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  1. #1
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    Default The Affordability Crisis

    This just in from http://www.interest.co.nz

    The affordability crisis

    Everyone knows that housing has been getting increasingly unaffordable. But it has been difficult to quantify the idea. There are plenty of anecdotal stories, and lots of evidence many people are finding the task of getting qualified for a home loan difficult-at-best, or impossible-at-worst.

    Long term renting is becoming normal. And lenders are trying to supply products for desperate homeowner-wannabes with "100% home loans". But the lower the deposit used in a transaction, the higher the monthly or weekly repayments.

    And it is those high repayments that inhibit increasing numbers of people from buying.

    Yet, this month's OCR increase is designed to make housing even less affordable. It is designed to dampen housing demand and lessen the fast rise in house prices.

    Prices are rising faster than incomes, even though the rate of increase may be tempering. Interest rates are also rising faster than incomes.

    Recently, the government has announced a new initiative of "equity funded mortgages" (EFMs) where up to a 30% deposit is given to the home buyer in exchange for a modest one-time fee and the right to a share of the capital gain in the property. EFMs are products that can be offered by the private sector as well, and many programs will be launched in the next year or so.

    We predict EFMs will become central to the way kiwis buy residential real estate. They are a brilliant solution for everyone involved - except society. In the end, they will raise prices even further, and make affordability even harder.

    EFMs will be another 'demand' solution to what is essentially a 'supply' problem.

    Demand for housing already greatly exceeds supply, so it seems dangerous to have only demand-solutions. There can only be one result.

    Our current affordability pressures began about 2002. Then, it took around 35% of the average wage to make a mortgage payment for an average house.

    But now, in 2007, after the latest OCR increase, it takes 74% of the average wage to make that payment for today's average house.

    To arrive at these benchmarks, www.interest.co.nz has developed the homeloan affordability index. This monthly series measures the proportion of after-tax average weekly earnings it takes to make a standard mortgage payment on the current median house price.

    And the numbers make sobering reading indeed.

    But it is less of a problem in some regions - in Southland it still only takes 38% of the average wage to make the payments on a median-priced house.

    However, the situation is near impossible in Northland, or the Central Otago Lakes, where you need 78% or 104% respectively of the average local wage to buy the average house. Clearly locals are being priced right out of their own communities.

    Making the payments is one thing - before that you need to save for a deposit. But as prices rise, the deposit goal gets even further away.

    On average, you need a $67,000 deposit to afford an average home. That will take the equivalent of 22 months of income (all of it). That's up from 15 months at the end of 2002. [Of course, you can save less, but that will just mean higher weekly repayments.]

    So, what did the RBNZ rate hike do to affordability? It raised the repayments 2.2% of net take-home pay - from 71.9% of pay to 74.1% - but it raised the time to earn the deposit by very little.

    For most of New Zealand, it takes now two average incomes to afford the mortgage on an average house. But in Auckland it takes almost three average incomes to afford the average home loan.

    Having house prices stabilise, or even fall a bit, won't redress the affordability crisis one bitl. To get back to where 40% of the average take-home wage will pay for the mortgage on an average house, the Auckland median price would have to fall from $430,000 it currently is to $185,000. It is just never going to do that.

    Or, take-home pay needs to rise from the current average of $669 to $1,240 - without house prices moving. And that is equally unlikely.

    If you think things are bad now, just wait for the arrival of EFM's - either or both the government-sponsored program or the private programs. They will likely draw large numbers of new buyers into the market, and prices will get another boost.

    Since 2002, the higher marginal tax rate together with relatively low interest rates, have combined to fuel the house price spiral.

    In 2007, EFM's may well drive that spiral significantly higher.

    What is really needed is action on the supply front. We've spent three government terms limiting supply. We now need to invest at least as much effort rebuilding the housing stock faster than demand. Selling the public housing stock and using the funds to build significant numbers of new houses would be a good place to start. Incentivising the private sector to build new homes faster will help as well. Both actions will require a full re-think of urban planning impediments, and our attitudes to density, among other things.

    Until then, homeloan affordability will stay in crisis mode.

    For more details of www.interest.co.nz's homeloan affordability index
    You can find this review in full here >>> http://www.interest.co.nz/comment27March2007.asp
    Find The Trend Whose Premise Is False - Then Bet Against It

  2. #2
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    Sep 2004
    Location
    Hastings
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    15,012

    Default

    Some more detail here:
    http://www.stuff.co.nz/4007765a10.html
    (references the same study)

    Also has some reader comments, at the end.
    Some rather asinine ones among them.
    Last edited by Perry; 28-03-2007 at 01:24 PM.

  3. #3
    Join Date
    Feb 2005
    Location
    Auckland
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    795

    Default

    As I had said in a previous post - Affordability has nothing to do with property investors.

    Its government policy that makes homes affordable or not!

    https://www.propertytalk.com/forum/sh...&postcount=328

    It has also been said that the cost of average home is 7 time the average gross wage... this has always been the case, and this goes back to my memory of investing in the 70's and 80's.

    On one hand the government is accusing property investors for making homes less affordable when in fact its the tax take leaving the average worker with less net pay that making home less affordable.

    In 1996 when the average worker on an average wage was paying 19 cent to 28 cents P.A.Y.E leaving a net Take Home Pay of 72 cents to 81 cents in the Dollar

    In 2007 the average tax bar of 1996(?) hasn't moved upwards proportionately so the result is the average worker on average wage is now paying 28 cents to 39 cents P.A.Y.E leaving a net Take Home Pay of 61 cents to 72 cents in the Dollar.

    What has change is that it takes a lot more years of net wages (take-home pay) to equal the price of an average home.

    So blame the current Government for the affordability crisis because it is they who are leaving us with less take-home pay after PAYE.

    Cheers Ron
    Justice of the Property Peace

  4. #4
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    Feb 2004
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    Newcastle-under-Lyme
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    Default

    Quote Originally Posted by RonHoyFong View Post
    It has also been said that the cost of average home is 7 time the average gross wage... this has always been the case, and this goes back to my memory of investing in the 70's and 80's.
    Ron, this is the second time you have made this, as far as I am aware, false claim. If you have some source for the information then a reference to that would be appreciated, if its just your memory, well I am afraid you are misremembering. As you can see from the attached graph the stats show these have been changing over this period.

  5. #5
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    Auckland
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    Default There is nothing wrong with my memory... duh what was it that you said?

    Quote Originally Posted by Monid View Post
    Ron, this is the second time you have made this, as far as I am aware, false claim. If you have some source for the information then a reference to that would be appreciated, if its just your memory, well I am afraid you are misremembering. As you can see from the attached graph the stats show these have been changing over this period.
    Hi Monid

    As I said... "memory" and I quote again in the 70's and 80's. (Never said 90's)

    The 70's and 80's was a time I was actively investing, I was also a senior "Payroll Personell Officer" at the time for a large Government Department and knew exactly what an average wage was, and what an average price of place was!

    Your graph only covers the 90s which was through a bad Share Market Time when lots of people lost truck loads of money, plus their homes, properties, and their jobs.

    The NZ Dollar Exchange Rate in the mid 90's was at an all time low as well (below 37 cents against the US Dollar)

    The late 80's and 90's was also a time when professionals and blue collar workers were maxing out on the DOLE queue, thus the average pay wasn't to high.

    I can say this because when I worked for the same Govt Dept, I was also in charge of a District dishing out the DOLE which had the largest numbers of unemployed people in the country.

    This also follows a period after "Desert Storm" which had a global effect.

    So much for your graph which doesn't really represent a normal average period of time.

    Nothing wrong with my memory.

    It's actually your information being mis-information out of perspective.

    You know very well that graphs can be interpreted in many way to suit the means that we would like it to show. (Your graph is so small with so little info, no-one could cipher it anyway)

    Hmmmmmm... now what was it you said, I seem to have forgotten?

    Cheers Ron
    (Justice of the Property Peace)

    PS -As I had said in a previous post - Affordability has nothing to do with property investors.

    Its government policy that makes homes affordable or not!

    https://www.propertytalk.com/forum/sh...&postcount=328

    It has also been said that the cost of average home is 7 time the average gross wage... this has always been the case, and this goes back to my memory of investing in the 70's and 80's.
    Last edited by RonHoyFong; 29-03-2007 at 03:24 AM.

  6. #6
    Join Date
    Feb 2005
    Location
    Auckland
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    Default There is nothing wrong with my memory... duh what was it that you said?

    Quote Originally Posted by Monid View Post
    Ron, this is the second time you have made this, as far as I am aware, false claim. If you have some source for the information then a reference to that would be appreciated, if its just your memory, well I am afraid you are misremembering. As you can see from the attached graph the stats show these have been changing over this period.
    Hi Monid

    As I said... "memory" and I quote again in the 70's and 80's. (Never said 90's)

    The 70's and 80's was a time I was actively investing, I was also a senior "Payroll Personell Officer" at the time for a large Government Department and knew exactly what an average wage was, and what an average price of place was!

    Your graph only covers the 90s which was through a bad Share Market Time when lots of people lost truck loads of money, plus their homes, properties, and their jobs.

    The NZ Dollar Exchange Rate in the mid 90's was at an all time low as well (below 37 cents against the US Dollar)

    The late 80's and 90's was also a time when professionals and blue collar workers were maxing out on the DOLE queue, thus the average pay wasn't to high.

    I can say this because when I worked for the same Govt Dept, I was also in charge of a District dishing out the DOLE which had the largest numbers of unemployed people in the country.

    This also follows a period after "Desert Storm" which had a global effect.

    So much for your graph which doesn't really represent a normal average period of time.

    Nothing wrong with my memory.

    It's actually your information being mis-information out of perspective.

    You know very well that graphs can be interpreted in many way to suit the means that we would like it to show. (Your graph is so small with so little info, no-one could cipher it anyway)

    Hmmmmmm... now what was it you said, I seem to have forgotten?

    Cheers Ron
    (Justice of the Property Peace)

    PS - As I had said in a previous post - Affordability has nothing to do with property investors.

    Its government policy that makes homes affordable or not!

    https://www.propertytalk.com/forum/sh...&postcount=328

    It has also been said that the cost of average home is 7 time the average gross wage... this has always been the case, and this goes back to my memory of investing in the 70's and 80's.

    WHOOPS - Seemed to have forgotten that I had already posted the above only 10 minutes earlier
    Last edited by RonHoyFong; 29-03-2007 at 03:25 AM.

  7. #7
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    Default

    Ron, my apologies, I thought you said this:
    Quote Originally Posted by Ron
    the cost of average home is 7 time the average gross wage... this has always been the case
    But obviously I was wrong what you had said must have been this:
    Quote Originally Posted by Not Ron
    The cost of the average home is now 7 times the average gross wage and it was like this in the 70s & 80s.
    It hasn't always been the case. Maybe it was 7 times the average wage in the 70's & 80's. To be honest I can't be bothered checking the information although this here: http://www.treasury.govt.nz/workingp...6/twp06-03.pdf

    states this:
    Quote Originally Posted by Affordability of Housing: Concepts, Measurement and Evidence
    We have calculated the ratio of median house price to the average income. We again use the median house sale price from QVNZ, the average household income from HES (with estimates for non-survey years, and TAXMOD to derive net values) and the average gross individual income from NZIS. In terms of this ratio, the current level of unaffordability is easily the highest on record.
    Sourced from:
    Affordability of Housing: Concepts, Measurement and
    Evidence by Mark Robinson, Grant M. Scobie and
    Brian Hallinan. NEW ZEALAND TREASURY
    WORKING PAPER 06/03

    Which at least suggests you might be mistaken.

    Cheers
    David
    Last edited by Monid; 29-03-2007 at 09:28 AM.

  8. #8
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    Default

    Ron, I started investing in PI in 81, and house prices were at a big low. The problem wasn't the price, it was the availability of credit. To get my first mortgage I had to prove my worth by saving regularly for two years prior with the bank I got my mortgage from (Countrywide). They even printed little brochures showing how much you had to save and for how long to qualify for X amount of money. This credit crunch put house prices through the floor.

    There is no way that houses were 7 times the average wage. I was only the office junior (19 years old) when I bought those first two flats, and on a low wage. Houses were cheap, credit was tight.

    By 84 my flats had more than doubled in value. This theme comes and goes (the property cycle), so your claim has little merit.
    Find The Trend Whose Premise Is False - Then Bet Against It

  9. #9
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    Feb 2005
    Location
    Auckland
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    Default

    Hi Gate Keeper

    Yes I agree with you and can accept what you say.

    Yes it was a lot harder to buy property back then.

    I can remember having to wait up to 3.5 weeks before being told in 1972 by the ASB Bank that my application for a two thirds loan of the purchase price of $10,300 was approved. (Such is the wonders of computerizations of today!)

    However I still stand by my fading memory and count my beans.

    Cheers Ron

    Cheers Ron

  10. #10
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    Auckland
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    Default

    Quote Originally Posted by Monid View Post
    Ron, my apologies, I thought you said this:

    But obviously I was wrong what you had said must have been this:


    It hasn't always been the case. Maybe it was 7 times the average wage in the 70's & 80's. To be honest I can't be bothered checking the information although this here: http://www.treasury.govt.nz/workingp...6/twp06-03.pdf

    states this:

    Sourced from:
    Affordability of Housing: Concepts, Measurement and
    Evidence by Mark Robinson, Grant M. Scobie and
    Brian Hallinan. NEW ZEALAND TREASURY
    WORKING PAPER 06/03

    Which at least suggests you might be mistaken.

    Cheers
    David
    "Whatever" you say Monid... That's COOL by me!

    To give support to your "depend which way you look at" argument, Stat's are Stat's and you have my permission to look at it whatever way you choose.

    I wonder if your statisticians used a National average, an Auckland average, a Wellington average, or Whatever average?

    Never-the-less I still stand by my fading memory and count my beans, wanna make sure I haven't lost any yet!

    Duh - what was it I said... Oh yes

    "the cost of average home is 7 time the average gross wage... this has always been the case"


    Cheers Ron
    (To forget or not to forget, that is the question)


 

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