Affordability

Housing and Rental affordability has changed little in 20 years

Affordability is often referred to as the price of a home divided by the household income. To make a point some commentators compare the price with average incomes, which decreases the affordability dramatically.

When deciding to lend, BanksALWAYScompare the ability to payinterest and principalwith the householdincomeof the proposed owner(s). As a buyer, I have yet to experience a bank comparing the price of a property with my income over a period of time to decide if I can afford a purchase.

Surely affordability is simply mortgage payments as a percent of income - as in this chartwhere short speculative periods in Auckland show the impact of interest rate increases until the market bubble crashes (1998, 2008 - and 2018?). For investors, the critical ratio is the proportion of rent as a percentage of income with some allowance for risk of vacancies.

Here is great regional comparison - this chart is interactive, click on the headers to see the component parts of the choice.

An alterative view based on household income compared to rent or buy:

Affordability is much easier to understand in the rental market, it is simply how much of your household income is going on rent. A study of this percentage using public data from MBIE and Stats has some surprising insights over 20 years:


Notice two important and obvious features of this chart:

  1. The proportion of rent has remained constant over 20 years for all regions with some minor changes here and there, usually returning to the long term average. This is especially so for the entire country, ie Rents are fixed to incomes.
  2. Auckland rents are 5% greater portion of income than all other cities. This is really just an indication that some areas have higher proportions than others, as you would expect to see in different suburbs, eg Te Aro should be higher than Taita.

Close study shows a change happening in Tauranga (Bay of Plenty), where the proportion has increased quickly from about 23-25% over time to a recent high of 27%. Wellington on the other hand, where rents are now rising quickly, has obviously had an increase in income to lower the line, this is recently driving an increase in rents (Anecdotally too recent to show a change).



The above chart could be an important factor for deciding on a fair rent. ie a regions rent movement coul dbe used as the basis for a rental change, if your current rental price was set by the market to match a fair percentage of the regional average.

Jonette 2011