A lot of information and misinformation has been circulating about housing affordability, so I thought it worth going back into the archives and putting some numbers around the talk. The question is, are houses more or less affordable that they were, say, 15 years ago? The first common measure of housing affordability is to express the cost as the number of years it would take a household earning an average income to buy an average house.
To demonstrate the extreme I have used 1998 when the average national household income was $39,500 and the average house cost $167,500, which is 4.2 times the average household income. In other words, a family would have to work 4 years 10 weeks to buy a house (ignoring tax).
Fifteen years later, in December 2012, the income and house price averages had risen to $67,800 (up 71% over the 15 years) and $385,000 (up 129%), or 5.7 times. So, on that measure houses are more expensive - 18 months more expensive, because house prices have increased at a faster rate than incomes.
The state interventionists claim this to be evidence of a “housing affordability crisis”. While the figures are what they are, the figure do not say houses are unaffordable – they simply say it takes more of the average wage to buy a house than it did 15 years ago.
Looking behind the figures one does not need to look far to see why that is so, and it has nothing to do with a crisis in housing.
Firstly, houses are larger. According to Quotable Value the average size of a house built since 2010 is 205 m2, and this has increased in almost every decade since 1900 - the exceptions being the depression years during the 1930 and 40s when most of the new housing stock would have been part of the then Labour government’s state housing scheme.
Clearly people ARE paying more for houses because they want to live in bigger homes. That people are spending more on housing probably reflects the fact they have more disposable income to do so - because they are spending less on other things like cars and overseas travel which now (in income terms) cost a heck of a lot less than they did say 40 years ago because of advances in technology and fewer state controls.
I personally recall the 1960s when our family saved for years to buy a car. Nowadays cars are almost a disposable item. The money we and previous generations put into overpriced cars, appliances, and travel would have gone into housing had we had the choice.
Probably back then our family may have been paying 30% of our income on housing, and 70% on all the other stuff. Nowadays the very same family would more than likely spend 40% on housing and 60% on the other stuff, because the other stuff is cheaper! That does not make housing less affordable than it was, it simply means we have an extra 10% of our income available and we have decided to spend it on housing.
I personally don’t think houses are unaffordable, for those with a job and a serious commitment to saving. A lot of political nonsense has been stirred up over the issue but when all said and done people are spending more of their income on housing because they are able to, and because they want to.