House prices have been going crazy in the last year, which again is raising the concern of how expensive houses are. But are they?
How much have house prices increased?
Here is the median cost of a house since 1992:
Median cost of a house in New Zealand since 1992
Prices are up by a staggering 600% between 1992 and now. Sure looks unaffordable. Even worse in some locations, such as 659% in Auckland.
How much have mortgage interest rates changed?
What if we make some adjustments to put these prices into context. Let’s bring interest rates into the equation, as house prices are only one part of affordability. Here are the mortgage interest rates over the same period:
Historical floating interest rates in New Zealand since 1992
The two graphs are going in opposing directions. One (house prices) is getting more expensive, the other (borrowing costs) is getting cheaper. So when prices were lower, borrowing rates were much higher. So what does that mean combined once we factor in the cost of the house and the cost of borrowing? What do monthly repayments look like assuming the starting mortgage rate, a 30 year mortgage and 20% deposit?
Monthly mortgage repayments
Monthly repayments clearly going up. But not as much as the 600% increase in house prices. Payments are up 342%. Still pretty bad though at 12.3% per year average increase.
How much has housing affordability changed?
But we are forgetting one other thing. Our incomes have increased since 1992. Unfortunately I can’t find any data for median incomes prior to 2001. Most data I can find uses averages which is inconsistent with the median I used for house prices. So, this is only data since 2001:
Monthly mortgage repayments as a percentage of income
Once you look at it in this way, mortgages are not much more expensive now, than they have been in the last few years. 38% of income on a mortgage is very high, don’t get me wrong. But historically speaking, it’s not as big a jump as you may think. This is at the beginning of the mortgage as well remember. Over time, your house price purchase price remains the same, and your income increases, hopefully. With inflation and experience. This means your personal percentage should decrease, assuming mortgage interest rates don’t increase too much.
There are of course regional differences, with house prices being much higher in some regions such as Auckland and Wellington. But you’d expect incomes to be higher here too. So if you are looking at a house in these areas, you’d hope that you earn at least the median income, if not more.
The point of this was to show that house prices may not be as out of control as people think. Bad? Yes. Historically bad? No, affordability has been worse before.
How long does it take to save for a house deposit?
The problem we have with such rapid growth in house prices, paired with rapid decrease in interest rates is the price of a deposit.
House deposit required as a percentage of income
Since 2001, the amount of median income required to pay for a 20% deposit has gone from just 64% to 157%. A huge spike in the last 3 years.
So if a median income earning household can manage to save 20% of after tax income, and house prices increase by 4% (pretty conservative by historical standards) a year, income by 3% a year, you should be able to buy a median priced house with a 20% deposit in 13 years.
Unless you can increase your income at a faster rate, that is a heck of a long time. Longer if you are single, in Auckland or Wellington, or if house prices increase by faster than 4% a year.
You may say that first home buyers shouldn’t be buying median priced houses, which may be true. But younger people tend to be on lower incomes buying lower quartile houses, so it all balances out.
It is tough out there and the statistics show. Although affordability is pretty bad, it isn’t historically bad. It has been worse. The larger problem at the moment is the size of deposit needed.
If you have someone in your life that is telling you it has always been tough and was “just as hard in my days”, they are wrong and underestimating how much harder it is now. So often I hear the older crowd saying younger folk just need to be more frugal or stop being so picky. That’s simply not true. There may have been a select few years, where relative to income it was just as hard, but never long lasting, and it has never been as hard as it is now to buy a house. Not by a long shot.
So back to the original question. Are house prices expensive at the moment? Pretty expensive once you have one, but extremely expensive just to buy one. 13 years is an extremely long time for an average couple to get a foot in the door. Interest rates only have one way to go too, so make sure you stress test your potential purchase.
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