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:
- 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.”
- 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).
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.
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:
- The degree to which income growth is invested in housing; and
- 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:
- Minimum lot sizes – i.e. “all ye who have less money shall be forced to purchase land you don’t want.”
- Minimum apartment sizes – i.e. “all ye who have less money shall be forced to purchase living space you don’t want.”
- Minimum parking requirements – i.e. “all ye who have less money shall be forced to pay for vehicles you don’t own”.
- Maximum height limits – i.e. “all ye who chose to live like rats are consigned to perish like rats – on the street.”
- 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.