Demographia ranks Auckland severely unaffordable

on Monday 25 January 2016 in Affordability, Market, Residential, Sectors

Auckland ranked predictably among the world’s least affordable cities for housing in Demographia’s annual survey, out today.

It carried a “severely unaffordable” tag with a median multiple (median house price:gross household income) of 9.7, up from 8.2 last year. Auckland came in at 6.4 4 years ago, 6.7 3 years ago, and rose to 8.0 in 2013. Demographia rates a median multiple of 3.0 as affordable.

The survey, Demographia’s 12th, covers 367 metropolitan markets (11 fewer than last year) in 9 countries (Australia, Canada, China – Hong Kong, Ireland, Japan, New Zealand, Singapore, the UK & the US).

The survey ranks Auckland 362nd for affordability overall, and 82nd among major markets, tying with Melbourne & San Jose, California, on a median multiple of 9.7.

New Zealand’s 8 areas with their international & national rankings, median multiple (last year in brackets), median house price & median household income:

Auckland, rankings 362, 82, 8; multiple 9.7 (8.2), price $748,700, income $77,500
Christchurch, 316, 6; 6.1 (6.1), $388,200, $63,900
Dunedin, 283, 4; 5.2 (4.6), $292,300, $56,200
Hamilton-Waikato, 276, 3; 5.1 (4.7) $354,300, $69,000
Napier-Hastings, 270, 2; 5.0 (5.1), $299,500, $59,600
Palmerston North-Manawatu, 202, 1; 4.1 (4.1), $228,200, $55,900
Tauranga-Western Bay of Plenty, 346, 7; 8.1 (6.8), $491,900, $60,400
Wellington, 283, 4; 5.2 (5.2), $403,800, $77,300
NZ median multiple, 5.2 (5.2)

Overcoming constraints

Survey authors Wendell Cox in the US and Hugh Pavletich in Christchurch noted that New Zealand’s Productivity Commission had recommended an “event trigger” to release sufficient greenfield land to restore housing affordability when affordability discontinuities associated with urban containment boundaries reached a defined threshold.

The criticism of urban boundaries is based on their role in restricting development. Under pressure, Auckland Council has proposed in its unitary plan – now going through hearings – that about 12,000ha be zoned future urban, and submitters have proposed about twice that amount be opened up. In addition, the council would be required to maintain several years’ supply of land ready for development (infrastructure to it in place).

The independent panel hearing submissions will make its recommendation on the proposed plan to the council at the end of July, for a council decision in August-September.

US most affordable

The most affordable major metropolitan markets in 2015 were in the US, with 13 markets rated in that category. The US overall had a moderately unaffordable rating of 3.7, followed by Japan, with a median multiple of 3.9. Major metropolitan markets were rated seriously unaffordable in Canada (4.2), Ireland (4.5), the UK (4.6) & Singapore (5.0). The major markets of Australia (6.4), New Zealand (9.7) & Hong Kong (19.0) were rated severely unaffordable.

Hong Kong’s median multiple of 19.0 was the highest (least affordable) recorded in the 12 years of the survey. Sydney was the second least affordable major market, with a median multiple of 12.2. Sydney’s increase of 2.4 points from its 9.8 median multiple in 2014 was the largest year-to-year deterioration.

Justification for method

The Demographia survey is highly rated as a tool, although critics question its analysis. This year’s survey carries considerable justification for the method, but also adds a qualification that it’s about the rating of middle-income housing affordability: “The survey rates middle-income housing affordability using the ‘median multiple’. The median multiple is widely used for evaluating urban markets, and has been recommended by the World Bank & the United Nations and is used by the Joint Centre for Housing Studies, Harvard University.

“The median multiple & other similar price:income multiples (housing affordability multiples) are used to compare housing affordability between markets by the Organisation for Economic Co-operation & Development, the International Monetary Fund, the Economist & other organisations.

“More elaborate indicators, which mix housing affordability & mortgage affordability, can mask the structural elements of house pricing and are often not well understood outside the financial sector. Moreover, they provide only a ‘snapshot,’ because interest rates can vary over the term of a mortgage; however the price paid for the house does not. If house prices double or triple relative to incomes, as has occurred in many severely unaffordable markets, mortgage payments become much higher.

“Historically, the median multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the UK & the US, with median house prices from 2.0-3.0 times median household incomes.

“However, in recent decades, house prices have been decoupled from this relationship in a number of markets, such as Vancouver, Sydney, San Francisco, London, Auckland & others. Without exception, these markets have severe land use restrictions (typically ‘urban containment’ policies that severely ration land for development on the urban periphery) that have been associated with higher land prices and, in consequence, higher house prices (as basic economics would indicate, other things being equal). Further, periodic reviews of housing supply, put in place to maintain housing affordability in these metropolitan areas, have generally not succeeded.

“However, encouraging developments have been implemented at higher levels of government in New Zealand & Florida, and there are signs of potential reform elsewhere.”

Authors say it goes beyond ideology

The Demographia survey’s authors say virtually all governments consider household economic issues as a top priority, especially increasing the standard of living and reducing or eradicating poverty. “Yet economic growth has been laggard, and discretionary income trends are even more concerning. Housing costs, which represent the largest household expenditure category, have been rising much faster than incomes. The resulting stagnation or even decline in household discretionary incomes is at least as much a threat to prosperity & job creation as the limited gross income gains.

“The largest losses in housing affordability have been associated with urban containment policy. Severely unaffordable housing (median multiple of 5.1 or higher) has occurred only in major metropolitan areas that have strong land use policy, especially urban containment boundaries & variations thereof.

“Corrective measures that could halt or reverse losses in housing affordability from urban containment policy have either been absent or not been implemented. As a result, urban containment policy has been a profound policy failure, as house prices have doubled & tripled relative to incomes in many metropolitan areas.

“Over the past year, the loss of middle-income housing affordability associated with urban containment policy has received greater attention. These include concerns about lost economic growth and the role concentration in housing wealth has played in increasing inequality. The difficulty that high house prices cause central bankers in their attempts to control inflation has been noted. NZ Deputy Prime Minister Bill English said urban planning itself has become an externality, by virtue of its impact on house prices, equality & the economy in New Zealand.”

Transport Blog view

For a small amount of balance to the Demographia surveys, it’s worth clicking on 2 Transport Blog pieces written last year by Peter Nunns, who wrote in the first of those 2 articles: “Basically, the urban economics literature suggests that Demographia’s chosen measures do not mean what they think they mean. And they almost certainly do not prove the case they’re trying to make.”

Links:
Demographia
Performance Urban Planning
Wendell Cox in New Geography, 21 October 2015: Planning has become the externality: NZ deputy prime minister
Wendell Cox, Frontier Centre for Public Policy, October 2015: A question of values: Middle-income housing affordability & urban containment policy
Wendell Cox, Heritage Foundation, 25 June 2004: Costs of sprawl reconsidered
Peter Nunns on Transport Blog, 30 March 2015: Alternative explanations for Auckland house prices
Peter Nunns on Transport Blog, 24 March 2015: Demographia fails urban economics 101