The 15th Annual Demographia Housing Affordability Survey: 2019 was recently released. The survey contains disturbing reading for Kiwis because it reveals the extent of the housing affordability issue facing this country.
The Survey ranks housing affordability using a “median multiple” approach. This is calculated as the average house price divided by average household income to derive a Price to Income Ratio (PIR). The ratio is used to compare housing affordability in 309 cities, including 91 major metropolitan areas with more than 1 million people, across 8 countries - New Zealand, Australia, Canada, USA, Hong Kong, Ireland and Great Britain. The survey includes 3 mega cities of London, New York and Los Angeles.
Demographia’s median multiple approach, is widely endorsed by organizations such as the OECD, the international Monetary Fund and The Economist magazine.
The Survey can be found https://consilium.org.au/consilium-2019/wp-content/uploads/2019/08/Demographia-Bertaud.pdf
Demographia rank housing affordability using the following Table:
Some of the key findings in the Survey are that:
29 of the 91 major metropolitan areas were rated severely unaffordable including the Auckland market, (the only New Zealand market with more than 1 million people).
The 10 least affordable major markets in order of unaffordability were:
Tauranga/ Western Bay of Plenty had a PIR of 9.1, placing it even more unaffordable than Auckland and making it the 8th least affordable metropolitan area out of 309 surveyed, (Auckland was in 9th place in this expanded group of 309 areas).
At a country level, New Zealand was the second least affordable market with an overall PIR of 6.5 behind Hong Kong at 20.9. Australia was the third least affordable market at 5.7.
Auckland’s PIR worsened from 5.4 in 2004 to 9.0 in 2018.
Demographia note that a high PIR is not in itself a diagnosis of a housing affordability issue, it is simply an indicator that there is a problem that requires addressing.
Demographia say “ Historically the Median Multiple has been remarkably similar amongst six surveyed nations, with median house prices from 2.0 to 3.0 times median income. (Australia, Canada, Ireland, New Zealand, United Kingdom and the United States). Housing affordability remained generally within this range until the late 1980s or late 1990s in each of these nations”. However “In recent decades house prices have escalated far above household incomes in many parts of the world”.
Demographia attribute much of the affordability problem to restrictive urban containment policies. These policies “… do not permit the market for land to operate on the urban fringe. Typically urban containment includes urban containment boundaries and related variations such as urban growth boundaries, green belts, urban service districts, “growth areas” and other strategies that substantially reduce the amount of land available for house building”.
Don’t cities with high median house prices simply reflect that they are desirable places to live and work?
Well yes, but the authors contend that households and families are paying too high a price for utopian living! They say:
“We know that unaffordable housing causes a lot of hardship for those that do not yet own their own home, in particular the youngest ones. But abnormally inflated housing prices have also a negative impact on the entire economy including on the households who already own their home and who might rejoice that their real estate assets are increasing much faster than general inflation”.
They reason that “High housing prices misallocate resources toward real estate at the expense of the rest of the economy. This misallocation could eventually slow down economic growth and cause a housing bubble to burst, freezing investments in the entire economy. Japan has not yet fully recovered from its asset bubble created in the 1980s.”
“High housing prices create an immediate hardship to low and medium income families, but in the long term every household - rich or poor – would eventually become poorer because the imbalance in resource allocation will decrease investments and the productivity of the entire country”.
The solution to unaffordable housing does not consist in inventing clever regulatory gimmicks or in designing massive subsidies to be paid by the taxpayer or a few wealthy households. The answer will always consist of increasing the supply of land and floor space and removing any land and floor regulatory straitjacket”
What might happen next?
The three main reasons why housing booms can occur are demand, supply and the cost of money. In Auckland’s case all three factors have been strongly supportive of house price inflation in recent years. However those factors may now be turning adverse, due to, for example:
Reduced demand from declining inwards migration.
Increased supply pipeline evidenced by an increase in building consents including potentially from KiwiBuild.
Potential for higher interest rates.
In addition to these factors, the ban on foreign buyers, the extension of the bright line test and proposed measures to ring-fence tax losses on rental properties may all contribute to house price deflation through a reduction in demand for existing residential property.
At 31 December 2018, house prices in Sydney and Melbourne have retreated by 11.1% and 7.2% respectively from their 2017 peaks. Many commentators have expressed concern that a similar slide may occur in New Zealand.
How can you benefit if the housing price bubble has run out of steam?
If you are an existing owner/investor, consider downsizing your exposure whilst prices are at elevated levels. Deploy a greater proportion of your wealth into assets with better growth prospects, higher cash flow and/or lower risk.
However the alternative of renting whilst it should not be ruled out, also has risks, for example lack of security of tenure.
If you are a new investor perhaps looking to start a family, or simply wanting to get a foot on the ladder you can reduce your exposure to property related risk by:
Buying wisely and not over-paying.
Investing in suburbs/streets with greater upside potential.
Avoiding over-capitalising for the area.
Lengthening the re-pricing term of your mortgage.
Whether your are any existing or prospective owner and want to discuss your housing situation and get advice on your options please give me a call – my initial consultation is free!