The property market is one of the most talked about topics right now and the latest affordability measures from CoreLogic shows us why
The centre point of much of the market commentary is the Reserve Bank of NZ (RBNZ) and their role or otherwise in minimising financial stability risks related to the property market. Recently, the Minister of Finance, Grant Robertson asked the RBNZ Governor Adrian Orr to consider that the “Monetary Policy Committee takes house prices into consideration when formulating monetary policy to help achieve the government’s objectives”.
The Governor duly acknowledged they already do so and that the recent rise in asset prices was not unexpected and in fact it wasn’t as important as the need to provide support and stability for the economy as it responds to the economic shock of the global COVID-19 pandemic. There may be some changes to the RBNZ’s remit later down the track, but for now, their hands are tied to a large extent.
So the focus then turns to the Government and their concern that this economic recovery is worsening inequality. Anyone who owns assets like housing are benefitting from the stimulatory monetary policies, which are lowering interest rates, while the young and renting population are more likely to have seen their income impacted by the pandemic and are less likely to see a wealth benefit from asset appreciation.
New affordability measures illustrate housing divide
For current home owners, serviceability is improving as mortgage payments come down off the back of lower interest rates. RBNZ also report that most mortgages are fixed short term (59% <1 year) or floating (13%) so with rates only tipped to go lower in this period those payments are likely to drop further (at a time when the assets they’re secured on increase in value).
Paying the mortgage for people that already own a house is currently a little easier than ‘normal’ – about 31% of gross household income was required for repayments in Q3 2020, versus the long-term average of 36% (see the first chart). This figure varies around the country (e.g. 37% in Auckland; 24% in Christchurch), but the general picture is that once people have made their purchase, servicing the debt isn’t as hard as it has been sometimes in the past.
Of course, much of that is to do with super-low mortgages rates. It’s interesting that after tracking each other closely from 2004 to 2012, a gap has since opened up between mortgage rates and the share of income required to service the debt (see the second chart). In other words, without low mortgage rates, the debt servicing requirement for existing home-owners would be much more onerous than it is (albeit actual house prices/loan sizes might not be as high either).
However the metrics used to assess the ability to get into the market are all illustrating a worsening situation. The ratio of housing values compared to household income has jumped from 6.2 a year ago, to 6.8 at the end of Q3. Meanwhile the average time it takes to save for a 20% deposit in NZ is now 9.0 years, up from 8.2 years a year ago, and the share of income dedicated towards renting is increasing as well – up from 19.8% in Q3 2019 to 21.2% in the most recent reading, adding to the difficulty of saving the deposit for those that aspire to own a house.
In other words, these refreshed affordability measures help to illustrate a widening gap between existing homeowners and aspiring buyers, which is a key part of why the market has recently got so political so quickly.
The potential solutions to solve for the future are varied, and often complex. But they all need to be seriously considered. From the crucial supply perspective:
- Keep building more houses. As the fourth chart shows, Christchurch’s years to save a deposit (6.7) and rental affordability measures are less stretched. After the earthquakes, more flexible planning rules have clearly allowed supply to respond more readily in Christchurch (and the surrounding areas), and this has been associated with flatter property values and less strain on housing affordability.
- Cheaper and faster off-site manufacturing needs to become more prevalent.
- Investment in infrastructure needs to increase to improve the connectivity and liveability throughout cities, especially the outer fringes where housing is more affordable but commuting times inefficient.
- Town planning reform needs to be addressed to incentivise appropriate intensification for best use – perhaps through taxes.
- The cost to build must also be investigated, understood and probably managed better.
And while addressing the demand side of the equation is more debatable, we need to consider how to reduce the property owning obsession in NZ:
- Promote other forms of investment for retirement. Part of the greatest appeal of property is to provide a passive form of income in retirement (alongside expected capital gains),
- Improve security/appeal of renting – which should be a viable long term living option. The Government has made some progress on this, and
- Favour investment in new builds above existing stock.