Is there a Housing Affordability Crisis in New Zealand?

Do you have the sense that owning a house is getting harder and harder for the average kiwi? You’d be right. For years the growth in house prices has out-stripped the growth in average incomes.

A recent report online highlighted an international trend of a decrease in home affordability. Unfortunately they only reported on Auckland, but their statistics showed that the average house in Auckland is 6.9 times the average income. That’s huge! (Source: demographia.com)

A quick search online reveals numerous articles regarding the NZ issue of home affordability. The Members of Parliament are all crying out for more solutions that will help kiwis to own property.

A recent New Zealand research report by Massey University agrees with the general view that things are getting worse. Their report shows that national median house prices had risen by 6.4% while average weekly wages had only risen by 1.5%. It goes on to say, “Currently housing is now less affordable than it was in early 1989 when mortgage interest rates were 15.5%”. (Source: property-group.massey.ac.nz)

But let’s not focus on doom and gloom.

I personally think that this research indicates a trend of over-inflation. Maybe I’m right or maybe I’m wrong, but I hope that houses do not remain at 7 times earnings. Why? Because it makes the housing market suddenly an uneven playing field. Not that I’m wanting the market to crash! I’d much rather see incomes come up to match the growth in property.

Robert Kiyosaki, of Rich Dad Poor Dad, mentions this in several of his books. He predicted a widening gap between those who own property (who will be the “rich”) and those who do not (he labels the “poor”).

If we continue down this trend then the market will change and prices will be driven by large scale investors. This currently happens with property development as the prices are driven by the large developers. Normal or average wage earners will not be able to afford to compete and will therefore miss out on owning their own home.

So what can we do about it? The key for your financial success is to make sure that you at least own some property. And when you do own property the key is to do anything and everything you can to protect your equity. Your equity is the part of your home that you own – the bank probably owns the rest! The best way to protect your equity is to pay off your debt while increasing the value of your home. This put you in a stronger position when you decide to change properties. And when you do, make sure you protect your equity by not paying more commission than you need to. This keeps upgrading as affordable as possible for you.

What can the government do about house price inflation? Very little. Interest rates are one avenue they use to try and control the market, but it doesn’t seem to be working at the moment. What is pleasing to see is that the Government has started calling for public submissions on the issue. Their goal is “to ensure that as many New Zealand families as possible will be able to achieve the traditional Kiwi goal of home ownership at a fair and reasonable price”. (Source: parliament.nz) They have also just announced they will be launching home equity sharing initiatives early next year. It will be interesting to see how it plays out, but it’s definitely a good start.

My advice is to take control yourself though. If you can take advantage of an incentive the government is offering, by all means do. But don’t leave your financial future in the hands of the government – make the important steps as soon as you can to be in control yourself.

Phil Strong
CEO Wisemoney