Homes more affordable

January 22nd, 2009 at 3:23 pm by David Farrar

Bernard Hickey blogs at the excellent on home affordability:

Plunging mortgage rates and another fall in house prices improved home loan affordability by a record amount in December to its best level in 4 years, the monthly Home Loan Affordability report from shows. At current rates of improvement, housing is likely to be broadly affordable again for most home buyers towards the end of 2009.

In other words, back to sanity.


You can see the impact of both the fall in prices and of interest rates. And both should continue to fall. The tax cuts in October and again in APril will help also as they boost take-home pay.

40% is generally regarded as the maximum home owners should pay towards their accommodation. That’s probably unrealistic for many, but it would be good t get it below 50% anyway.

24 Responses to “Homes more affordable”

  1. dime (13,135 comments) says:

    ive been looking at houses this week.. im surprised how much they have come down.. i think another 6 months and ill buy something.. cheap mortgage, cheap house.. all good.

    philbest – what ya reckon? wait 6 months?

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  2. Owen McShane (1,193 comments) says:

    Just to be precise the normal index for “affordable housing” is an index (median house price over median household income) of 3 or less. In some of the world’s least affordable markets it is 11 or more. At the time of the 4th Demographia survey LA was 11.5, Sydney was 8.6, Tauranga was 7.5, Auckland 6.9.
    Atlanta was 2.8, Houston 2.9, Memphis 3, Dallas Fort Worth 2.5.
    3.0 or less used to be the norm in New Zealand.
    See Demographia survey and Don Brash’s introduction.

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  3. homepaddock (441 comments) says:

    Houses may be cheaper but if credit is harder to get it still isn’t easier for most people to buy.

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  4. mike12 (183 comments) says:

    DPF – you could always do a “pierson” and post a series of complicated graphs with blue and red lines that show how home affordability has improved under National significantly.

    Or maybe your audience is a bit sharper than his….

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  5. PhilBest (5,004 comments) says:

    Dime, that was well-timed, seeing I haven’t been on Kiwiblog for the best part of the last week and have just popped in again. You never know when something unforeseen is going to come along and stuff up the best-intentioned predictions, but I think that house prices in NZ have a long way to fall yet. Owen McShane is 100% on the nail. For house prices to continue to increase significantly faster than incomes, as they have done for years up till last year, is not only unsustainable and bound to cause a crash eventually, it is actually the immoral result of bad government.

    If you’ve read enough of my comments over the last few months, you will know what the causes of this are. More bad government policy may end up propping house prices up, only with further dire consequences for the economy further down the track. The only obstacles to brand new houses on the edge of existing metropolitan areas, selling for less than NZ$200 grand, are and have been up till now, political obstacles. The National government needs to grasp this nettle and do something about housing affordability and the racket that is land development, land banking, and local body regulatory action acting in cahoots with each other. The alternative is more of the same that has given us a combination of unaffordable housing, moribund development, and a housing SHORTAGE, all in a country that is only 1.4% built on.

    It would actually help to boost the economy if we just faced this reality and allowed a new housing construction boom, with freed-up land going for about 30 grand per section, which is about what it should go for if you allow for the value of farmland, plus development costs, plus an ethical profit for the developer. The fact that such sections go for 200 grand, is exhibit one for the case that there is a racket going on.

    And can you imagine the effect on bank and finance institution confidence, if they are lending you money to buy a $200,000
    brand new house, rather than the same house priced at 400 grand at the top of an inflated market?

    So my answer is, a lot depends on the government. On pure economics and past example, such as Japan, houses should
    continue to collapse in price, maybe rallying occasionally as government policies to assist new owners and bail out existing owners, take effect; but long term, the government trying to prop the market up, is just pissing the country’s monetary and fiscal policy future into the wind. Japan has taken nearly 20 years to have a 50% drop in house values. A realistic government would just let it happen a lot quicker than that, and not drag out the economic distortions that prolong the economy’s moribundity.

    As Owen points out, a lot of the USA DOES have affordable housing anyway, that is why I have been arguing all along that this whole mortgage-equity-based economic crisis will be a lot LESS severe in the USA than in NZ.

    Take a look at the graph HERE:

    Notice that the markets in the USA that had the biggest inflation in prices, are having the biggest collapse, while those that were affordable in the first place, are having almost none at all. It doesn’t take much genius to work out which examples NZ is most similar to. Bruce Shepard was right about the stupidity of Hanover Finance shareholders backing a restructuring deal that to succeed, requires a rebound in our housing market……..

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  6. PhilBest (5,004 comments) says:

    Here is the 2008 “Demographia” Survey introduction by former NZ Leader of the Opposition and Reserve Bank Governor Donald Brash, that Owen McShane referred to:

    “…..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. This is most strikingly shown by US experience. In a country with considerable population mobility and common interest rates, there are cities such as Atlanta, Pittsburgh, and Houston, where housing is eminently affordable, with median house prices three times or less the median household income in those cities, and other cities such as New York and Los Angeles where the median multiple is from 7 to over 11.

    And the one factor which clearly separates all of the urban areas with high median multiples from all those with low median multiples, is the severity of the artificial restraints on the availability of land for residential building.

    Australia is perhaps the least densely populated major country in the world, but State governments there have contrived to drive land prices in major urban areas to very high levels, with the result that in that country housing in major State capitals has become severely unaffordable, with median multiples of eight in Sydney and seven in Melbourne.

    Despite all the evidence, governments continue to pretend that they are powerless to make housing more affordable or, worse still, implement futile interventions which make the situation worse, as the New Zealand government is proposing for this year……”

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  7. PhilBest (5,004 comments) says:


    Don BRASH; “The Implications of Present Restrictions on the Availability of Residential Land” presented before
    the Select Committee Hearing on Affordable Housing.

    “We all know that over the last few years the price of houses has risen enormously in almost all developed countries.
    We all know that in New Zealand house prices in our main urban areas are now among the most unaffordable in the world, relative to household incomes.
    And we’ve all heard the multitude of reasons produced to explain this situation: greatly reduced interest rates (so that borrowers can afford to borrow more than previously); low levels of unemployment (so that people feel more comfortable taking on large amounts of debt); financial deregulation (so that banks have been driven to compete for borrowers more aggressively than before); tax laws which favour investment in residential property; and, in some countries, high levels of net inwards migration.

    And there’s no doubt that all of those factors have, to varying degrees, added to the demand for houses.
    But an increase in demand for houses will only cause an increase in the price of houses if there’s no commensurate increase in the supply of houses.
    Of course, in the short term it’s not easy to increase the supply of houses. So if, for example, there’s a sudden surge in net inwards migration, it wouldn’t be in the least surprising to see the price of houses increase until developers and builders are able to respond to the increased demand by sub-dividing more land and building more houses.

    And it’s also true that a downwards adjustment in the level of interest rates will tend to lead to an increase in the price of all assets.
    Similarly, more aggressive lending behaviour by banks brought about by financial deregulation will lead to an increase in the price of many assets.
    But none of these factors seems adequate to explain what’s happened in many developed countries in recent years.

    We could reasonably expect that, after a year or two, developers and builders would respond to an increase in demand for housing arising from a surge in net inwards migration by increasing the supply, with a tendency for house prices to return to their previous level.
    We could expect to see a step increase in the level of house prices as a result of lower interest rates and more aggressive lending behaviour by banks, not steady increases, year after year, to the point where houses have become severely unaffordable in a great many urban areas.
    Something else has been going on to produce these very large increases…….

    “……clearly the first implication of restricting the availability of residential land:
    doing that greatly reduces the affordability of housing, with all the consequential effects
    in terms of a decline in the proportion of families who can own their own homes, with
    that effect almost certainly having a disproportionately large impact on low income New
    Zealanders, many of them Maori or Pacific Islanders.

    But I’ve come to believe that restricting the availability of land for residential
    development has consequences which go far beyond its effect on the number of people
    who can own their own homes. The rapid increase in the price of houses has almost
    certainly had far-reaching economic consequences as well…….

    “….We know that as house prices have increased strongly over the last 20 years, and
    especially over the last decade, New Zealanders have felt very much wealthier and have
    changed from being modestly frugal to being, on average, net dis-savers – indeed,
    probably the champion dis-savers in the world!

    We know that this has perpetuated a situation where, as a country, we are heavily
    dependent on the savings of others, with that dependence having become markedly
    greater in the last few years.

    In September last year, the New Zealand banking system had made loans totaling $273
    billion to New Zealand-based borrowers, but had deposits totaling only $175 billion from
    New Zealand-based depositors, leaving a funding gap to be borrowed from overseas of
    $98 billion.
    So much for the argument that New Zealand interest rates are in some sense
    “too high”!

    Or put it another way: between 1990 and 2007, deposits from New Zealand households
    grew at an average rate of 7% per annum, while home loans made by the banking system
    grew at 14% per annum over the same period. The difference was, to a large extent,
    financed by borrowing the savings of foreigners.

    We have supported our living standards by borrowing from foreigners to the point where
    we are, relative to the size of our economy, more heavily indebted to foreign residents
    than any other country in the world. Once upon a time, the New Zealand government
    borrowed overseas to fund its spending. Now, the New Zealand government has no
    foreign debt expressed in foreign currency, and very little foreign debt even denominated
    in New Zealand dollars. The overwhelming bulk of the obligations owed by New
    Zealanders to foreign residents is owed by the private sector, and a great deal of that is
    owed by ordinary New Zealanders, through the banking system, to fund a bubble in
    house prices and a level of consumer spending which we have not earned. This has been
    facilitated by the restriction on the availability of residential land.

    The rapid escalation in house prices fuelled by restrictions on the availability of
    residential land has also had an impact on the conduct of monetary policy. As the
    Reserve Bank noted in its submission to the Finance and Expenditure Committee of
    Parliament last year, rising house prices don’t in themselves cause inflation. But the
    Bank noted that once house prices start rising, whether because of increased net
    immigration or for some other reason, restrictions on the availability of residential land
    create a momentum for further increases in prices, which require tighter monetary policy
    to contain. So all borrowers end up paying a price in the form of higher interest rates,
    and all exporters and their staff pay a price to the extent that the exchange rate is pushed
    to levels well above what the fundamentals justify…….

    “……Pushing up the price of housing through restricting the supply of residential land almost
    certainly has another effect on economic growth. Not only has this encouraged New
    Zealanders to spend more than they earn, financing the gap by borrowing from
    foreigners, it has almost certainly encouraged more of the total available savings to be
    channeled into housing, with less going into more directly productive assets. While
    home loans from the banking system grew at 14% annually between 1990 and 2007, as
    I’ve noted, other loans to New Zealand borrowers – mainly New Zealand businesses and
    farms – grew by just 6% annually.

    In the United States, the increase in house prices to the point where in many major urban
    markets they have become severely unaffordable encouraged some grossly imprudent
    lending practices, with banks and other lenders willing to lend on the flimsiest of security
    and poor loan-servicing capacity because of a naïve belief that they would be saved from
    loss by a continuing escalation of house prices above the rate at which incomes are
    growing. The unwinding of this situation is having a serious impact on the economic
    growth of the United States, and potentially of the whole world.

    It is often argued that the restrictions which local governments have placed on the
    development of land for housing have at least reduced the total area of New Zealand
    devoted to urban development (as if this were some kind of desirable outcome in itself).
    But assuming that 80% of our population is in some sense “urbanized”, and assuming an
    average urban population density of 1900 per square kilometre (which is the density in
    Christchurch – both Auckland and Wellington figures are higher), only 0.7% of our total
    land area is urbanized at the present time. If New Zealand’s population grows by 50,000
    a year, and we housed all these additional people in fringe housing around our urban
    areas at the population density of Christchurch (requiring roughly 26 square kilometres,
    or one hundredth of 1 per cent of our total land area, each year), we couldn’t urbanize a
    further half per cent of our total land area over the next 50 years if we tried!

    And does the refusal of local governments to zone more land for residential purposes on
    the outskirts of our major cities actually reduce the land devoted to housing anyway?
    Probably not – it may just increase the amount of commuting which people have to do.
    Instead of being able to live on the outskirts of our larger cities, they may be forced into
    satellite towns some miles beyond the artificial boundaries of our cities – in Rolleston
    and West Melton in Canterbury, in Pukekohe and Warkworth in Auckland.

    But let’s suppose the tight restrictions which local and regional governments have
    imposed have actually managed to reduce the land devoted to housing in New Zealand.
    Let’s suppose that without tight restrictions the area of New Zealand devoted to urban
    development would already be 1% of our land area. Yes, it is possible we may have
    needed to invest a little more in transport and other infrastructure.

    But I haven’t the slightest doubt that that infrastructure could’ve been financed without
    difficulty if we’d charged appropriately for those services. And the consequences of that
    alternative policy would’ve been vastly less damaging – for the ability of young New
    Zealanders to buy their first home, for New Zealand’s dependence on the savings of
    foreign residents, for the interest rates paid by all borrowers, for exporters, and for our
    standard of living – than what we’ve experienced.

    The policy of tightly restricting the availability of residential land, a policy followed by
    most of the main regional and urban local governments in New Zealand, has been an
    unmitigated disaster from almost every standpoint.”

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  8. Bullitt (147 comments) says:

    The only reason houses are more affordable by their measure is because interest rates have fallen dramatically. There hasnt been a significant fall in the value of entry level houses (in Wellington at least).

    If I buy a house today Im gonna be paying a mortgage for the next twenty something years so the fact I can get rediculously low interest rates for two years makes very little impact to me.

    Id rather have a 1% reduction in the price I pay than a 1% reduction in interest rates.

    House prices have a huge way to fall yet, Id say at least another 20%, particularly low end ones. I wont be going anywhere near the property market for at least 12 months if not substantially longer.

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  9. Viking2 (14,467 comments) says:

    Given that NZ is short of housing, interest rates are retreating and those Kiwi’s that left for Aussie only to find houses a lot more expensive, interest rates about the same and now reduced employment (BHP today announced the reduction of 3400 jobs and others are doing the same) then do you not think that many will return and take up their houses that they haven’t sold putting the renters out on the street. ( Remeber that they don’t qualify for welfare for quite a time.)(Same for all those that have gone on contract to Dubai etc. All having their visa’s revoked; 1500 a day)
    Its been obvious for some months that this would be happening and so rents will be going up here along with the depletion in housing stock. Those that have been sitting waiting have been out buying for themselves in the last couple of weeks, I know of four this week, and builders have ceased to exist so by September we will be short of housing and house prices will be very firm.
    Wait as long as you like for others will be buying.

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  10. petal (707 comments) says:

    Hey Bullitt

    $500,000 house

    1% off purchase price – $495,000

    Save $5000.

    1% LESS interest over 20 years?

    Wanna guess?

    Your results

    Amount of loan
    Interest rate (per annum)
    Start date
    22 January 2009
    End date
    22 January 2029
    Loan period
    20 years
    Frequency of your repayments

    Interest you will pay

    And that’s $45,435.45 in today’s dollars.

    $5k vs $45k.

    You gotta watc’em percentages. They can creep up on ya and bite yer bum!

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  11. kiki (414 comments) says:

    PhilBest I have just one point to raise and that’s the report uses total land but what needs to be seen is usable land i.e good farm land. I look at Hamilton and see top quality land going under subdivisions and lifestyle blocks.

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  12. wreck1080 (5,057 comments) says:

    Homes may be more affordable.

    But, thats not going to help when you can’t find a bank to give you a loan, that is , if you still have a job.

    I’d suggest, the financial tsunami is going to hit NZ.

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  13. Banana Llama (1,105 comments) says:

    I’d rather not have to take out a mortgage to pay for a massively inflated dwelling, as it stands now the only real way of affording a house is saving for quite a few years of your working life while investing the money or getting a mortgage. It’s a fricking house, you can bloody build one with a few laborers if you have the will and ability to do so.

    As far as I’m concerned there is far better places to invest my money in rather than gambling on capital gains and speculation.
    In my opinion the housing bubble has a long way to crash before we see any reasonable prices and recovery emerging.

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  14. Viking2 (14,467 comments) says:

    There’s better places to invest. Tell us where?
    Shares, gold, bluesky, really, ha. Tell us where so we can all have a look.

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  15. Banana Llama (1,105 comments) says:

    I don’t know I’m not your financial planner, go pay for a decent one rather than a monkey pulling the housing lever.

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  16. grumpyoldhori (2,308 comments) says:

    Kiki, I’m an old tribal Labour type, but even I can see the utter bloody stupidity of Labour’s rules along with councils on not putting so called valuable farm land into housing.
    Kiki, Singapore is a lot smaller than us in land area yet they have a larger GDP for roughly the same population.
    Having people living in houses on former farmland, working in smart niche industries does a bloody sight more for our GDP than a few bloody cows.
    Damn I dislike that argument, if there was any truth to it we would all be in house boats.

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  17. kiki (414 comments) says:

    If we were producing something other than land based food products I would have no problem with building houses over good farm land but as we aren’t i think it’s a bit short sighted.

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  18. V (1,607 comments) says:

    I’m interested in the talk of a ‘housing shortage’ with respect to price appreciation.
    They were saying the exact same thing in the USA back in 2006.
    From this:
    To this:

    I’m not saying the same will happen here, given the better loan requirements we have.

    However it does lead one to wonder about the general acceptance of ‘myths’ in common society.
    If there were a true shortage of homes, then this would provide the impetus for new construction.

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  19. jcuknz (697 comments) says:

    While homes may be more affordable today what happens when the current trend reverses tomorrow or next year.

    I’m glad I had a sensible wife who didn’t want everything until we could afford it. Credit is too easy and disasterous for the quality of life of many who want to ‘keep up with the jones’s ‘

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  20. big bruv (15,619 comments) says:

    I wonder how the Standard would report this if they were a National party site?


    “The new National governments policies are already beginning to show results, data released today proves that under the inspired leadership of John Key (who rose from humble beginnings to become a self made millionaire) homes for mainstream New Zealanders have become much more affordable, this is further proof that Key has the answers to the problems facing New Zealand and that only the National party can implement the policies that will improve the lifestyle of all Kiwi’s.”

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  21. wikiriwhis business (5,217 comments) says:

    ““The new National governments policies are already beginning to show results, data released today proves that under the inspired leadership of John Key (who rose from humble beginnings to become a self made millionaire) homes for mainstream New Zealanders have become much more affordable, this is further proof that Key has the answers to the problems facing New Zealand and that only the National party can implement the policies that will improve the lifestyle of all Kiwi’s.”

    Wow, pure propaganda. These guys will be telling us PM has influence with the fuel companies next.

    Their crap would certainly be exposed.

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  22. Owen McShane (1,193 comments) says:

    There are no grounds for saving farmland from development. We only use about 3% of our most fertile land for best use anyhow.
    Furthermore fertility does not correlate with productivey. Olives, wine and truffles in particular generate the best profits on low fertility land.
    And why should not people who want to grow vegetables and flowers and native trees not occupy decent land – if they are not allowed to they just truck it in from somewhere else.
    There is NO SUCH THING as productive land. Land is only productive when human minds make best use of it.
    “Saving best farmland” whatever that means has been the argument used to regulate urban land, drive up the price of all property (including farmland) and bring on the present crisis.
    The people who wrote the RMA knew this and removed the Town and Country Planning Act requirement to save farm land from development. There is no mention of this objective in the Act but the courts were persuaded by “experts” (who knew nothing about economics) that this was an oversight and District and Regional Plans have simply all this crap into regulation.

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  23. Phil (130 comments) says:

    “There’s better places to invest. Tell us where?”

    Here’s a free stock tip for you; Invest in US banking stocks. If you have some spare cash and steel-balls, put a little in General Motors too.

    Here’s another free stock tip for you; put the shares, metaphorically speaking, in the bottom of your drawer and don’t bother looking at them again for about 4-6 years. Then you can shout me a crayfish and champagne dinner on your super-yacht.

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  24. GJ (331 comments) says:

    In regards housing prices I think there are few things most seem to forget. Yes things do work on supply and demand and are affected by both “fear” and “greed”.
    Greed drives prices up and fear drives prices down.
    They are not making any more land! (a few exceptions here) but they are manufacturing a lot more money! When things settle down as they will you will find it will take a lot more of the devalued money to buy the same bit of land. The devaluing of money is one of the main contributors to rising real estate prices over the longer term.
    On the North Shore in Auckland a friend who works in real estate is run off his feet. Prices have dropped or rather levelled out at aprox 5-10% below the boom. The sad thing is that most “Kiwis” are not the buyers and he says we are gradually selling our country to foreigners.
    He has been selling anything between $400,000 and 1.8 million. Plenty of investors have re-entered the market since interest rates have begun to fall.
    In his words “If you wanted a bargain, you have possibly missed it!” (Again when you are generalising there are always exceptions)
    If you are considering buying, forget the doomsayers which we have to many of, and do it now!

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