By Deborah Carlyon
Deborah is a Certified Financial Planner (CFPCM) and a member of the Institute of Financial Advisers (IFA). She is an Authorised Financial Adviser (AFA). Deborah has featured on the TV One programme "Money Doctor" and appeared dispensing advice on the last "Fair Go Money Special." She is a principal of independant advisory company Stuart + Carlyon.
While current homeowners might be happy with their high house values, unaffordability is not good news for first-home buyers, nor for those selling their home. Even those upgrading further up the property ladder need a flourishing first-home buyer market to underpin activity on the bottom rung. And as one report points out, economies suffer when housing booms bust – as painfully demonstrated by events in the United States and Ireland over the past four years.
So what exactly does "unaffordable" mean? The eighth Annual Demographia International Housing Affordability Survey released earlier this year, covers 325 metropolitan markets across seven countries – Australia, Canada, China (Hong Kong), Ireland, New Zealand, the UK and the US. It uses a straightforward measure of median house prices compared to median household incomes, or in other words, what a couple earn jointly before tax.
From World War II up to the 1990s, a median multiple of two to three times prevailed in the surveyed countries, with three being regarded as the outer bound of affordability. On this measure, New Zealand house prices are rated as "severely unaffordable" at over five. Wellington is at 5.1 times with a median price of $370,000 and median income of $72,000, while Auckland is the highest at 6.4 with a median price of $464,000 and median income of $72,500. Smaller centres such as Napier and Hastings have lower house prices. The median there is $265,300 but household incomes are also lower at $55,200 making the score only one notch better at 4.8 – still termed "seriously unaffordable".
We can console ourselves at being better off than Hong Kong on 12.6 at the top of the table – or the bottom depending on your perspective. Compare that with 24 cities in the US and one in Ireland that are actually at the affordable score of fewer than three. Of course, the US city of New York is higher at 6.2 but even that is still more affordable than Auckland!
This international survey cites restrictive land supply as the common factor in pushing house prices up and affordability down in all affected cities.
And just before Christmas, a draft report on housing affordability was released by the Productivity Commission in New Zealand. It too cites planning constraints as creating land scarcity, limiting housing choice and increasing prices. Compliance costs and the consenting process are said to add to the problem. The report was commissioned by the government and will shortly be finalised.
The upshot: expect pressure on local councils to revisit their urban planning boundaries. Any increase in land supply usually results in lower prices. With average Auckland section prices around $300,000, land has become a costly 40 to 60 percent of a property’s overall price, so a correction is certainly overdue. These reports don’t spell gloom but they do indicate an ongoing shift in attitudes to housing.
So what could this potential environment mean for the average Kiwi? If you are ready to upgrade your home, should you relocate or renovate? First you must consider whether asking prices are reasonable, then take a look at the land valuation compared to the building component. You should also consider transaction fees and moving costs. For your current home, if your equity has increased from loan repayments and higher land values, renovating cleverly should achieve upgraded living plus construction improvements that may prove more tangible than land values.
If you are a first home buyer, rather than stretching yourself with a big mortgage loan, consider buying a cheaper home, then improve the house as your budget allows. If land prices do fall, but you have enhanced the building itself, you will stand a better chance of preserving your overall home valuation.
