International survey rates NZ city housing severely unaffordable

By NZPA

Monday 23rd January 2006

Housing costs in this country's three main metropolitan areas are rated "severely unaffordable" in a new international report.

The Demographia survey said recent high housing price rises in the six countries covered in the report were unprecedented and could threaten prosperous economies.

In the longer term, less housing affordability was likely to lead to less home ownership, the survey said.

And it cast doubt on the power of the Reserve Bank in this country to restrain house prices by raising interest rates.

The authors blamed the sharp rises in house prices on "excessive land use regulation that strangles housing markets", a controversial argument in the fierce debate over land use planning.

The Demographia International Housing Affordability Survey: 2006 is co-written by Christchurch commercial property developer and investor Hugh Pavletich and prominent United States public policy consultant Wendell Cox.

Along with the three New Zealand markets covered, Australia's main cities, except Canberra and Darwin, are rated severely unaffordable, as are all British cities, apart from Glasgow.

The position is less clear cut in the US which, while having the metropolitan areas with the most unaffordable housing, also has 21 markets rated affordable.

In Canada only Vancouver is rated severely unaffordable, while four markets are moderately unaffordable and three are affordable. All 24 markets rated affordable are in North America.

The survey using data from September, 2005 compares the median household income in an area to the median house price. For a market to be rated affordable the median price must be 3.0 or less times the median income.

Markets where the median multiple is between 3.1 and 4.0 are rated moderately unaffordable, those with a multiple between 4.1 and 5.0 seriously unaffordable and those above 5.1 severely unaffordable.

Auckland with a median multiple of 6.6 - based on a median income of $57,800 and median price of $383,300 - shares a spot for 15th most unaffordable of the 100 markets surveyed.

Christchurch with a 5.9 multiple - income $46,500, price $275,000 - is 29th, and Wellington with 5.2 - income $57,400 and price $296,500 - is 39th.

The least affordable is Los Angeles and Orange County with an 11.2 multiple, while the most affordable are Rochester and Buffalo, both in New York state, with 2.2 multiples.

Sydney is 7th with 8.5, just ahead of the New York metropolitan area with 7.9, London is 11th with 6.9, Vancouver - the least affordable of the Canadian markets - with 6.6 is ranked 15th alongside Auckland and Hobart, while Dublin with a multiple of 6.0 is 26th.

Among the 21 US markets rated affordable are the large, fast-growing metropolitan areas of Atlanta, Dallas-Fort Worth and Houston.

Compared to the income/price ratios now, in recent decades the multiple was below 3.0 in most markets, the survey said.

"However, this historic relationship has been broken, as unprecedented house price escalation has occurred relative to incomes in some markets."

That was a matter for concern as home ownership had played an important role in democratising prosperity in the nations covered in the survey.

"Widespread home equity, together with the related quality of life, neighbourhood, community and social cohesion benefits make home ownership a pillar of a sustainable affluent economy.

"These benefits are threatened by the high housing prices that are likely to reduce home ownership and household wealth creating capacity. A nation with more renters is likely to be both less prosperous and less cohesive."

The run-up in housing prices had caused business writers to evaluate the market as they might a stock or shares market.

"However this characterisation is inappropriate. Housing prices that escalate to the point that millions of households are denied home ownership is anything but good news for the future of an economy," the survey said.

The authors discounted macroeconomic factors, such as low interest rates, as the reason for the house price increase, saying that if that were a factor similar price escalation would have happened in all markets.

Inordinately escalating house prices in some markets may be immune to monetary interventions by central banks, they said.

"For example, the Reserve Bank of New Zealand has increased short-term interest rates to the highest level in the industrialised world, at least partially to restrain rising house prices.

"Yet, the interest rate hikes have proven to be impotent with respect to restraining house prices, which have continued to escalate well ahead of incomes," they said.

A growing body of research indicated the proximate cause of house price escalation in unaffordable markets was government policies that created land scarcity.

Such policies which prohibited housing on large swathes of land were found throughout the markets rated severely unaffordable, while much lighter land regulation was typical of the affordable markets.

The survey said a structural shift may be under way that would permanently increase the price of housing relative to incomes and other consumer goods and services.

"It seems likely that such a shift would lead to lower levels of economic growth at the regional, if not the national level. In the longer term, less housing affordability is likely to lead to less home ownership.

"This is already evident in New Zealand, where high housing prices are expected to reduce home ownership levels to 63% by 2011, down from a peak of 74% in 1991," the survey said.

When it came to the size of new houses, Australia and the US led with more than 200sq m, New Zealand and Canada had 175sq m, while Ireland and Britain trailed badly with 88sq m and 76sq m respectively.

When it came to lot sizes this country was similar to the US and Australia where new detached houses were built at a density of 6.6 and 13.3 per hectare. That compared to Britain where new houses were built at an average of 40 per hectare and Dublin, where zoning called for 49 houses per hectare.

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