New Zealand as a whole. They noted that “affordability in 2013 is still well below the previous peaks in 1989, 1997 and 2008”.

Auckland is the main target of accusations of a market gone mad. While Auckland is certainly leading the way in house price increases, Auckland prices are only 2% less affordable than 2002, the beginning of the last boom period. Auckland house prices are currently 31% more affordable than they were at the peak of the market in December 2007.

Most areas around New Zealand have had static house prices over the past few years, although some have started increasing recently. New Zealand house prices are 39% more affordable than they were at the peak of the market in December 2007.

The main cause of relatively affordable property in New Zealand is the low level of mortgage interest rates. Floating rates have remained around 6% for four years now. Fixed rates have increased over the last few months and this may start to have an affect on housing affordability.

The Massey study notes that “in the current environment (wage growth 3% per annum) the reality is both house prices and interest rates are likely to be increasing faster than wages”.

The low interest rate environment may also be leading many rental property owners into a false sense of security.

To illustrate, someone buying an average rental in 2007 would have paid $345,000 and received a rent of $380pw. With interest rates at 10.4%, this property would have required a top up of nearly $10,000 a year. However that property would break even at today’s interest rates which is a big boost for the owner even with increases in other costs such as insurance and rates.

Given the improved cashflow, this theoretical owner may be less inclined to raise their rental prices. Over the last six years rents have actually increased by $60pw or an average annual increase of $10pw.

The shock may come next year when mortgage interest rates are likely to increase. The false sense of security that low mortgage rates provide may evaporate quickly.

Faced with a rapid increase in rental prices, tenants often look for cheaper accommodation, move back to Mum and Dad or move in with others to compensate.

This tends to reduce rental property owners ability to increase rents at the same rate as mortgage costs.  

It is much easier to raise rental prices slowly and consistently as large increases at once, even if justifiable, are not welcomed by tenants.

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