Follow us on Twitter

Demolishing Demographia?

*** Spoiler alert: The title of this post is somewhat hyperbolic ***

Demographia’s “9th Annual International Housing Affordability Survey” has just been released and is receiving a lot of attention in various media outlets, such as the NZHerald. Indeed, NZ ‘s connection to the report is relatively strong – it was co-authored by a kiwi and the foreword is written by our very own Minister of Finance.

For those not in the know, the primary objective of the Demographia report is to evaluate housing affordability across a selection of “anglo” countries, namely Australia, New Zealand, Canada, the U.S., the U.K. and Ireland. This is a very admirable objective; after all if policy makers can better understand the complex range of factors affecting housing affordability, then this can in turn support more informed debate and policy settings.

Demographia measure housing affordability using the so-called “median-multiple” indicator, which they define as follows:

Housing affordability = Median house price / Median household income.

This is a pretty simple indicator: Take the median house price and divide by the median household income and, voila, you have a multiple describing the price of housing relative to incomes. Demographia then collect a swathe of data on house prices and incomes for all cities with populations of 1.0 million or more in Australia, New Zealand, Ireland, U.K., Canada, and the United States. Their results over time are shown below.

National results

Since 2004 the trend in the median-multiple measure has diverged between countries; it increased in Australia, New Zealand, and Canada; stayed broadly constant in the U.S.; but declined in the U.K. and Ireland.  While these are fairly innocuous results, the Demographia report then concludes (p. 3):

Overwhelming economic evidence indicates that urban containment policies, especially urban growth boundaries raise the price of housing relative to income. This inevitably leads to a reduced standard of living and increases poverty rates, because the unnecessarily higher costs of housing leave households with less discretionary income to spend on other goods and services. The higher costs ripple into rental markets, tightening the budgets of lower income households, who already suffer from lower discretionary incomes. The principal problem is the failure to maintain a “competitive land supply.” Brookings Institution economist Anthony Downs describes the process, noting that more urban growth boundaries can convey monopolistic pricing power on sellers of land if sufficient supply is not available, which, all things being equal, is likely to raise the price of land and housing that is built on it.

I read that and thought “hmm, that’s fairly strong stuff.” So at this point I thought it was worth stepping back a little.

First let’s examine the two key arguments the Demographia report advances in support of the median-multiple measure of housing affordability (p. 6):

  1. It is used by other reputable organisations, such as the World Bank, the UN, and Harvard; and
  2. It is simpler than other measures, which are “often not well-understood outside of the financial sector.”

The second reason given is rather vacuous and, frankly, a little condescending to anyone who does not work in the financial sector. And believe me, many economists do not work in the financial sector; at least not anymore.

On the other hand the first reason offered as justification for using the indicator is more understandable: If the median-multiple indicator is used by a range of reputable international organisations then it likely has more merit as measure of global differences in housing affordability.

At that point I tried to follow the sources provided in the Demographia report. Doing raised some fairly important issues: The World Bank link, for example, takes you to a relatively obscure web-page that appears to date from 1992, while the Harvard link appears to be an on-line catalogue of the indicators used in the U.N. report, rather than an independent publication attesting to the merits of the median-multiple indicator.

That leaves us with one “independent” reference, namely the U.N., lending credibility to the use of the median-multiple indicator of housing affordability. Following that link, however, reveals that the median-multiple indicator is but one of a myriad of indicators and checklists identified by the U.N. And perhaps more importantly, the U.N. do not present the median-multiple indicator in isolation, but instead consider it as one of two possible “housing affordability” ratios, as illustrated below.

UN report

 

Righto, so the median-multiple measure can be calculated using either median house prices or house rents. At this stage I was perplexed: Why does the Demographia study not (from what I can tell) mention the ratio of house rents to income as as a possible alternative indicator?

So I did some more digging, and found this graph in the Productivity Commission’s final report on housing affordability in NZ, which considered median rent to household  (disposable) income, as illustrated below. In many ways this indicator is more comprehensive than that originally identified in the U.N. report, because it considers after-tax income.

Productivity commissionBased on this graph the Productivity Commission concludes (p. 4):

During the house price boom, rents increased at around the same rate as generalised inflation. Across territorial authorities, rents grew in a relatively tight range of 2.3% per year (in Dunedin City) to 8.2% per year (in Buller District). In all cases, rent increases were significantly less than real house price inflation and the ratio of house prices to rents increased markedly, a departure from the long-term broadly stable relationship. 

This apparently benign aggregate situation disguises a more difficult position for renters on lower incomes. In particular, people in the lowest two income quintiles spend a much higher proportion of their income on rent than people on higher incomes (Figure 0.5). Even though the situation appears to have improved since the late 1990s, those in the two lower income quintiles still spend, on average, more than 30% of their disposable income on rent, after allowing for government assistance.

Oh dear Daisy: It seems that the Productivity Commission has – using the other housing affordability indicator recommended by the U.N. study referenced by the Demographia report – come to a different conclusion: That housing affordability in NZ has been improving since the late 1990s.

Now at this point I want to caution that these other indicators do not prove that Demographia is necessarily wrong, only that their use of indicators may be too limited. Usefully, the Productivity Commission includes another indicator of housing affordability, namely the “home affordability index” (compiled by Massey University). This index considers the relationship between the costs of servicing a mortgage on the median house and median household income:

Home affordability indexThis indicator suggests that home affordability has been declining for about the last 4 years. Perhaps more importantly, the 2008 peak in the home affordability index (indicating relatively unaffordable homes) does not seem to be significantly higher than earlier peaks in, for example, 1989 and 1996.

So where does this leave the Demographia report? Well on I’m afraid to say that a first investigation throws up very little corroborating evidence to support their key conclusions, namely that the current price of housing in New Zealand is “unaffordable” relative to historical norms. That’s not to say that they’re wrong, only that their conclusions are not fully supported by the available evidence.

Nor is this to suggest that more affordable housing is not a valid objective: I certainly think it is. And just because the current price of housing is comparable to historical trends, we should still be interested in making housing more affordable, because as Deomgraphia note it is perhaps the most basic of human needs. So while I question Demographia’s analysis and conclusions, the subject is nonetheless very important and worth considering in more detail.

I only wish that 1) they had the time/energy to analyse these issues in more detail within their existing research and 2) news organisations did a little more research before reporting the results of studies like this. While I have more to say on this issue (and hope to do so in future posts), it’s now time for me to up stumps and head for tea (i.e. bed). Until next time …

51 comments to Demolishing Demographia?

  • ahoopernz

    I think house prices / income is rather simplistic. The calculus should include prices of a range of commodities, similar to the Consumer Price Index. Aside from food and energy costs, important considerations would be fuel prices and public transport fares. And connectivity to employment centres is surely an important consideration too.

    • Stu Donovan

      Simplicity, or parsimony, is both a virtue and a curse. What I mean by that is that simple calculations are somewhat virtuous because of their transparency. On the other hand, they by definition will omit many confounding factors that are relevant to the topic at hand.

      In general, robust economic analysis would resist “hanging one’s hat” on any single economic indicator, as Demographia do here. Instead you would want to slice and dice the numbers using several simple indicators, such as the home affordability index and median rent to income ratio presented above, to see if the same/similar trends emerge from all indicators.

      And to me that’s the major failing of the Demographia report: It fails to give any air time to alternative (and arguably equally if not more valid) indicators. When you do dig into these indicators, as the Productivity Commission has done, then a much more complex picture emerges.

    • Stu Donovan

      P.s But in general I agree with you – it is too simplistic. My next post on this topic will hopefully consider some of the issues you raise.

  • Mr Anderson

    Nice work Stu. So their methodology is about as flawed as their proposed solution of more sprawl when Auckland doesn’t have a land supply shortage at all.

    • Stu Donovan

      Their primary hypothesis, i.e. that urban containment policies have made housing less affordable, remains unproven in a New Zealand context given the ambiguity associated with other relevant indicators. This in turn renders their conclusions and recommendations are premature, i.e. they are not supported by evidence.

      From a scientific perspective that’s not quite the same as suggesting that their methodology/recommendations are “flawed” – I would prefer to say their methodology/evidence is “highly questionable” and their solutions were “premature” :).

  • bbc

    Isn’t it also the case that they don’t include anything on a unit title? Such that all of the apartments in Auckland don’t make it into the equation?

  • GTP

    One difference is the demographia report is for cities over 1m people ie: Auckland whereas the Massey numbers are for the whole country ?

    • Stu Donovan

      The Demographia report is interesting: It initially appears to be limited to cities with populations > 1 million, but then in the NZ section it presents median-multiple ratios for a number of different locations in NZ. I’ll come back to the NZ results in more detail in a subsequent post.

      But yes the Massey numbers are for the entire country.

      • GTP

        I think you’re being a bit disingenuous using a graph showing rent/disposable income across the entire country to “demolish” a graph effectively showing price/income for Auckland. We all know the Auckland market is very different to the rest of the country.

        • Stu Donovan

          Nope. The problem you refer to arises because Demographia’s housing affordability graph refers to “New Zealand”, when I think the underlying numbers are based solely on the Auckland market.

          They then use these results (from Auckland) to talk generally about implications for housing affordability nationally. Given their recommendations are caged at the national level, I think it’s reasonable to point out that a graph of trends in rents versus disposable incomes at the national level is not consistent with their “national” results.

  • There are so many factors that play into the debate, Demographia only look at gross income however each country has vastly different tax structures that will severely alter take home pay and therefore affordability. Other issues include costs associated with housing like transport costs that will vary by country/city. I think that Demographia use the multiple median method as a way of pushing their ideology.

    • Stu Donovan

      That does appear to be the case yes; the overwhelming ideological themes in the report does hint at some strong underlying pre-conceived ideas on behalf of the authors. In this case, two other reasonable indicators of housing affordability were omitted from the discussion, which – when investigated – did not support it’s primary conclusions. Whether that was accidental or deliberate is somewhat irrelevant: It’s poor economics.

      Relying solely on the median-multiple indicator to draw conclusions about housing affordability is akin to using national income as your sole measure of economic performance, i.e. drawing too long a bow.

  • Greg N

    Taklng a leaf (or rather, Burger wrapping) from the Economist magazines “Big Mac index” of relative currency valuations.

    What we need here is the “Big Mac house prices index” TM.

    This is similar to the Demographia index
    – but instead of $ figures it uses the number of Big Macs (in local currency with local taxes e.g. GST in NZ and AUS included) you’d have to sell in each country to buy the median price house in that country,
    And then calculate out the number of Big Macs in each country at the same local tax included price that you’d be able to buy with the median income.
    And the ratio of these two numbers is the index value for that country, for that period.

    Then you’d have some kind of half decent international comparison with each countries local purchasing parity built in in a rough and ready fashion..

    Of course, the the argument is then do you make the income before or after tax.
    Something I’m not sure the Demographia numbers are not so clear about either.

    After tax is the figure for income I’d use though.

    This index does mean you could create a housing crisis (in the numbers at least) just because McDonalds changes the price up or down of the Big Mac in one country while nothing else changes i nthe economy.

    However, thats no worse than the current situation with the current figures with their overly simplistic and totally meaningless comparison.

    • Of course, the the argument is then do you make the income before or after tax.
      Something I’m not sure the Demographia numbers are not so clear about either.

      Yep they are clear about it, they use “gross before tax annual median household income”.

      • Stu Donovan

        That’s not a bad idea Greg. And thanks for clarifying that issue Matt – this use of before tax income is potentially hugely problematic when trying to compare between countries.

        • Greg N

          Stu,
          You could get a half way value now if you take the existing Demographia numbers and then take the ratio value for a given country, then multply it by the Big Mac price for that countries currency for that year (sourced from the Economists Big Mac index if no where else) – then you’d have a rough cut of your numbers.

          Wouldn’t do the After tax income part of the median income – but it would provide a somewhat meanginful comparison between countries at least than the current hokey numbers..

          Be interested to see where little old NZ sits relative to the usual suspects of AUS, UK, US etc on that index.

  • The other question that needs to be asked is how they set their affordability scale. They say that houses are affordable when their median multiple is 3 times household income but who did they set that level. I suspect that it is because that was roughly the level that people in my late grandparents generation paid for housing but it wouldn’t surprise me if that was at the low point of an affordability cycle.

    • Greg N

      Yes, 3 seems to be a pretty arbitrary number for the “affordability threshold”.
      And doesn’t allow for any variability to do with income taxation, deductability of housing costs from income to reduce your tax, existence of Capital Gains Taxes versus local property “owning” taxes (like rates), changes in interest rates over time.

      So its a pretty meaningless number all round.
      Even within a country over time, its still suspect due to the “one size fits all” mentality of the people who continually refer to and use this index like its some kind of 11th commandment, written on a stone tablet.

    • Stu Donovan

      It’s simply a convenient number that seems to be based on a relatively arbitrary historical average across the selected countries for some particular time period (post 1980s I think). But yes I agree Matt: If one was to set an arbitrary scale in this way (i.e. using an arbitrary number) I’d want to see a little more historical evidence to suggest that is the “norm” to which we should aspire.

  • JeffT

    Well, our housing is expensive in Auckland because people want to buy a house on a section but if they willing to buy a unit or apartment they’d prpbably find these are cheaper and their housing affordability would rise. And if these apartments were closer to PT hubs, they’d probably find their transport costs would be lower too (if PT WAS cheaper than driving!). So building further out isn’t really the answer.

    • Stu Donovan

      I would not want to judge other people’s preferences, but in a future post I’ll consider the impact of regulations (including urban containment) on housing affordability and how they might tilt the playing field.

    • SteveC

      is housing affordability the right measure? if buying a lower cost house means running an extra car and a 45-60 minute drive to work, there are whole of life costs that aren’t taken into account, maybe a living cost index would provide better answers

      it would take more effort and cost more to compile, but it would help to define the true costs of urban sprawl

  • Lucyjh

    thanks for this! I have been trying to find a graph showing that rents haven’t risen much relative to incomes or inflation for ages. now I know where to look.

    just a thought – that measure which looks at the cost of servicing a mortgage is influenced by interest rates. so it probably makes the last few years look a bit bit better. if interest rates rose suddenly then housing affordability would probably look pretty bad by either measure don’t you think?

    • Stu Donovan

      Yes, the home affordability index is linked to interest rates – but I think that is arguably more reasonable? The cost of owning a house is, for most people, linked to the opportunity cost of the capital (if they buy it outright) or the mortgage payments that they pay (if they borrow). Both of these “costs” seem to be intrinsically linked to prevailing interest rates.

      I will accept that there’s some “stickiness” in interest rates because a lot of people fix their rates, on the other hand this stickiness will work in both directions depending on the direction of change. I.e. if interest rates rise over the next 12 months then people who fix now will not be immediately exposed to the higher rates, and vice versa if interest rates drop.

      Personally I think all three measures are quite useful, for the reasons that I will hopefully discuss in a future post :).

      • LucyJH

        hi. Yes I agree it’s reasonable to use both measures – I guess I was just making the point that the low interest rates we’ve had recently are possibly masking (in terms of the shape of the graph) what has been quite a dramatic increase in house prices in Auckland. In the rest of NZ (except for Canterbury) I actually don’t know if house prices have risen relative to inflation since 2008. Last time I asked the parliamentary library for that info back in 2010 they hadn’t.

  • Frank J

    Demographia – the Fox news of urban policy.

  • Frank E

    Demographia – the MSNBC of urban policy.

  • Icebird

    The media coverage that the Demographia study gets every year annoys me to know end, but the simplicity of its methodology probably makes it more media friendly. “If youc score less than three, you’re afforadable! Auckland is a 5! Auckland is severely unaffordable!”.

    While I don’t necessarily disagree with the conclusion that Auckland house prices are over-valued, I do disagree with their singular focus on restrictive land policies as the sole reason for high house prices. Their supply and demand logic is focused solely on supply of land and demand for it. But there is no consideration of the other factor in the home price equation: money. If prices are risisng, that seems to indicate money is in plentiful supply. Who’s providing that money? The banks. The period of rising house prices in the 2000s identified by Demographia may have coincided with more restrictive land use policies; but it also coincided with a period of extremely low interest rates around the world. (Yes, New Zealand interest rates were relatively high, but NZ banks could source funds from overseas at low interest rates). The banks seem to think current prices are affordable, or they wouldn’t lend out the money. You could probably influence the housing market much faster by lifting the level of deposit required for a mortgage (maybe give first-home buyers a slight discount to get on to the property ladder), and tightening up the rules which allow banks to treat mortgages as inherently less risky than other forms of loans.

  • RHarris

    The frightening thing is some news agencies don’t question their research. Thankfully I think all news channels reported their findings with some balance. Most people don’t realise each year they just push their same biased agenda probably paid for by landbankers. They never seem to cover that house affordability is caused by a number of factors.

  • RHarris

    Yepp I have friends who see the simple numbers and think their conclusions must be right until I point out to them the other factors involved and then they realise what rubbish their reports are.

  • Nick R

    It seems an Australian economist has much the same queries:
    http://theage.domain.com.au/real-estate-news/economist-tears-roof-off-affordability-study-20130121-2d2e4.html

    He also brings up another point, basically the Yogi Berra fallacy: If housing is so unaffordable, how come people keep buying it and how come prices can continue to climb? If it were actually “extremely unaffordable” then no one could afford to buy anything!

  • Sacha

    “our housing is expensive in Auckland because people want to buy a house on a section but if they willing to buy a unit or apartment they’d probably find these are cheaper”

    Jeff, if only the market was actually providing enough of those choices (terraces, non-shoebox apartments). It’s not. And changing planning rules to build more sprawling suburbs is a 1950s ‘answer’.

    • JeffT

      Perhaps I should have phrased this as “if lower priced (compared to 2-4 bdrm houses) units and apartments WERE AVAILABLE it would improve housing affordability”.

      I totally agree with you Sacha, I have been looking at a few apartments in the cbd and close to rail stations the last few weeks. I’m not going to assume they are the maket norm but I wasn’t impressed with the space/quality. I wouldn’t have thought that the supply meets consumer expectations. I lived in the UK for a while and the space/quality was better. How is this happening? Is it lax building regulations?

      • GTP

        But larger apartments of higher quality = higher prices surely ? (Presumably you are looking at apartments in your price range)

        Building/planning regulations could be changed to encourage/enforce developers to build larger/higher quality apartments but it won’t make them more affordable or am I missing something ?

        • JeffT

          Yep I agree. Better quality will cost more. I just think there could be a bit more supply of apartments in between shoeboxes and penthouses.

          • Nick R

            Yes indeed, I live in one that fits between shoebox and penthouse and it took me a long time to find.

            According to my rates bill, my share of the land is worth around $50,000 and the improvement (i.e. my apartment) is worth around six times that. So the cost was 1/7th on land, 6/7ths on dwelling. That’s how I can get a high quality good sized place, by spending it all on dwelling and not on land.

            I guess the point is when you’re not spending three hundred grand on a section you can afford to spend more on a higher quality dwelling and still keep things affordable.

        • jonno1

          And that’s the elephant in the room right there GPT. Most advocates of intensification claim it’s cheaper than “sprawl” (an emotive word at best). Maybe it is, but seldom, if ever, does anyone compare like with like. For example, if the average size of a new free standing house is 250m2, what does it cost to build (ignoring the land cost) compared with building a 250m2 apartment of the same quality (again, ignoring the land cost). I don’t know the answer, but I suspect the apartment would be costlier, as it will be built as a commercial building with fire cells, lifts, sprinkler systems etc that are not required for a private house. The land/dwelling value ratio may mitigate this somewhat, but I suspect not a lot. And then there’s lifestyle to consider; apartments may suit young, child-free professionals and retirees, but maybe not those in between (eg families).

          Nick R has identified his land/dwelling value ratio as 15:85, but doesn’t mention floor area or number of floors & apartments in the block. I’m not suggesting he discloses that, I’m just pointing out that the data are incomplete without it. Location is, of course, another factor.

          Just for fun I looked up my old suburban house of 250m2 on a “full” section and that found the land/dwelling value ratio is 46:54 (using Auckland city figures). But it’s now an old house so not surprising. What that says to me is that sooner or later someone will knock it down and start again, and maybe split the site into two while they’re at it. But that will only happen when the market decides it’s viable. By comparison, my present, larger & newer, house on a smaller site in the city fringe has a ratio of 56:44, but so what? It’s a 2-unit site but I chose to build a single house, so the ratio could be quite different.

          I haven’t mentioned transport costs relative to workplace or tax structures as others have covered that, I’m just agreeing that there are multiple factors to consider.

          • Dan

            Apartments have some higher building costs (fire rating, stronger supports, lifts etc) but also many efficiencies: only need to prepare one set of foundations, shared walls, standardized fit-outs etc. I’d be very surprised if they were more expensive than freestanding houses on a per m2 basis.

            As for average house size, you need to look at where you are talking about — you might as well go big on a new build out of town. In town, where space is more expensive and there is more shared public space, smaller is probably fine.

          • Dan

            New houses may be large, but most houses in the city are smaller yet still highly sought after. The average house size in the old Auckland City is 158m2 according to QV. I’m living with 3 other adults and a child in a 135m2 house very comfortably.

          • jonno1

            I’m not whether you’re agreeing with me or not Dan! But you’ve confirmed my main point, that apartments are generally smaller than houses so that needs to be factored into any cost comparison. And yes, there are economies of scale for apartments compared with bespoke houses, however many of the housing groups can achieve this also with stansardised modules etc. Maybe someone in the building industry can provide a definitive answer to the costing thing – it shouldn’t be too difficult.

          • Jonno1 – Although it is a perception in NZ that it is impossible to raise a family in an apartment, we all know that billions of people do it every day. If you want to live in a big city, which Auckland is rapidly becoming, then that is just part of the deal. In the future, if NZers dont want to accept that, they will have to live in a smaller city. Many people in Europe make that choice every day. Things are going to chnage in Auckland whether NZers want it or not, it is just inevitable as the population rises and I welcome it.

            Living in an apartment with a family may seem daunting in our autodependent environment. But if you had infrastructure and public spaces that were safe for children and allowed them to get around by themselves, the lack of space in your house wouldnt be that much of an issue. The children might even just go outside and play withe the other children in the neighbourhood spontaneously, without being dropped off in a car (shocking I know).

            The other point is that noone will be able to subdivide your property as long as our anti-density minimum land requirements are in place. As a free market advocate, I know that you are outraged by draconian controls such as minimum parking and minimum land sizes that stifle innovation and keep us locked into a one dimensional housing market. Why cant I build a house on 200sqm if I want to? The burden should be on the person wanting to stop me to show the negative aspects of that.

  • Dan

    The median rent graph shows shows how bad it was for the poorer members of society in the early 1990s — those in quintile 1 were hit badly by things such as the benefit cuts and they’ve never recovered.

  • Greg N

    On the topic of housing affordability.

    Heres quote from Nick Smith in todays Herald, quoted from a Firstline interview on TV3 this morning ( http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10860868 )
    :
    Herald’s headline is ‘No magic silver bullet’ for housing affordability.

    Nick Smith is quoted as saying:

    “There is no magic silver bullet. If there was one it would have been fired a long time ago.
    It’s about land supply, it’s about the cost of infrastructure that impacts on subdivision costs,
    it’s about the actual costs of building a house, and it’s also about compliance costs.”

    Then he says:

    “The cost of the section has gone up so much more over the past 20 years than the actual cost of building a house.”

    I also heard Bill English on Morning Report on Tuesday morning talking about the oft quoted Productivity Commission report.
    He was asked about the fact that house construction costs have gone through the roof.

    English said “There is anecdotal evidence that the few (one?) numbers of players in the building supplies market is one thing that has been raised as something to be looked into but no hard evidence has been found so far.”

    i.e. he was asked “Is is not the case that Fletchers is monopolistically pricing building supplies in NZ as they have a strangle hold on the market?”
    English says in effect: “Nah,we don’t think so, they say they aren’t doing that & we believe them”

    – And how Finance Minster will anyone know that is the case unless you actually objectively look at this relevant question?

    And then he almost immediately he then gives a long critique about councils being at fault for costs due to lengthy delays in consenting processes yada yada yada.

    So, whats it to be Finance/Housing Ministers?

    Either everything mentioned above including land is a part of the housing price problem,
    OR
    Is just land supply/price (and then by extension council “interference” via zoning rules & consents) the only problem with house prices?

    Personally I think the correct answer “is all of Nick Smith’s answer above and then some” not just “Land” or “Councils”.

    As Stus other post shows today ( http://transportblog.co.nz/2013/01/23/does-auckland-really-have-a-land-supply-shortage/ ) there is plenty of land around in Auckland ready for building, right now.
    But not much building is happening – Why?,

    Thats more to do with the business cycle for construction and demands being placed elsewhere on resources – human, capital & materials for the Christchurch Quake rebuild being the reasons for the lack of houses around right now than anything else.

    So, maybe Nick Smith might bring something new to the house prices discussion but it seems so far that the old habits die hard with these guys and they are still banging away at simplistic views that land & councils as the only cause of the problem,

  • Malcolm M

    There is good publicly available information on construction costs, for example in Sydney where there is a good depth of experience in the construction of detached homes, semi-detached and high-rise apartments :
    http://mortgagehouse.com.au/construction/construction-costs-per-square-metre.aspx
    Per square meter it costs about 5% more to build a 2-storey town-house than an outer suburban detached house, and 50% more to build apartments with 4-8 levels. Other differences include
    – a lower land price component in the apartments
    – higher holding costs (and risks) for apartments between when a developer purchases a property and when the apartments can be sold
    – smaller dwelling sizes with apartments, especially if parking provision is omitted.

    • jonno1

      That’s a great link Malcolm, is there a NZ version? I didn’t anticipate the 50% loading for apartments though. It also appears that Australia has a slightly different definition of townhouse, ie what we would call a duplex or the Brits a semi-detached, rather than a free-standing multi-storey house on a small site.

      • NCD

        That’s very useful- it would be interesting to use it to build up some scenarios for dense housing with land costs for CBD, places like GI and Panmure within walking distance of a train station, and compare for stand alone housing if car-reliant suburbs.
        (and of course applying an outrageous factor to convert to NZD and NZ costs)

        Next phase would be to then take the different models and make a “housing + transport affordability index” for the different scenarios as CNT has done for actual housing in the US here: http://www.cnt.org/tcd/ht

        Phase three: take into account the energy efficiency gains of dense housing – I think we don’t take that seriously enough.

        That would make an interesting post….

    • JohnP

      It’s certainly more expensive to build high-rise (on a per square metre basis) – you need deeper foundations, stronger structure etc. Typical cost for high-rise, 2-3 bedroom apartments is $2,400 to $3,000 per sqm. Balconies add a bit extra but not much in the scheme of things. Underground carparking is bloody expensive and would make up a big part of the cost of an apartment.

      Single storey houses cost $1,450/ sqm – $1,800/sqm.

      Two-storey gets more expensive, with houses at $1,800-$2,000 for medium quality.

      As mentioned earlier, developers would also want a higher profit margin due to the higher risk (more complexity, consents process more difficult, more volatile demand).

      So apartments are more expensive, but you save on the land. You’d also expect the occupants to save on transport and energy.

Leave a Reply