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Could it be time to celebrate housing unaffordability?

The latest Demographia International Housing Affordability Survey was published earlier this week and here is the surprise! - nothing has changed in each of the 10 years that this report has been published.

The top cities of the world, be it San Francisco, London, Hong Kong, Sydney, Melbourne or Auckland are assessed by the survey as severely unaffordable.

These cities (24 in total from the 85 major markets with population over 1 million) are classed as having a ratio of house price to income of over 5.

The past 10 years has not really seen much change. Certainly not in the line-up of the cities judged to be most unaffordable as well as those at the other end of the spectrum, being those cities assessed as being most affordable as the chart below shows.

In my view the judgement of affordability in this case is not actually true to the definition of the word. If these global cities were truly unaffordable, then they would suffer a population exodus which would remove demand, free up supply of homes and drive down prices. That has not happened and will not happen any time soon.

Scanning your eyes down the list of those cities that are least affordable as compared to those most affordable leads in my mind to a conclusion that people actually want to live in those cities that are unaffordable by this measure, and conversely don’t want to live in these cities that are affordable.

The case in point in this survey are cities like Pittsburgh, Detroit and others in the US. In those cities properties are cheap due to low demand, while wages are around the median for the country overall leading to a low ratio of house price to income. The weak demand is a consequence of a weak economy as these cities fail to attract business and people.

This situation has parallels in New Zealand. There are many areas of this country where the ratio of house price to income is not 5+ and more like 3 but sadly these are towns that are struggling to maintain industry and jobs and are fighting to stop an exodus of workers.

The reality in my mind is that we cannot through land policy (which this report’s authors place as the solution) influence what is a global shift of people to major cities. Cities that deliver jobs, facilities, lifestyle and opportunity. These dynamic and successful cities are growing and with growth comes pressure on demand for property and that leads to property inflation.

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To my mind rather than bemoan the fact that we have ‘severely unaffordable' housing in Auckland that ranks us in the top 10 most unaffordable cities in this report we should actually celebrate this fact. We are in the top 10 because we have a vibrant economy in Auckland, we have a city that is attractive to business and immigrants to develop their lives. How depressing it would be if we were not in the top 10, if our property prices were affordable. We would likely then be living in a less dynamic city with less economic activity and facilities, forgotten by the global economic tides and left to drift in the South Pacific.

We live in a global economy where mobility is the norm and where cities are the new brands that compete for talent. This new creative talent (have a read of Professor Richard Florida’s book ‘The Rise of the Creative Class’) is what is sought by businesses. This creative class wants to live and work in cities that offer the amenities and lifestyles that Auckland offers. Where this creative class goes, so business and money follow and so begins a virtuous cycle - one we need to be a part of to secure our economic future.

So while this may not be of immediate help to people looking to buy their first home, the trickle down benefit of the economic success for Auckland which defines us as severely unaffordable housing will assist the country. It is a case that ultimately equality should not be the end game - rather dynamic economic activity, placing NZ closer to centre of the global economy. 

Former Realestate.co.nz CEO Alistair Helm is founder of Properazzi.

Comments and questions
18

Well put Alistair,

In practice this chart should be presented in the inverse, i.e. the top cities are the lowest paid per $ of House value, while the lower cities are the highest paid. That may point to the real issue, i.e. how do the lower paid get to work and afford accommodation in those cities? They do.

I suspect the data is too simplistic and there are other factors here.

It is long long overdue that HNZC closed down and sold off all of it's houses, the whole concept is now outdated and definitely does not provide what it was set up to provide.
HNZC now seems to provide permanent long term housing needs to Pacific Islanders, with a very minor allocation to other's, and as history is proving they become tenants for life at a pittance, and their children graduate to become HNZC tenants as well, a prime example is my neighbour, who is the one and only tenant that has ever lived in that house since it was built 34+ years ago now this is so wrong.
In my immediate area there are 7 HNZC Homes all 7 have Pacific Islander tenants, 2 of them are beautifully kept, the others are just abused, it guts me as a NZ'r that this is the way that the system is working!!!
Disclosure... I had worked for HNZ for 35+ years.

Wills I reckon your years of experience is now commonsense, but there is no one with the gumption either within HNZC or the government prepared to think laterally. Only a few weeks ago Nick Smith was declaring some fantastic fast track housing which in one case I know of is idiocy on steroids. Cant believe Nick Smith would boast how bulldozing a few outdated state houses in Takapuna and guess what, rebuilding even more state houses on the very same site, when the land is worth telephone numbers. Not that HNZC would know what stuff is selling for nearby I guarantee. So Takapuna is going to have new build intensive state houses each one if on the real open market will be worth 700k to 1m apiece. Cant see the sense in it myself.

Don't get too excited about your logic. Auckland is only up there because Chinese are dumping money here as housing is very cheap compared to Hong Kong and the return year on year exceeds any other investment tool. Don't fool yourself and call those 'investers' 'immigrants'. They are far from it.

If the survey uses the median income for the country verses the median house price for the city then I would expect we would get a different result if the median income for the city was used.
As the Chinese were not hurt by the global financial crisis they are in a financial position to purchase property anywhere they can. Because New Zealand has no true capital gains tax and a very liberal property ownership policy it's only common sense for them to buy here.
Most cities that have a bull property markets usually also have a growth in rents that parallels the growth in property values. Auckland doesn't which indicates we have a bubble.

You would see a significant change in housing prices if the government stopped their capital gains give away. This tax policy provides huge incentives to people to invest in properties, thus increasing demand for housing as rentals, while diminishing the pool of available capital that could be going into starting new companies.

Richard pointed out the influx of Chinese capital. California, Vancouver and Washington have been experiencing that for years. So there is that element. But I submit the government needs to eliminate all the incentives for property investment in order to diversity our employment base from dairy farmers, property developers and slumlords.

I just sold a house on Waiheke Island and purchased a comparable if not better property in Whangarei (water front) for 53% of the price.

Why is Auckland so expensive - well it is simply because of demand. I.e. more people wanting houses in Auckland then there are houses to have. There is nothing special about Auckland houses.

Why the demand - well jobs I guess. Historically and perhaps currently people had to move to where the jobs are.

But surely in todays state of technology many many jobs do not have to be anywhere in particular. So why put them in Auckland?

Councils want to add trains, Government wants to add roads, Councils want to infil creating undesirable places to live and yet we have a country that is 25% bigger than the UK (although to be fair we have large tracts especially in the South Island which are uninhabitable).

The solution to so many of our problems is to move jobs that do not have to be anywhere in particular - somewhere else. Further once you realise this you suddenly realise there are then few barriers to obtaining a customer base of 7 billion rather than 4.2 million.

This will not happen of course as long as all our town planning resides at a local government level as this provides a power base for those who seek power at a local level - we need an increased National residential planning initiative

Every auction over the last few years that I have been to (and that is many as a NZ agent buying for a number of Asian funds) has many Asian buyers bidding or watching. But whoever pumps out the infometrics to influence perceptions keeps stating Asian buyers are not influencing price. Well my sources do !!! So the subject is really more about what misinformation is being pumped out and why, as against what most who are in the market week after week already know. The Asian real estate agents and their offices are selectively sought out by Asian buyers and make a killing. Why do you think the big real estate agencies have turned to engaging so many Asian agents? Its stunning the general malaise in NZ which cannot see the obvious. Whether debt levels, or housing supply and demand realities.

Concur totally. Similar experiences. The question is why are the media and National Politicians downplaying the obscene amounts of Chinese money flooding into Auckland?

Most, if not all, chinese vote national or previously act.

Follow the money

Living in Auckland with kids that need housing is problematic. Believe me it is distressing and costly.

Three issues that I can see,

1/ Crazy low interest rates are forcing savers worldwide into property to protect their monies value, means the kids have little or no chance unless they and their family are savers. That's 10% of the population - what about the other 90%? The interest rates are presently well below fair market value. Better to pay 10% of 300k than 6% of 800k.

2/ Councils in centres outside Auckland could provide incentives for business to make use of a willing and focused pool of labour.

3/ Auckland especially is filling faster with immigrants than it is with Kiwi families expanding naturally. The Dynamic of the suburbs has changed, Why not allocate valuable immigrant spaces through out the country, especially those coming in on the business investment program.

Make no mistake space in our country is very valuable - but that space is given away to freely and the focus is on Auckland only. Business investment should exclude buying a home - should be solely for business.

Auckland is sought out because of the soft ease of access to NZ residency, to it's life style, which is great compared to places in India, China - Asia, South Africa, Pacific Islands. Unabated our valuable lifestyle will be lost, already the kids born here and trying to set up house are significantly disadvantaged.

As one contributor states, non resident syndicates are buying property here, for one reason only - profit

Yeah, here's to unaffordable cities, seemingly the ones I like to visit most and I live in Auckland
Aroha and KMA

This is serious nonsense as it ignores the primary reason for house prices being so high in Auckland.

Len Brown and the Council are obsessed with hugely subsidised railway trains and buses as the only possible solution to congestion. All the cities Alastair mentions are seriously congested.

The Council solution ignores the options. The first is the technology of driverless cars that will double or treble the number of cars on a motorway lane and reduce accidents by more than 50%. Following on from this, we can expect to see driverless cars and taxis and automated buses that, when they get on a motorway, connect up to a train of other buses. All these things will happen.

But the most glaring failure of the Council is their failure to assess the alternative of allowing the city to spread and encouraging satellite centres North West and South of Auckland where people could live and work.

People always tell us that Auckland is one of the most densely populated cities in the world, in fact this is not true. Cities like Houston, Dallas Fort Worth and many others have a lower population densities, much larger areas, and are very prosperous and with affordable housing. These are the models that we should be following.

Instead, the Council wants to force poor people to live in what will amount to tenements, have a chainsaw massacre in the suburbs so perfectly good houses can be replaced with blocks of flats and make the city unaffordable – all in pursuit of the dream of railway transport. Do not forget that building a railway tunnel was number one in Len Brown's priority lists!

I wonder if there is anything happening in the property world at the moment other than the price of houses in Auckland. 8 out of the 12 articles in the online property pages are focused on this topic...

We will remain in the less affordable bracket in the long term until the planning issues rightly identified by Bryan above are fixed. But even within that bracket we are in a mammoth bubble fuelled by low credit rates and international capital flooding in her searching for returns (and finding it in a largely tax free form in NZ property).
But this is all changing this year, and the change has already begun. Normalisation of US monetary policy will help lift the USD and cause capital to move away from emerging markets and carry trade recipients like NZ. At the same time domestic interest rates will be able to rise without crippling exchange rate consequences. All of this should be welcomed - a fall in property prices and a fall in the dollar are great things for NZ, as they will push scarce capital into productive businesses that generate export earnings and jobs for Kiwis!
Hooray for the Fed and RBNZ if they are brave and do the right thing. Rather that than keep inflating the bubble and have markets crash horribly as a consequence.

Central government should be encouraging new immigrants to locate to the provinces.

NZ has exposed itself to huge risk, should Auckland have a natural disaster. They do happen just ask Chrishchurch.

This would also utilise provincial infrastructure, which in parts of the country is not used to their potential.

Whats wrong with the government having a large part of their administration through the provincial towns? Accommodation with be cheaper, wages too.

Who does centralisation benefit anyway?

Richard S "NZ has exposed itself to huge risk, should Auckland have a natural disaster. They do happen just ask Christchurch."

And Len wants to concentrate development in the isthmus where all the volcanoes are and new ones will appear.

Spreading out is cheaper and safer!

Who can buy in NZ. : The overseas investment Act 2005 regulates overseas investment in New Zealand and balances "privilege for overseas persons to own and control sensitive New Zealand.assets" against the desire to encourage positive foreign contribution to the New Zealand economy. The overall effect of house prices in Auckland reflects the contribution of overseas investment in New Zealand. At least that's how I read it. The issue of unaffordability will always pop up in any part of the country that becomes popular. Some people can afford to live there and others have to move to less expensive locations. Many Aucklanders retire to more affordable locations to free up money they then spend in our economy and I'm all for that.