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Demolishing Demographia? An alternative explanation

My last two posts (here and here) considered Demographia’s recently released survey of housing affordability for 2013, which concluded that housing in NZ is increasingly unaffordable.

My first post suggested Demographia’s primary findings were not supported by independent evidence, such as alternative “rent-income” and “home affordability” indicators. My second post then outlined some issues with their “median-multiple” indicator (calculated as the median house price divided by the median household income). 

This post will now refine some of these criticisms, before outlining some of my own ideas on the causes of housing affordability issues in New Zealand. First I wanted to tease out some of implicit assumptions that underpin Demographia’s “median-multiple” indicator, namely:

  1. Median-matching: This issue was best articulated by James H: “the median-multiple indicator carries an assumption: that the income-earners at and around the median are the same group who demand the houses priced at and around the median, and that result can be extrapolated for other price-income pairings. As mentioned in the post, that excludes measurement for a large group of earners at many income levels who are in fact happy to rent for a range of reasons. Also I doubt whether median houses are often bought by median earners for a variety of reasons including life stages, geographical differences etc.”
  2. Independent inputs: This issue relates to the fact that the two inputs into the median-multiple indicator (house prices are income) are actually not independent of each other. Consider a situation, for example, where most of the houses in New Zealand were being bought and sold by relatively wealthy households, and that these households subsequently experienced high income growth, while incomes for the general population remained broadly unchanged. In this situation the median house price (and median-multiple indicator) would rise simply because income growth was concentrated within the same people that were purchasing properties, rather than because housing was becoming less affordable.

The second issue is quite important, because it implies that changes in income may in fact impact on house prices. The figure below illustrates the input data used by Demographia for Australia. In this graph, we find a strong positive correlation between median household income (x-axis) and median house prices (y-axis).

Income versus house prices

This suggests that locations with high incomes have more expensive housing (surprise surprise!). More specifically, it suggests that for every $1 increase in median household income there is a corresponding $5.1 increase in median house price. While that sounds like a lot, note that income is measured p.a. whereas house prices are “total.”

My final comment is on the relevance of Demographia’s indicator. i.e. the “so what” question? It seems that the parts of New Zealand with the highest median-multiple ratios, such as Auckland, are actually attracting the fastest population growth, as illustrated below. Of course, this may reflect other factors that are at play, but it does suggest that our housing affordability (at least as measured by the median-multiple indicator) is not yet significant enough to drive people away.

Population growth versus median-multiple indicator

Thus, population growth in these places seems to be going the other direction from what Demographia would expect – we are increasingly moving to areas that they consider to be unaffordable. Based on this evidence, I’d suggest that the median-multiple indicator used by Demographia is not a good measure of housing affordability. Instead, it seems to measure:

  1. The degree to which income growth is invested in housing; and
  2. Population growth (which will tend to push up property prices but suppress income growth).

It’s not clear to me that the median-multiple indicator measures housing affordability, and nor is it clear to me that the urban containment policies pursued by local governments are binding to the degree that they have major impacts on property prices. They may be – but Demographia’s indicator does not, and cannot, tell you that.

My personal view is that the primary impact of local government regulations is not through the constraints they place on land supply (i.e. urban containment), but actually through the barriers they create to the development of more compact and affordable housing. Here’s some examples of regulations pursued by local governments in New Zealand that seem likely to restrict the supply of affordable housing:

  1. Minimum lot sizes – i.e. “all ye who have less money shall be forced to purchase land you don’t want.”
  2. Minimum apartment sizes – i.e. “all ye who have less money shall be forced to purchase living space you don’t want.”
  3. Minimum parking requirements – i.e. “all ye who have less money shall be forced to pay for vehicles you don’t own”.
  4. Maximum height limits – i.e. “all ye who chose to live like rats are consigned to perish like rats – on the street.”
  5. Heritage protections – i.e. “all ye who don’t have the money to renovate a villa shall live elsewhere.”

In my experience these policies are often more binding constraints than the availability of land. So my suggestion is that housing affordability has less to do with policies that favour urban containment (as Demographia and the National Party would have you believe) than they are to do with the plethora of policies that suppress more intensive and affordable housing. I’d go as far as to say that most of our policy settings have a systematic bias against the development of compact and affordable housing.

In this light, it seems that recent political announcements have missed the mark. National are deluding themselves into thinking that the release of land on the urban periphery will deliver meaningful and sustained reductions in the cost of land, and by extension housing. Labour and the Greens, meanwhile, seem intent on using government capital to build our way out of the problem – which is not only expensive but also runs the risk (at least on the surface) of building the wrong kinds of houses in the wrong places. None of these three parties seems to yet acknowledge that some of our issues with housing affordability may be the result of policies that prevent urban intensification.

So instead of writing the foreword to next year’s (deeply flawed) Demographia report, I’d suggest that Bill English – and other National cabinet Ministers – should be writing letters in support of proposals to develop apartments, town houses, and units in places like Milford and Orakei. And more importantly, they should be making submissions on aspects of the draft Unitary Plan that support and/or prevent more compact and affordable accommodation options. Onya Bill.

22 comments to Demolishing Demographia? An alternative explanation

  • Dan

    Lots to think about there, thanks. m not sure about your argument about the “Independent inputs” assumption. In your example there you certainly would have house buying being more unaffordable for the majority of the population, so unless there were a completely different renting market, housing overall would be more expensive.

    And I’m not quite sure what you are trying to pick apart in the median income to median price graph — the fact that the correlation is so strong means that the median income multiple works well across different regions of the country.

    Of your 5 policies restricting housing, I’d agree the 1-3 are pretty arbitrary but 4 and 5 are very important to people and the community in terms of maintaining the fabric and character of an neighbourhood. Are you suggesting that they could all go?

    • Yeah they could all go although personally I think minimum apartment sizes could be needed for a bit to help build confidence that not all apartments are shoeboxes. The heritage protections will be a particularly tricky area as we seem to have developed a mentality that old = good. I personally am of the feeling that we save the best heritage examples but let the majority go as I don’t particularly want to live in a city that has been turned into a museum where nothing can happen.

      Stu – Another of the things to add to your list that help to restrict supply (especially in new developments) is minimum setbacks which means more land is needed for a house than the owner may want. Normally it ends up only useful for growing grass and gardens.

      • Dan

        I’d say you’re onto a real loser advocating for removing heritage and height restrictions. There are few parts of the city that have heritage protection. Intensification can happen in the spaces between without bowling over the prettiest parts of the city.

        • On the heritage issue I know it won’t happen because people don’t often think logically through things. In fact it is looking like going the opposite way with the council talking about imposing a blanket ban of any building over a certain age regardless of its merits.

        • Stu Donovan

          I don’t think minimum apartment sizes are needed. The market already manages this through lending criteria, while the buyers seem to be aware of what they are getting into. I don’t see what externality/distortion they are trying to manage – in fact if I was being blunt then I’d suggest that their main purpose is to protect high-income people’s from a situation where they might have to live next to low-income people.

          In terms of heritage protections, I’m not suggesting they should all go and should have made that clear. But I am suggesting that they are a constraint on urban development in inner-city areas that will make housing more unaffordable. I’m with Matt on this – targeted heritage provisions for sites of specific cultural value, rather than blanket heritage provisions of suburbs.

          • JohnP

            I agree, and tbh there’s probably an oversupply of shoeboxes already and an undersupply of larger apartments (i.e. 3 bedrooms). At the moment, the overwhelming majority of apartments in the CBD are one or two bedrooms, and I’d expect the next wave of development to try and boost the number of 3-brms. Although, sadly, I’m not seeing much evidence for this from Sugartree and the Vincent St conversion…

      • Greg N

        “we seem to have developed a mentality that old = good”

        Thats probably because right now for most people “new = cheap, nasty and shoddy”, so its hard for them (or council) to think otherwise isn’t it?
        So by modern definitions older is better.

        However, you are right not everything “old” is always “good”, so what we need is plans that recognize that “only some old = good”.
        However, you also need to stop the death by a thousand cuts process as well for what remains as has happened over the last 30 years.

        It is a balancing act to be sure. But one that needs to be struck.

    • Stu Donovan

      The median matching argument is simply noting that the people trading houses may not be the same people who are on median incomes. The latter, if they rent, will be relatively unaffected by house price escalation caused by income growth in the sectors of the population that are more likely to purchase houses.

      The “independent inputs” assumption is about the endogenous relationship that exists between income and house prices, where the former impacts on the latter. Because they two are linked in a casual relationship, I’m suggesting that you lose more information than you gain from combining them into a ratio. That’s why I’ve plotted the two inputs separately for Australia, because when you do it throws up an alternative interpretation of the data: That high income areas have more expensive property.

      From what I can tell Demographia’s indicator are completely obfuscating this impact. What they should be doing is a multiple regression of house prices versus incomes and some indicator of the stringency of urban containment. Ideally this regression would use panel data so that you get both cross-sectional and longitudinal variation (i.e. across space and across time).

      I bet you $5.1 that the household income variable would come out as having a larger impact on house prices than the urban containment variable.

  • Peter M

    Nice post Stu. I think the points you make about the real problems of planning being to limit development intensity within the current urban area is a really key point. Considering that there’s a large amount of greenfield land available but not being taken up, while often developers have to fight tooth and nail for any level of intensification shows that we should really be focusing on getting rid of things like density limits, minimum parking requirements and upping height limits (where that makes sense) far more than expanding the urban boundaries.

  • Greg N

    I still think the median mulltiple is flawed to death as its basically merely defined in terms of itself, so the questions it seeks to answers are the same answers it seeks to question.

    “Labour and the Greens, meanwhile, seem intent on using government capital to build our way out of the problem … also runs the risk (at least on the surface) of building the wrong kinds of houses in the wrong places”

    I don’t think that either Greens or Labour have actually said exactly what and where the kinds of homes they are proposing are to be built.

    But David Shearer was particular in a recent clarifying comment when he said “we are talking homes not houses”. (i.e. the 100,000 over 10 years figure is 10,000 homes a year, not 10,000 houses).

    By talking “homes not houses” he means the the usual trotted out idea of building more detached state owned houses on a section in Auckland is dead as a Do Do.

    What they are proposing I understood is more akin the the mixed residential developments that the Auckland Plan proposes to become the norm across Auckland. Where 2 storey development is the max height but more more intensive use is made of the land. And this rules will apply to most of Auckland outside the town and local centres.
    So that Greens and Labour will be able to put the homes where the needs are.

    By putting a mixture of housing types, in clusters, and not some cookie cutter (new) development of detached (or terraced) houses out in the sticks somewhere cos the land is cheap and without any services like PT we avoid the mistakes of what was done in during the ’40s to ’60s for state house developments previously.

    This also means that the current HNZ policy of continuing detached in-fill housing for existing state house areas to merely double the density is probably quite a folly as well.

    The model for intensive redevelopment of state houses was being touted a while back as the Talbot flats redevelopment in GI, where a entire block of land, involving many state houses and partment blocks were redeveloped en-masse in a co-ordinated manor. With the buy-in of the old Auckland City Council and Housing NZ.

    The comments I heard subsequently, was that development was a really stand out model of how and what to do, but was considered too expensive by HNZ to roll out anywhere else.

    Which begs the question why is that so? If you are going to intensify, which everyone agrees is a Good Thing – then you have to do the job properly.

    And that takes design, resources and money in equal measure (like a 3 legged stool). But it pays for itself in spades down the decades if done properly.
    Otherwise we just up building more highly intensified future slums. And we have enough of them in the CBD now, and don’t need them anywhere else anytime soon thank you.

    One other thought – if you are going to intensify to a high degree, then proper provision of community green spaces as well becomes even more important.
    If you take away the back yards and open spaces the kids need to play their informal soccer and cricket etc games somewhere. And if theres no local green space for that then what will that impact be of raising yet another playstation generation who never go outside to play – who instead only go outside to go somewhere else like school or shopping.

    • Patrick Reynolds

      Yes my understanding of the policy, and I spoke with David Shearer about it directly, differs from Stu’s version in two important ways:

      1. The seed money is to be raised by a bond issue to NZ investors, so a gov guaranteed place to put your savings with a modest return to start the programme which then fund this return and the continuation of the programme from sales. Not gov capital.
      2. Coordination of the location and form of the dwellings with Council plans, especially AC, and he has already meet Len Brown. Not just houses on greenfields at all, but apartments and terrace houses on infill and brownfields sites too.

      But yes AC needs to look at its own regs as Stu outlines as the first and best ways to stimulate the construction of more affordable dwellings. Perfect complement to this policy.

      • Stu Donovan

        If that is the case then it sounds much better.

        I guess my main point about the Labour/Greens is that there’s some work to do on fixing existing policies that may have sustained and substantial impacts on housing affordability without needing to jump in with new policies designed to increase supply.

        Fixing existing policies that restrict compact development will tend to bring prices down, whereas new policies that funnel access to cheap debt to a particular segment of the population may actually drive prices higher. Those people may still be better off (insofar as they can now afford to own a property they could not before) but there may be unintended consequences.

        Still could be worth a flutter :).

  • Patrick Reynolds

    And here it is: http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10861855

    But of course the Herald somehow manages to spin this good news as some kind of a back down….. I guess if you live in a world where the big detached house at the end of a motorway is ‘what everyone wants’ no matter the cost you could see it like that. Sorta.

    And this is good news because a dwelling for 300k can only be involve more intensive landuse or be in the back blocks and therefore involve huge transport costs and/or face zero demand. So unless the programme includes multiple housing units it will be impossible to make that figure or will not be in Auckland or both.

    So these statements show that the policy is both realistic and consistent with growing Auckland without sprawling disastrously and burdening everyone with huge transport cost.

  • Nick R

    English with “the wrong type of housing in the wrong place”… Yet methinks a $300k terrace in Tamaki or Hillsborough would sell like hot cakes. How about we stop regulating where people live and let th decide, or does the finance minister hold veto on where people want to live?

    • David O

      Not a veto on where people want to live, but a veto on where (some of) his property developer mates can be bothered to build. For a lot of developers, the model is 3/4/5 bedroom detached ‘family’ homes on big sections. No surprises that the only place you CAN build those is on the edge of town. Brownfield mixed developments are for quite a few developers (it seems) an unusual proposition, where they are less certain about how to do it, how to market the results, and overall whether or not they can make money doing it. They just want an easy life, and central govt to bully local govt into making it happen.

      This isn’t true of all developers – the guy who was on the radio this morning interrogating Len Brown’s 15,000 ready-to-go sections this morning sounded pretty comfortable with the ‘intensifiication’ parts of the spatial plan – but whoever it is has Bill English’s ear definitely prefers the detached family homes model.

      Makes no sense to me at all, because (i) those homes won’t be ‘affordable’, and (ii) the current market suggests noone will want to buy them – so they won’t be profitable, and (iii) transport disaster.

      • The facts on the ground in Auckland show that anyone who is serious about housing affordability must be in favour of intensive models on accessible sites; ie terrace houses and apartments within existing city limits served well by transport infrastructure. These are the only cheap dwellings that can be built in Auckland today. There is simply no other way to provide sub 300k or sub 400k dwellings, especially not ones with transport options for low income families that can be met along with dwelling repayments. Therefore anyone who claims that the housing affordability problem can be addressed by expanding the opportunity to build more large detached houses on distant farm land has either only a passing understanding of the facts or actually is not really interested in this problem but rather using it to achieve some other end.

      • I act (as a lawyer) for a number of property developers and I am constantly underwhelmed by their business acumen. We are always sold the idea by commercial interests that “the market” will lead to innovation and progress. Yet I dont see any of that with property developers. Most have never left NZ and have no idea what dense living means. The only residential property business model they understand is greenfield developments with McMansions. Anything else is too difficult as it would actually involve coming up with a new way of doing things, which is beyond them.

        I would certainly agree that business owners deserve rewards for risking capital (though in my experience property developers risk it, go bankrupt and then run the same business through family/friends leaving out of pocket tradesmen in their wake) but very seldom do I see genuine innovation through the market except maybe in the IT sector. Residential property development is usually a cookie cutter business plan. I wouldnt say the same about commercial property as it tends to respond much more quickly to customer needs.

        Because them and their golf/fishing mates cant imagine ever living in an apartment or terraced house, they cant imagine that anyone else would. And public transport? Only the chronically poor and mentally deficient would ever step foot on a train or bus rather than drive around in an Audi Q4 (registered in the wife’s name of course because he is bankrupt).

  • Dale Smith

    It should not matter whether you want to live a higher density lifestyle or a lower density, what should matter is what that costs you, unless you like getting ripped off. The $300,000 ‘houses’ that are proposed by the polllies have been quoted as having a raw land cost of $45,000 for a 250m2 section which equates to $1,400,000 per ha for land that has a rural land value of $50,000. While there are legitimate development costs, the majority of the difference between the $50,000 and the $1,400,000 is waste. We all understand why we should not waste natural resources, what about financial resources?

  • Kevyn

    Stu suggested we “Consider a situation, for example, where most of the houses in New Zealand were being bought and sold by relatively wealthy households, and that these households subsequently experienced high income growth, while incomes for the general population remained broadly unchanged.”

    This is not really an hypothetical situation as the concentration of head offices and financial services sectors into Auckland since the economy was deregulated has probably delivered precisely the situation Stu is describing. No doubt Wellington and Christchurch have the same problem due to being economic centres with the same concentrations of extremely well remunerated jobs, albeit to a less extreme extent than Auckland. Stu’s critique of the Demographia logic certainly is supported by the disparities in house prices between these three cities and their collective difference from the provincial cities.

  • Sacha

    Auckland and Christchurch housing price inflation is strongest right now, notes Reserve Bank.
    http://www.stuff.co.nz/business/industries/8253858/Canterbury-homes-head-price-charge

    Also relevant to how affordability is calculated, this:

    “The RBNZ kept the official cash rate unchanged at 2.5 per cent this week, and commentators saw that low level providing cheap money for mortgages, driving house prices higher.

    Wheeler said the bank kept an eye on the housing market by looking at the house price to household disposable income ratio. It also carefully watched debt levels held by Kiwis, and household credit growth.

    In terms of dealing with financial sector stability the RBNZ did not want banks providing mortgages to become ‘overdrawn’, given the impact potentially of a collapse in house prices or a sharp decline in house prices.”

  • Hi Stu,

    Good summary of some of the many flaws in the Demographia survey.

    Using gross household income is an inappropriate way to determine household spending power, because the spending power of a household is based on the amount of gross income remaining after costs are deducted for essentials such as taxes, food, transport, clothing etc. Differences in tax rates and cost of living pressures across various countries make a comparison of spending power based on gross income meaningless. Furthermore, there is no reason why a family on median wage income should feel entitled to be able to afford a median house, because houses are not purchased using wage income alone. Houses are purchased using wealth. A better measure of a household’s ability to afford property would be to consider household discretionary income and total wealth. This would include non-wage income (such as income from interest, shares or other investments), and wealth stored in other assets (such as shares or equity in existing property) that may be liquidated or borrowed against in order to fund a new property purchase. A family with median wealth should feel entitled to a median dwelling, but an FHB on median wages (with no other wealth) should not.

    Check out my blog below where I discuss various other issues, including their apples vs oranges definition of a ‘house’ in each country, and their incorrect income figures for Australia…

    Debunking Demographia: http://australianpropertyforum.com/blog/entry/3174279/8081

    Cheers,

    Liam Patterson.

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