Monday, 19 January 2015

Property Price to Income Ratios

Property prices are rising. It has been repeated ad nauseam, and young people have begun to assume that they'll never be able to afford to own property in New Zealand. The exact cause of rising property prices cannot be proven, but that doesn't stop every politician and their favourite pet (or in some cases, plant) from having an opinion. Reasons range from simple supply and demand to an Asian invasion to blame apportioned on unsustainable Kiwi culture to interest rates to the leaky homes crisis to the value of the Kiwi dollar to humanoid reptilians manipulating our financial system.

But let's take a quick step back - how bad is the problem really? If we just look at the house prices, they certainly seem to be rising quite quickly when graphs like this are published:


Note the sneaky truncation of the y-axis to amplify the perceived effect. But okay, the price of housing and property in general has increased significantly. In Auckland, it rose 29.3% (adjusted for inflation) in the space of 26 months between 2011 and 2013. Adjusting for inflation is important, because it means that the price of property is increasing (a lot) faster than other things. The OECD and others estimate that New Zealand house prices are overvalued by 25%.

Does it matter? When we look at the raw numbers and talk about the rise in median house price being tens or hundreds of thousands of dollars, the initial reaction is one of horror. But the rising house prices have to be not only adjusted for inflation, but discussed in the context of rising incomes as well. Looking at a similar time period as the graph above, it presents a slightly different picture:


As it turns out, while house prices may not be affordable for many, the general trend is that they are becoming more affordable over the last four or five years (the ratio is definitely higher than it was before 2011; I can hear @BKDrinkwater shouting "ENDPOINT SELECTION MATTERS" at me through the internets). Price to Income ratio is a good way to better understand the effect of rising house prices, measuring affordability rather than raw prices. Interest.co.nz has a post about this, using slightly different data (back to Nov 2012, missing the 2011 data point that gives the above graph the trend it does).

But regardless of whether property is more or less affordable over time, New Zealand is still in a reasonable position in the world as a whole. Articles in the Herald and on Stuff cite various studies that show that New Zealand has some of the highest house prices in the world. However, those studies often only look at the more developed cities/countries (generally the OECD). As an experiment, I sourced some data and asked Twitter to give me a list of random countries to compare against New Zealand:

The above table is sorted by average price to income ratio across the five years. In 2015, New Zealand ranks 18th in lowest price to income ratio (out of the 122 countries for which data is available). For the record, there are some caveats with this data (as there always are); the original housing price and income data is crowdsourced rather than from national statistics agencies, and the ratio is calculated as median house prices / median (annual) family income (defined as 1.5 * average net salary).

So the next time someone says "housing is so unaffordable in New Zealand", you can tell them it's a lot more unaffordable in Iran (20.78). Or Vietnam (23.92). Or Uganda (31.13). Does New Zealand have a housing problem that needs to be addressed? Yes. Does New Zealand have a housing price problem that's amongst the worst in the developed world? Probably. Does New Zealand have a housing affordability problem that's amongst the worst in the entire world? Nope. If we compare ourselves to the entire world, the problem is not as bad as the media makes it out to be.

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