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.
8 comments:
You do not say what is the average increase in house size compared with affordability - I suspect this will indicate it is a minor factor in affordability. The major factors are land prices and construction costs, which are primarily driven by council land use and building regulations.
Land prices and council required infrastructure costs are a significant part of the housing cost package. So too is building cost, which is largely determined by the size of ones house. E.g. building a 205m2 house would cost about $310k, compared to $210k for 140m2. In other words, over time the price used in the housing index has been inflated by $100k merely because people are building bigger homes. My contention is they are doing so because they CAN afford bigger homes, care of the fact that the other living costs have fallen (relatively to the hours of work required to pay for them).
Not adjusting for house size is a little like measuring the change in car prices by taking the cost of a Mini one year against the cost of a Rolls Royce the next.A reliable index of house prices would adjust for "quality" issues like house size and the range and quality of the fittings.
Frank, you are a learned fellow and you are right, just not completely right. If you were a student of the philosophy of statistics and not just a practitioner of the mathematics of statistics, you might be more aware of the distortions statistics can create. But take comfort, you are not alone, the weakness of the media today is highlighting bites of information, leaving a false impression that such bites are the answer.
The facts are, that because housing prices have outstripped the median income of young new housing buyers for some time and because other market factors have eliminated added savings, the market volume in standalone new first housing has dropped away leaving only the more financial older aged group on the new house market. That group can afford (and desire)larger houses so larger houses then become the new industry norm. The point you missed Frank was that no statistics exist for intending buyers that are squeezed out of the market.
Kiwiwit said that that land cost and construction cost has driven housing cost upwards primarily by land use and building regulations.
This is undoubtedly the Primary driver. Early first new houses were simple houses for couples who married around the age of 21 and started a family.
Today couples marry around the age of 31 and start a family, their expectations are more sophisticated.
The scrapping of the State Advances child capitalisation, the pill, increased personal income and the transition to purchase at a later age group, have pushed out specification demand, which has legitimately had an upward effect on statistically captured as built construction prices. The younger generation, that was the teen bride new home buyer, has moved to become the liberated renter between 20 and 30 yrs and doesnt figure in the construction statistics, they only list as an end user for larger multi-apartment construction.
Parallel with these trends, the politics of the day is faithfully following the UN Agenda 21 socialist dictates which are designed to squeeze the population off freehold land into politically controlled city rental accommodation. To that end we have seen the widespread adoption of the near useless RMA applied to residential development. I ask apart from the protection applied over Commercial zoned land and utility infrastructure, what use is the RMA over residential property use. NOT much, but it is the cash cow of councils and serves to be the political rod of policy makers.
Long before this country was settled with civilisation by Scottish immigrants in the South Island we have survived without poli-synthesised insulation, for 4000 years we managed without double glazing and frame wrap. Since before roman times we have enjoyed the utility of fired clay roof tiles without the need for fully air-sealed mono-membranes under roofing. These materials are all improvements but they are only answers to the problem of excessive controls in the practice of construction. The knee jerk reactions to earthquake and weather-tightness insurance issues is a plethora of building regulations that does much to protect the Insurers and little to advantage the people. The result is that the people are pushed by compliance price escalation, away from being freehold owners and therefore default to be renters of property, most often of an older non conforming construction.
The RMA on subdivision is even worse, several reputable developers having left NZ to operate in a more sane environment.
Politically agenda driven cliques including; The greens advocacy, The maori advocacy, The naturalists, The greenbelt conservatores, The anti development nutters and in the spirit of Shadbolt, The anti everything-ists, have captured the town planning function and the RMA function to the point of stagnation where nothing functions.
The cost is not only revealed in distortions of price, but a huge cost of lost opportunity is manifest. Is it any wonder our best and brightest flee to Australia.
So what if new homes are larger than they used to be?
That is nil reason whatsoever for the median price of the entire existing housing stock, including many small and dilapidated dwellings, to be around $200,000 more expensive than they should be.
There happens to be 150 or more cities in the USA that score a consistent median multiple of around 3 in the annual Demographia Reports. Looking at Real Estate sites for these cities, one finds new McMansions selling for US $130,000 and old fixer-upper homes for $40,000. The cost of actually building superior homes does not need to rise relative to incomes, any more than the real cost of cars or TV's needs to rise.
All the distortion in inflated-price cities (as in NZ) is in the LAND, including sunk costs of fees and regulations and delays. This results in new McMansions being $200,000 or so more expensive than they should be, AND old fixer-upper homes being $200,000 or so more expensive than they should be. This obviously cuts the bottom few rungs off the home ownership ladder.
The focus on new homes is a red herring. Lower income first home buyers need the old fixer-upper homes to be affordable again. If you disaggregate the cost of land from everything else, you will see that lowering the cost of land by ending the land rationing racket at the urban fringe, would achieve this.
Undistorted markets have a smooth "land rent curve" from rural areas into the urban fringe area and up to the urban centre. Markets with a "planning"-enforced racket in land banking at the fringe, have what the LSE's expert urban economists call a "discontinuity" in the land rent curve. As numerous studies have shown, including in NZ, the price of land immediately inside a growth boundary is around 20 times as high as the rural land prices further out. This results in land prices throughout the entire city being around 20 times higher than they should be - and this gets worse the longer the racket continues.
The UK's average intensity of new developments has risen to around 20 units per acre, yet the price of this 0.05 acres of land is about double the price of a whole acre in a US median-multiple-3 city. In NZ, the price of our typical 0.1 acre of land per new house (the house has grown and the section shrunk - look at Churton Park) is about the the same price as the whole acre in the US city. So the UK is about 4 times as bad as us - but we will track their experience if we do not reform the planning-enabled racket.
The UK is about 13% urbanised and we are about 0.8% urbanised. What a pack of numbnuts we are to let the Eco-Taleban do this to us. They are the "Baptists" to the "Bootleggers" of "Big Property". Of course even CBD property investors gain massive capital gains when fringe growth is constrained, because as I said, the price of land is forced up throughout the entire city. The smart big property investors around the world, the Rockefellers, George Soros, et al, are HUGE supporters of "Agenda 21" and Ecological activist groups. No self-interest to see there, move along, please.
Phil Hayward, Lower Hutt
Regulations has a huge amount to do with it. We subdivided our property in Christchurch 3 years ago and we worked out that $80,000 (without accounting for the massive loss of time) of what we spent went to "Council Contributions", building regulations and general council palaver. A complete nightmare and this for a $350,000 house. The council even wanted to know the slip resistancy grading of the carpet on the stairs!! And then someone is suprised at "high" prices....That's what it costs buddy.
Frank ... regrettably you are well wide of the mark. Building affordable housing today is a very ho hum formulaic business... and has been since the time of the Levitts.
You should have known by now that when the Levitts created the modern production housing industry, new fringe starter stock was put in place for $US100 per square metres ALL UP. Today on the fringes of the affordable North American markets it is in the order of $US600 through $US700 per square metre ALL UP.
In contrast here in New Zealand it has bubbled out to north of $NZ2,500 per square metre ALL UP on the fringes of Christchurch and $NZ3,500 per square metres ALL UP PLUS on the fringes of Auckland.
New fringe starter stock should be going in here for about $NZ1,000 per square metre ALL UP. Thats how "out of whack" the current productivity / pricing performance of new housing is in New Zealand.
The Definition of an affordable housing market within this years Demographia Surbey and on the front page of my archival website www.PerformanceUrbanPlanning.org should be easy to understand - particularly for a bright guy like you !
Bear in mind Frank we are simply aiming to RESTORE affordable housing in New Zealand not INVENTING it !
its a nonsense issue - because the problems and solutions are so simple. Check out Section 4 of Cantabrians Unite www.cantabriansunite.co.org CHRISTCHURCH: THE WAY FORWARD for the simple solutions.
Hugh Pavletich
Co author - Annual Demographia International Housing Affordability Survey
Christchurch
In reply to Anonymous, February 27, 2013 at 11:59 PM
I agree totally. The cost of regulation is a significant factor in the cost of new housing. In previous posts I have stated the view that in addition to the actual dollar costs is the significant holding cost delays. Reducing the time taken to obtain subdivision consent would significantly reduce land prices in my view.
Hi Hugh. Thanks for the post. The figures I have used are from the Ministry of Business, Innovation & Employment website (http://www.dbh.govt.nz/quick-calculator)
The main point of my blog was not so much to do with the actual cost of building, but more to do with the fact that houses being built today are on average bigger than they have ever been previously - and bigger means they will cost more.
The second point was I was expressing the view that people are building bigger homes because they have more discretionary income available - due to other big-ticket household goods (like cars) becoming cheaper relative to the hours of work needed to buy them.
I have posted previously about my views regarding the RMA (and councils) inflating land prices.
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