Increasing section prices have been the major factor in reducing housing affordability over the past decade, according to a recently released report from the BRANZ Group.
The Changing Housing Need study undertaken by Ian Page, economics manager with BRANZ Ltd, and funded by Building Research, included an analysis of the impact of the key drivers of housing affordability.
The report concludes that the major factor impacting housing affordability has been section prices, which were ahead of interest rates and the cost of new house construction.
“Housing affordability has fallen markedly since 2001 due to a number of factors,” Mr Page says.
“The fact that average wages have only increased by an average of 2.2% per year over the past decade has exacerbated this trend. The rising cost of land, with sections increasing by an average of more than 14% per year over the past five years, has been the major contributor to the decline in housing affordability.
”The following table shows the relative impact of each factor on housing affordability.
Note: These figures show the average increase per annum and have compounded over these periods.
“Given that home ownership has also fallen over the past 10 years, we believe it is reasonable to assume that there is a relationship between housing affordability and home ownership.
”Home ownership has been declining and was down to 66.9% in the 2006 census. Tenure and new housing affordability are shown in the graph below which indicates downward trends from 1996 onwards.
The study also tracks new housing affordability in an index* since 1970.
Between 1993 and 1998 wages rose around 9% but construction costs rose 30% and interest rates increased by around 1%. This caused affordability to fall over this period.
In 1998 the increase in affordability was mainly due to a fall in mortgage rates from around 11% to 7%. Since 1999 affordability has declined markedly due to increasing section prices, construction costs and home lending interest rates. The report provides two sets of forecasts which depend on the assumptions made for growth in incomes, new housing construction cost changes, land prices and interest rates.
The “expected” scenario indicates a flattening out of affordability, and is based on modest wage growth, lower rates of increase for construction and land costs, and a slight reduction in interest costs.
With the “optimistic” scenario, wage growth is quite high while house and land price escalation is relatively low, and the interest rate for home lending (6% in 2016) is 3% below current rates.
“Should these factors come into play, housing affordability could improve. However, when we look at what factors have contributed to housing becoming less affordable over the past decade and, particularly, the past five years, we can conclude that relatively low wage increases and escalating land prices are the two most important factors.
“These are followed by the cost of funding and then the cost of new house construction,” Mr Page says.
A copy of the report, Changing Housing Need can be downloaded from the BRANZ web site: see www.branz.co.nz/branzltd/bookshop/info.php?ask=free&idnum=1666.
* The affordability index is a ratio of a wage index divided by a new house cost index and a financial factor index:
• The wage component comprises all industries all occupations’ wages/salary, including overtime;
• The new house cost is a combined new house cost index and a real section price index.
• The house cost index used is the Capital Goods Price Index (housing). For the section the QVNZ section price index is used. The two are combined into one index using a varying weight between the section and house construction costs.
The financial factor is the annual capital recovery factor for a 20-year term, and uses the floating house mortgage rate.