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Mixed Housing Measures Are Technically Unsound ...

Liz McDonald reports in this morning’s The Press ... Canterbury Houses Easier to Buy ...

http://www.stuff.co.nz/the-press/business/your-property/7794259/Canterbury-houses-easier-to-buy

There is a world of difference between “housing affordability” and “mortgage affordability” – and it is well recognised within professional property circles, that it is technically unsound to mix the two.

These “mixed measures” are fine for use internally within the finance sector, but are of no value in the public arena - other than the free publicity they provide the commercial and educational institutions that generate them.

The first deals with the affordability of houses (house prices in relation to household incomes) – the second, the affordability of mortgages being the interest rates and the term and conditions of the mortgages.

Interest Co NZ for example is very clear with its Roost Home Loan Affordability Index - in that it is NOT a Housing Affordability Index. Roost Mortgage Brokers pay Interest Co NZ to generate these on a regular basis – clearly for the advertising purposes of Roost – and that is just fine.

Indeed – it was primarily the problems created by the technically unsound “mixed measure” housing affordability indices, which motivated me with my colleague Wendell Cox to get the “clean” Median Multiple based ( median house price divided by gross annual median household income – with figures for both clearly set out) ANNUAL DEMOGRAPHIA INTERNATIONAL HOUSING AFFORDABILITY SURVEYS ) www.demographia.com ) underway – with the first released early 2005.

The Median Multiple measure is recommended and employed by the United Nations and World Bank Urban Indicator Programmes and Harvard University Joint Centre for Housing Research – as three examples of many.

I expanded on the problems associated with the “mixed measures” back early last year within a Sydney Morning Herald Opinion – HOUSING AFFORDABILITY OUT OF SYNC WITH INCOMES ...This article needs to be read closely ...

http://news.domain.com.au/domain/home-investor-centre/report-housing-affordability-out-of-sync-with-incomes-20110202-1ad3m.html

The major problem with the often opaque (detailed figures / methodologies are rarely disclosed – and often vary over time to suit changing market conditions) is that they MASK the critically important structural aspect of housing affordability – the relationship between house prices and household incomes. By “tweaking mortgage structures, conditions and interest rates, one can pretty much generate any “affordability” number one likes!

So it is best to stick with the clean and simple structural Median Multiple measure – the relationship between house prices and incomes. The cost or affordability of money can vary dramatically through the term of the mortgage.

We know for example that in normal and affordable housing markets (refer Demographia Survey www,demographia.com ), that housing should not exceed 3 times annual household incomes and MOST IMPORTANTLY that mortgage loads should not exceed about 2.5 times annual household incomes.

The reality is that New Zealand’s major cities are generally rated “severely unaffordable” with house prices in Auckland in excess of 6.4 times household incomes and Christchurch at least 6.3 times.

This explains in large measure why – some two years later – we STILL haven’t got a sound recovery underway in Christch. And too – why on a population basis, there is 7 and 10 times more house building going on in Selwyn and Waimakariri Counties respectively, than there is in Christchurch.

Why hasn’t Ms McDonald of The Press informed the public of this ?

We know too that new starter housing stock is being provided on the fringes of the affordable United States housing markets for about $US600 per square metre ALL UP – here in New Zealand $NZ2,500 per square metre and often well beyond that.

We have a massive problem to deal with.

I explained this about 2 ½ years ago within HOUSTON: WE HAVE A HOUSING AFFORDABILITY PROBLEM ...

http://www.interest.co.nz/news/49029/opinion-houston-we-have-housing-affordability-problem

....and too ... last Sunday within a Sunday Star Times article written by Rob Stock ... GOVT TO TARGET CITY FRINGES FOR CHEAP HOUSING ...

http://www.stuff.co.nz/auckland/local-news/7780376/Govt-to-target-city-fringe-for-cheap-housing

Back late July, Deputy Prime Minister and Finance Minister Bill English made it very clear to Alex Tarrant of Interest Co NZ, what the Governments policy development focus is in dealing with these issues ... WHOLESALE CHANGES TO HOUSING SUPPLY ...

http://www.interest.co.nz/property/60411/wholesale-changes-how-government-approaches-housing-affordability-it-drops-helping-de

It seems likely the initial reforms will very much focus on land supply and the proper financing of infrastructure.

The Government announcement is expected by the end of October.

It is going to take some considerable time to restore housing affordability in New Zealand (it use to be when I was a young guy) so that Kiwis don’t have to pay any more than 3 times thir household income to house themselves with MOST IMPORTANTLY mortgage loads of no more than 2.5 times their annual household income – so they have money left over to spend on their kids rather than being forced to pay for a welfare scheme for Banks with grossly excessive mortgage loads.

Professor Bob Hargreaves of Massey University and Liz McDonald, property writer for The Press need to “get with it” by informing Kiwis how and why we need to restore affordable housing in this country.

They owe it to their fellow New Zealanders – particularly the young ones - who deserve a “fair go”.... for a change. They can start by consigning the opaque “mixed measures” to the trash can.
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