Sven/Housing

The affordability crisis Everyone knows that housing has been getting increasingly unaffordable. But it has been difficult to quantify the idea. There are plenty of anecdotal stories, and lots of evidence many people are finding the task of getting qualified for a home loan difficult-at-best, or impossible-at-worst.

Long term renting is becoming normal. And lenders are trying to supply products for desperate homeowner-wannabes with "100% home loans". But the lower the deposit used in a transaction, the higher the monthly or weekly repayments.

And it is those high repayments that inhibit increasing numbers of people from buying.

Yet, this month's OCR increase is designed to make housing even less affordable. It is designed to dampen housing demand and lessen the fast rise in house prices.

Prices are rising faster than incomes, even though the rate of increase may be tempering. Interest rates are also rising faster than incomes.

Recently, the government has announced a new initiative of "equity funded mortgages" (EFMs) where up to a 30% deposit is given to the home buyer in exchange for a modest one-time fee and the right to a share of the capital gain in the property. EFMs are products that can be offered by the private sector as well, and many programs will be launched in the next year or so.

We predict EFMs will become central to the way kiwis buy residential real estate. They are a brilliant solution for everyone involved - except society. In the end, they will raise prices even further, and make affordability even harder.

EFMs will be another 'demand' solution to what is essentially a 'supply' problem.

Demand for housing already greatly exceeds supply, so it seems dangerous to have only demand-solutions. There can only be one result.

Our current affordability pressures began about 2002. Then, it took around 35% of the average wage to make a mortgage payment for an average house.

But now, in 2007, after the latest OCR increase, it takes 74% of the average wage to make that payment for today's average house.

To arrive at these benchmarks, www.interest.co.nz has developed the homeloan affordability index. This monthly series measures the proportion of after-tax average weekly earnings it takes to make a standard mortgage payment on the current median house price.

And the numbers make sobering reading indeed.

But it is less of a problem in some regions - in Southland it still only takes 38% of the average wage to make the payments on a median-priced house.

However, the situation is near impossible in Northland, or the Central Otago Lakes, where you need 78% or 104% respectively of the average local wage to buy the average house. Clearly locals are being priced right out of their own communities.

Making the payments is one thing - before that you need to save for a deposit. But as prices rise, the deposit goal gets even further away.

On average, you need a $67,000 deposit to afford an average home. That will take the equivalent of 22 months of income (all of it). That's up from 15 months at the end of 2002. [Of course, you can save less, but that will just mean higher weekly repayments.]

So, what did the RBNZ rate hike do to affordability? It raised the repayments 2.2% of net take-home pay - from 71.9% of pay to 74.1% - but it raised the time to earn the deposit by very little.

For most of New Zealand, it takes now two average incomes to afford the mortgage on an average house. But in Auckland it takes almost three average incomes to afford the average home loan.

Having house prices stabilise, or even fall a bit, won't redress the affordability crisis one bit. To get back to where 40% of the average take-home wage will pay for the mortgage on an average house, the Auckland median price would have to fall from $430,000 it currently is to $185,000. It is just never going to do that.

Or, take-home pay needs to rise from the current average of $669 to $1,240 - without house prices moving. And that is equally unlikely.

If you think things are bad now, just wait for the arrival of EFM's - either or both the government-sponsored program or the private programs. They will likely draw large numbers of new buyers into the market, and prices will get another boost.

Since 2002, the higher marginal tax rate together with relatively low interest rates, have combined to fuel the house price spiral.

In 2007, EFM's may well drive that spiral significantly higher.

What is really needed is action on the supply front. We've spent three government terms limiting supply. We now need to invest at least as much effort rebuilding the housing stock faster than demand. Selling the public housing stock and using the funds to build significant numbers of new houses would be a good place to start. Incentivising the private sector to build new homes faster will help as well. Both actions will require a full re-think of urban planning impediments, and our attitudes to density, among other things.

Until then, homeloan affordability will stay in crisis mode.