Why do cities become unaffordable?
Houses in Palmerston North are more expensive than Miami – one example of NZ’s unaffordable housing woes
The value of an owner-occupied home is a source of pride to many NZ families. This has meant the last few decades of NZ house price increases haven’t always been seen as an issue, as those that already own properties feel wealthier as a result of their home increasing in value. However, this has led to a major difference in housing affordability between NZ and most of the rest of the developed world. For instance: where do you think has more expensive housing:
- Palmerston North, in the region of mighty Manawatu, with a population of 88,000? Or
- Miami, population six million?
If you chose Palmerston North, you’d be right! This is among other interesting conclusions you can find in the 2020 edition of Demographia’s housing price study.
Background – how did they figure this out?
To determine affordability, the researchers studied house prices relative to incomes in 309 cities across eight countries. By dividing the median (middle) house price in an area by the area’s median pre-tax household income they were able to calculate affordability as a ratio. The lower the number, the more affordable the housing. Of course, that doesn’t factor-in differences between countries with things like mortgage interest rates or the taxes on household income, but the researcher’s methods still provide a clear-cut way to compare locations.
(Interestingly, with the example of Miami versus Palmerston North the actual price of the median home was still higher in Palmerston North, even before including a ratio to account for household income!)
This year’s study was released just before Covid-19 became a global event. The impacts of the virus and lockdowns etc on housing markets remains to be seen – though most commentators are still predicting a drop in NZ housing prices due to largescale job losses and small business failures. Many have suggested that this may now take effect in 2021 as we have “kicked the can down the road” with various subsidies and the mortgage repayment holiday.
Before we take a look at why cities become unaffordable, let’s explore how NZ compares internationally.
How does NZ compare?
Expensive! – NZ has some of the globe’s least affordable cities.
- All eight of our main housing markets included in the study are classed as “severely unaffordable” – NZ is the only country with all centres falling into that category.
- NZ averages a ratio of 7.0, that means that the average NZ house will cost the usual NZ household seven years of pre-tax income. This is the highest ratio in any of the countries studied. Most other nations were no-where near us: with average ratios of 3.6 in the US, 3.9 in Canada, 4.5 in the UK, and even pricey Australia averaging 6.0.
How does your town stack up?
You might also be interested to know that:
- Christchurch’s ratio of 5.4 is more expensive than Chicago at 3.5 or Calgary, Canada at 3.9
- Palmerston North’s ratio is 6.0, more expensive than Miami at 5.4
- Wellington is 6.8, pricier than Singapore at 4.6
- Dunedin (6.9) significantly out-prices Dublin (4.7)
- Hamilton (7.0) is markedly more expensive than Manchester, UK (4.6)
- Napier-Hastings (7.4) is more expensive than New York (5.4) or Las Vegas at 5.0
But two NZ housing markets really stand out:
- Auckland ranks 8th out of all 309 housing markets studied as nearly more expensive than all others, with a ratio of 8.6, and
- Taking the cake is Tauranga, with a ratio of 9.3 which places it 5th most expensive out of all 309 locations studied.
Why are NZ houses so expensive?
After looking at some of the data above, the question naturally arises – why are residents of NZ facing extremely – even prohibitively – high prices?
In many cases, answers to this question have been suggested over recent years by commentators and the media. They include:
- Foreign investors. In selected international locations, such as Hawaii and Vancouver, foreign buyers have certainly impacted property markets. However – despite plenty of vocal support for banning foreign buyers of NZ houses a couple of years ago – when the ban came into effect, it had no impact on house prices, which continued to go up.
- Physical barriers to the expansion of cities – such as mountains or the sea. Research has shown this does relate to higher home prices, though whether that causes the higher prices is still unclear.
- A lack of an NZ capital gains tax – which has proven to be a political hot-potato. When this tax was introduced in other countries, such as Australia, it did not stop rising house prices.
So, what’s causing the high prices?
Over-regulation restricting housing supply – zoning, planning costs, and other regulations are the biggest driver of NZ house prices. This is explained in the following quotes from the Demographia report:
From Dr Robert Breugmann, the University of Illinois “…a growing number of people who have looked at the figures have tended to agree that a good many well-meaning policies involving housing may be pushing up prices to such an extent that the negative side-effects are more harmful than the problems the policies were intended to correct.”
From Dr Donald Brash, former Reserve Bank Governor of NZ “...the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.”
From Dr Shlomo Angel, New York University “We all understand what it means to prepare adequate lands for urban expansion, enough land to accommodate both residences and workplaces, so as to ensure that land—and particularly residential land—remains affordable for all. Unfortunately, municipalities of many rapidly growing cities often underestimate the amount of land needed to accommodate urban expansion. In the minority of cases where expansion is effectively contained by draconian laws, it typically results in land supply bottlenecks that render housing unaffordable to the great majority of residents.”
People reluctant to change housing regulations have been called NIMBY’s (Not In My Back Yard). The existing owners of high-priced homes have little incentive to support new construction and expansion cities, which would diminish the value of their housing investment.
The bottom line – NZ’s expensive cities
High housing costs have often been regarded as an NZ success story – Kiwi’s have historically loved investing in property and done very well from it. Unfortunately, NZ now has most unaffordable housing in any country studied, which is not at all a success.
High housing costs just leads to the departure of people who might see the market as unaffordable, especially younger people who haven’t built up a solid income yet (maybe people departing Palmerston North to head to Miami?!). This hasn’t been a problem in recent years due to high migration levels into NZ – which meant more new migrants have offset Kiwi’s migrating overseas. Though it’s still too early to tell whether Covid-19 has stopped that in its tracks, it is noteworthy that 98,000 people have left NZ (net departures, i.e. arrivals less departures) since the first of March 2020. If this trend continues over a period of time then the impacts on NZ could be significant, and relate to a wide range of areas, not just the housing market.
In spite of all this data about how expensive NZ housing is, for those in stable jobs with good cashflow, super-low interest rates mean that housing is often still affordable for first home buyers and property investors alike.