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4.5  The Future

Whether any affordability “problem” exists on more than a temporary basis largely depends on the course of house prices, incomes and interest rates in the near future.

Prospective home-owners are currently enduring an ‘unaffordability bubble’. This deteriorating affordability of purchasing a house may continue, stabilise, or reverse.

It is expected that the New Zealand economy will slow in 2006/07 (The Treasury 2005), causing growth in GDP to fall. This will adversely affect wage growth, and consequently the disposable incomes of individuals and households.

The Reserve Bank of New Zealand (2005), The Treasury (2005) and the New Zealand Institute of Economic Research (2005) are all predicting that house prices will stabilise somewhat and actually fall for a period sometime in 2006/07. Furthermore the Reserve Bank predicts that OCR rises are likely to be finished for this cycle, and markets are already pricing in falls in interest rates in 2006/07.

If the change in house prices is smaller than the change in household incomes (e.g. if house prices fall), which seems at least possible, then the ratio of prospective mortgage payments to household income will fall, meaning improved affordability for would-be home owners. However in the medium term, if house prices continue to rise faster than household incomes then we would expect deterioration on several indicators.

The proportion of households spending more than a given percentage of their income on housing costs does not show any affordability problem at present. The future of this measure depends also on the strength of the housing market, interest rates and income. If house prices remain historically high, more mortgages will be financed at these higher prices, resulting in higher regular costs. Any slowing in household income growth will add to the problem. If these two factors occur to any significant degree, we may find this measure shows deteriorating affordability in the near future.

The Treasury and The Reserve Bank of New Zealand are presently investigating potential Supplementary Stabilisation Instruments, at the request of the Minister of Finance. Some of the possible recommendations to come out of this process may involve the housing sector, specifically related to mortgage lending practice. If any of these recommendations are implemented in the future, they may have some impact on the housing market. The extent to which these may affect affordability is unclear.

4.6  Affordability Influencing Home Ownership?

The affordability of housing is linked to the level of home ownership. A deterioration in the affordability of owning a house is generally seen to adversely affect the level of home ownership.

The rate of home ownership in New Zealand fell from 73.8% in the 1991 census to 67.8% in 2001[23]. Affordability is often cited as one factor causing this.

The literature is unclear as to the primary reasons for the change, and the relative impact that different factors had. Reasons cited, other than affordability, have included changing preferences, increasing tertiary education enrolment, rising average age of marriage and first child, and a correction from a period with conditions excessively conducive to home ownership.

Australia has experienced a similar decline in home ownership rates. Much debate has centred on whether this is due to decreasing affordability or to delays in family formation. The Australian Housing and Urban Research Institute (Baxter and MacDonald 2004) argue for the latter.

Delaying family formation and increasing tertiary education enrolment are part of the same phenomenon. The impact they have is that less young people wish to purchase a house, preferring to delay this also. Although this factor is sure to be part of the reason home ownership rates are falling, it seems unlikely that it is the sole cause. Ownership rates have fallen for all age cohorts of the population in New Zealand, meaning middle-aged and older people are also less likely to own their own home. Delaying family formation cannot be the cause of this.

The proportion of households not answering the relevant ownership question in the census has risen from 0.6% in 1981 and 1.5% in 1991 to 4.7% in 2001. One possible reason for this is the impact of family trusts, with a household effectively owning the house through a trust and being unwilling to state this on the census form, or unsure of how to answer. Furthermore, almost 10% of houses were unoccupied on census night in 2001. The ownership status of these houses could potentially significantly alter the headline rate.

Lastly, in 1971 the home ownership rate was 68.1%, marginally higher than the current figure. Over the next 20 years this rate rose 5.7 percentage points. It has been suggested that ownership rates are simply settling down to their natural levels, after an unusual period. This period was associated with very high inflation (especially at the start), negative real mortgage rates and negative net returns on other investments. This is all conducive to investment in housing, and to households purchasing a home (Littlewood 2004). All the above factors are feasible causes of declining home ownership figures over the last decade. The relative influence each has had is unclear. Specifically it is unclear as to what extent affordability has played a part, if it has played one at all.

Notes

  • [23]Source: Statistics NZ, Census figures.
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