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4.4  Drivers of Trends

4.4.1  Drivers of aggregate New Zealand trends

Ratio of prospective mortgage payments to net household income

The analysis of the proportion of mortgage payments to household income (including the AMP affordability index) indicates that there have been three ‘bubbles’ of relative unaffordability since 1983. The first was from 1985-1988, the second from 1995-1998, and the third from 2002 to present (Figure 5).

These ratios are driven by several factors. House prices and interest rates affect the nominal mortgage payments, and then household income affects the overall ratio (any other factor influences these three factors). Changes in any of these three factors will influence the ratio, and will do so without lags.

Figure 14 shows the median house price, average household income (gross and net), and interest rate (the RBNZ derived combined rate, and the floating rate), since 1983.

Figure 14 – Median house price, average household income, interest rates

The above graph shows some distinct trends. House prices rose reasonably steadily over the period, with some periods of slower growth from 1990-1993 and 1998-2002. Average household income rose steadily also, except for a period of unchanging incomes from 1990-1995. However interest rates show extreme volatility, with several local peaks.

The first bubble of unaffordability occurred from 1985-1988. This period was also associated with by far the highest interest rates since 1983. The second bubble occurred from 1995-1998. This period was also associated with higher interest rates than immediately before or after. This local interest rate peak was lower than in the 1980s, and unsurprisingly the unaffordability bubble wasn’t as high as that of the 1980s either.

The third is occurring at present. While interest rates have only started to slowly trend upward, house prices have been growing faster than ever before (at least since 1983). The start of the increasing house price inflation (2002) coincided with affordability beginning to deteriorate.

Thus it appears that the main drivers of the short periods of relative unaffordability since 1983 have been high interest rates (the first two periods) and high house price inflation (the current period).

Proportion of households spending more than a given percentage of household income on housing costs

The other measures of affordability are not driven by current prices and interest rates to the same extent as those analysed above. The proportion of households spending more than a given percentage of their disposable income reflects many changes over time, and many effects will be quite heavily lagged.

We have already seen that the proportion of households spending more than a given percentage of their income on housing costs was rising from 1990-1997. This was the case for all households, home-owning households, and low-income households (Figures 1,2,8,9). After 1997, low-income households fall back from this bubble, and the all household figure levels off.

At the simplest level, these ratios are affected by net household income and housing costs. Obviously many things influence these two factors. Figure 15 shows average household income and average housing costs since 1983. This data is from the HES, the same data as used in the OTIs.

Figure 15 – Average incomes and housing expenditure

However the average income and housing costs shown above don’t show the same pattern as in the earlier ratios. Comparing average net income with average housing costs (which is simply an average OTI), doesn not exhibit the same pattern as the figure representing the proportion of households with OTIs above certain levels. Affordability on the average OTI improves from 1990-93 and deteriorates from 1998-2004 (both of which are different to the proportional OTI). Since the data is obtained from the same source, we must assume that the difference lies in the composition of individual households’ OTIs.

Whatever the particular intricacies are, the ratios shown earlier exhibit improving affordability after 1997 for low-income households (Figures 2,9), while affordability only stabilises for the all households figure (Figures 1,8).

The difference between low-income and all households is obviously the middle-to-high income earners. For the all households figure to remain stable there must have been increasingly more of these households spending large proportions of income on their house. It is possible that rising house prices mean that some (high-priced) households simply spend more on housing costs, and are quite happy to do so.

These ratios show no sign of any deterioration in affordability at present. Indeed all measures, against all benchmarks, were better in 2004 than in 2001. It appears that the rapidly increasing house prices have had little effect, if any, on these ratios.

One likely reason for this apparent anomaly is that current mortgage payments of households in general are largely based on historic house prices, rather than current ones. The data indicate that ‘other’ housing costs have increased at the same rate as incomes[20], and we have already seen that this is the case with rent (Figure 4). Thus, it is mortgage payments’ apparent failure to rise in 2004 that is causing this lack of a bubble. Any mortgage that was financed prior to 2002 will show no effects of rising house prices. Further any recently financed mortgage may be offset by the capital gains received by the sale of any previously owned property at the same time. The relatively small numbers of first-home buyers[21] seems unable to influence this ratio to any significant degree.

Another possible reason is the relevance of the Accommodation Supplement (AS). The AS is included as income for these OTIs for all households, but not for the prospective OTIs for would-be home owners. The AS is intended to make housing more affordable, and this may contribute to these results. However we were unable, with the data we obtained, to establish how much of an influence the AS has had.


  • [20]Source: HES, Statistics NZ.
  • [21]For 2003 the Real Estate Institute of New Zealand Consumer Survey reports 25% of buyers were first-home buyers (, while the Australian figure is 18.3% in November 2005 (Australian Bureau of Statistics).
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