Is housing more affordable than it used to be?

When debating housing issues, there a tendency to cherry pick numbers in order to support a particular position or worldview. Politicians and those with a vested interest in market outcomes do it shamelessly, most economists try not to engage in it (with a couple of glaring exceptions), and housing activist groups have developed it into an art form.

Mostly, it’s harmless – except when it influences Government policy and we devote billions of tax payer dollars to building thousands of homes that we probably don’t need, or when we introduce measures to solve a first home buyers crisis that doesn’t actually exist.

One area where such cherry picking is rife is around the relative cost of housing during different periods of our recent history. On one side of the debate are those who claim that housing is more expensive now than it has ever been – evidenced, they say, by its actual cost which, in a city like Auckland, is over eight times the average income.

On the other side are those who say that a full picture emerges only when interest rates, household income and inflation are factored into the equation. On that basis, housing is now much more affordable than it was a generation ago.

So who’s right?

If you ask your grandparents, they’ll probably tell you that they bought their first house in the 1960s for less than $10,000. While this may sound unbelievable, the data says it’s right. In 1966 (a year I’ve chosen because it was the first year in which the New Zealand Census first measured household income), the average house price was a bargain at $8,400.

Sixty years later, in 2017, the median house price had risen to an astronomical $526,000. So case closed, our housing market is a basket case. Surely the market has failed?

Not so fast. Any high school economics student will tell you that, because of the corrosive effect of inflation, a dollar in 1966 is not worth the same as a dollar today. So these figures need to be adjusted to reflect todays reality to give a meaningful comparison.

In 1966 the average household income was the inflation adjusted equivalent of around $51,000 today, and the median NZ house price was the equivalent of about $159,000 today. The average floating mortgage interest rate, at the time, was 6.27 percent. So if we assume an average mortgage was 80 percent of the value of a house, the annual interest and principal cost of a 30 year mortgage would have been about $9,420 in today’s dollars – or about 19 percent of household outgoings.

Fast forward 10 years to 1976 and we were smack bang in the middle of New Zealand’s first modern property boom. Median house prices had increased to the equivalent of around $202,000 (in today’s dollars) and floating interest rates had jumped to 10.22 percent. That meant that it was now taking the equivalent of around $17,300 today, or about 30 percent of household income, to service a 30 year principal and interest mortgage – even though the median household income had increased to around $58,000 in today’s dollars.

At this point your eyes are probably glazing over from all the numbers.

So now that we’ve established the variables that we’re using, let’s simplify things a bit. By 1986 floating mortgage interest rates had increased to almost 20 percent, which meant that the cost of servicing a mortgage was now 52 percent of the median household income – the highest level it has reached in the modern era.

By 2001 the cost of servicing a mortgage on the median New Zealand house price had dropped back to 34 percent of the median household income. It currently sits slightly above that, at 37 percent. This is despite the fact that median house prices have increased dramatically since 1986 and houses now cost almost three times what they did, back then, in inflation adjusted terms.

So how can this be true? How can it actually cost less to own a home, now, than it did 33 years ago?

The answer is simple. While house prices have been going up, interest rates have been coming down. And that, coupled with a steady increase in wages and salaries, has meant that the latter has more than offset the former.

And keep in mind that I’ve been quoting floating mortgage interest rates when, by fixing their interest rate todays purchaser of a median priced Kiwi home could get the cost down, even further, to well below 30 percent of the median household income – or the equivalent of what a home buyer was last devoting to mortgage costs in 1976!

So next time someone tells you that today’s houses are too expensive and that housing costs are out of control, ask them what time period they’re comparing them to. Because the cost of owning a home, right now, is as good as it has been at any time since the mid-1970s.

- Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for OneRoof.co.nz. Email him at [email protected]