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Affordability of Housing: Concepts, Measurement and Evidence - WP 06/03

6  Discussion and Conclusions

6.1  Discussion

Even though economists are reluctant to use the term affordability in relation to housing, it has come into widespread usage and we are able to establish a usable, if unspecific, definition. Affordability refers to the relationship between housing costs and some ability to pay criterion.

Whether or not a household considers some particular level of housing to be affordable is contingent on the amount of income which is spent on this housing, and how much is left over for other expenditure.

Affordability is best considered as a continuum. A particular point on the continuum represents the financial stress that housing exerts. We need to consider affordability for renters, would-be homeowners, and existing homeowners, as the concept is applied differently for all of them.

Simply comparing points on the continuum over time and across subsets of the population only tells us part of the story. We also need to decide if a particular point on the continuum is affordable or not. This cannot be done objectively. We are required to make normative decisions around how much people should be spending on housing and how much residual income people need for other expenditure.

There are various measures of affordability. Each has its own strengths and weaknesses, and no one measure should be taken by itself as showing a complete picture of the situation.

There is no sector consensus as to the best way to measure affordability. However, among the currently used measures, outgoings to income ratios (OTIs) and residual income measures are still considered the most useful.

Despite outlining the various weaknesses of each common measure, we have still used them in our analysis. Individually, each measure does provide useful information if it is analysed carefully. Collectively they can give a more complete picture of the situation.

Given that the trends generally differ between measures, the ability to establish an overall picture lies in the examination of the components of each measure and the reasons for the variation in trends.

Furthermore, the measures that we were able to use were limited by our ability to access data. Some specific measures simply could not be used because we don’t have the requisite data.

The New Zealand evidence shows differing affordability situations depending on the measure used. The proportion of households spending more than a given percentage of household income on housing deteriorated from 1984 to 1997-98 before improving somewhat to 2004. The prospective mortgage payments as a proportion of average household income for would-be homeowners has moved in cycles with periods of relative unaffordability in the mid-1980s, late 1990s, and currently. The ratio of average house prices to average household income is currently the highest on record.

Each of these measures taken individually shows a picture of affordability over time. However, if all of them are considered together, we are unable to establish any long-term trend.

Indeed, apart from the ratio of house prices to income, no individual measure shows a long-term trend. The proportion of households spending more than a given proportion on housing costs has risen and then fallen slightly (it has fallen substantially for the low-income household subset). The prospective mortgage payments as a proportion of household income has moved in cycles. Consequently, fluctuations in affordability appear to be of a cyclical nature, without any long-term trend.

The present spike in unaffordability shown on the prospective mortgage payments to income is largely the result of historically high house price inflation over the last few years. Whether this continues in the near future depends largely on the extent to which house price inflation remains high, and the course of future interest rates and incomes.

These recent deteriorations in affordability are not abnormal compared with the past. On the prospective mortgage payments to income measure, although affordability is currently less favourable than 2001, it is still more favourable than 1986 and at a similar level to 1996. Furthermore, if house price inflation remains high in the future, the proportion of households spending more than a given proportion of income on housing is likely to rise.

Over the last 5 years, the trend in affordability of low-income households (with low-cost houses) is more favourable than that of the average/median. The proportion of households spending more than a given percentage of income on housing has shown more recent improvement among the low-income household subset than for all households. Similarly, the prospective mortgage payments over household income figure has deteriorated less for low-cost and low-income households than it has for all-households.

There is substantial variation in affordability across regions, and other cross-sections of New Zealand’s population. Auckland is the least affordable region, with some other cities being relatively unaffordable. There also exist several rural areas with significantly less favourable affordability situations than many urban areas.

No measure exhibits any clear relationship between affordability and housing policy regimes.

Given that each measure shows a differing trend, there seems to be no single policy instrument which provides a solution (if a solution is required). Addressing housing affordability requires the use of a portfolio of instruments.

We have considered relative affordability far more than absolute affordability in this report, despite describing the necessity to use both. The arbitrary nature of absolute affordability limits its usefulness. We simply have little knowledge of whether any particular ratio or residual income (point on the affordability continuum) is ‘affordable’ or not.

Much thought has gone into benchmarking for this purpose. However the best estimates are still the result of normative decisions, and are essentially an educated guess.

6.2  Concluding Remarks

We need to be careful with the measures that we use. There is no single measure of affordability that can tell us everything, and different measures reveal different movements over time. A basket of measures needs to be considered to obtain a complete picture of affordability trends.

Housing affordability largely follows a cyclical pattern. With the exception of the ratio of house prices to income, none of the affordability measures considered in our study show any long-term trends.

On some measures (but not all), affordability has been deteriorating for the last few years. If house price inflation slows in 2006/07, as The Treasury, RBNZ and NZIER are all forecasting, this deterioration will slow, if not reverse (i.e. affordability will improve).

Affordability for different groups responds differently to changes in influential factors. For example, existing home owners, would-be home owners and renters are affected differently by, say, changes in house prices.

Low-income households fare better than all-households when comparing current affordability situations relative to the recent past.

There is significant regional variation in affordability within New Zealand. Auckland is the least affordable region, while outside Auckland there are certain regional enclaves in coastal areas where affordability is less favourable than in many urban areas.

There is a lack of any apparent relationship between different housing policy regimes and affordability indicators.

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