How much would you have had to earn in order to afford a home in the past? The question gets at some of the generational divide that seems to dominate New Zealand’s housing conversation, writes Emma Vitz.
Sean Rush has some advice for first home buyers. At a recent council meeting, the Wellington councillor opined that “If you want a house, you must save. You must work. You must ensure that you make good decisions and life choices, it just doesn’t come to you overnight.” This is a common view, but one that’s difficult to reconcile with the experience of many people trying to buy their first house now.
Looking back over the past 30 years, we see interest rates that now seem comically high, house prices that today would barely qualify as a deposit today, and inflation. It can be difficult to untangle these factors to reveal how much more expensive housing really is these days. I wanted to level the playing field of interest rates and inflation and see what has really changed.
To do so, I took REINZ’s median house price in each region going back to 1992, as well as the floating interest rate at the time. I then calculated the household income that you would have had to have in order to spend 30% of your gross income on mortgage repayments. The 30% limit is a common piece of financial advice aimed at keeping housing costs at a level where a household can still meet its other needs. Inflating this number to 2021 dollars allows us to compare like to like.
My calculations assume a 20% deposit and that the buyer has a 30 year mortgage which is being paid weekly. It uses the RBNZ’s consumer price index to inflate past prices to those comparable to 2021.
The result? New Zealanders have never had to earn as much as they do right now in order to afford the average house.
At a national level, the required household income in May of 2021 was $132,863. This sneaks in just ahead of the last time housing was almost as unaffordable in July of 2008, when you would have had to earn the equivalent of $125,061 in today’s dollars to afford the average house in New Zealand.
In Auckland, the required amount in 2008 was $154,487, while Wellington needed $136,463 in today’s dollars. In May of 2021, Aucklanders required $186,009 and Wellingtonians $143,396 to make that possible. A few regions, most notably Canterbury and the West Coast, have house prices that are more affordable now than they were in the high interest rate environment of 2008.
One of the main drivers of housing unaffordability in 2008 was interest rates. In July of 2008, interest rates were at a lofty 10.7%, the highest they had been since 1998. A year later the floating interest rate had dropped precipitously by 4.4% to 6.3%. It came up again slightly in July of 2014 and nudged 6.6% for almost a year. Since then, interest rates have only trended down, and house prices have only climbed up.
The driver of housing unaffordability now is house prices. Today, the median house across New Zealand costs $820,000. In 2008, the median house across the country cost $420,522 in today’s dollars.
Sean Rush graduated in 1991 from Victoria University of Wellington with a Bachelor of Laws. Making some assumptions about how old he was when he started university and how long it took him to complete, he was my age around 1995. Back then, the required income to buy the average house in New Zealand was $66,812, in today’s dollars. Now, it’s $132,863. It’s easy to superimpose our experience onto the current housing market and assume that if hard work was enough to get onto the property ladder then, it must be enough now. But the numbers tell a different story.
Emma Vitz is an actuarial analyst for Finity Consulting. The opinions expressed in this story are her own and do not represent those of her employer.
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