Are New Zealand Houses Too Expensive?

We often look at the prices that houses are selling for and question if New Zealand houses too expensive.

Most of us probably think they are, but what is too expensive?

Let’s Get Some Detail

What we decided to do was to look at how New Zealand house prices compare to the average prices around the world, and given that there are various currencies the fairest way was to compare to the relative incomes of those countries.

We sourced the information from the OECD published data and compared the house prices and income (nominal disposable income per head) over the last 30-years (1990-2020) to see how the house prices here compared, and to see if the answer the question “are New Zealand houses too expensive?”

The price to income ratio is the nominal house price index divided by the nominal disposable income per head and can be considered as a measure of affordability. 

In the chart above we can see how house prices in New Zealand (the blue line) compare to the average prices within the 35 OECD countries.

In summary we can see;

  • House prices to income on average for OECD countries are very slightly more affordable in 2020 than they were in 1990 decreasing from 111.3 to 109.5
  • That is not the case in New Zealand where we can see house prices to income have increased from 53.1 in 2020 to 119.0 in 2020, meaning we have gone from the most affordable in the OECD just 30-years ago to the 10th most unaffordable in 2020.
  • Up until 2015 the house prices to income in New Zealand were better than the average; however in the 5-years since 2015 the affordability became more unaffordable than the average.
  • We know that house prices have increased further in 2021 but do not yet have the data to see how this compares to other countries.

The result, in New Zealand as elsewhere, is a widening generational gap between Baby Boomers, who are statistically more likely to own a home, and Millennials and Gen Z — who are watching their dreams of buying one go up in smoke!

New Zealand Houses Are Too Expensive

Most people that have looked at house prices or listened to the media will have seen or heard plenty of comment about increasing housing prices. It would be very hard to miss this.

The general consensus is house prices are too expensive.

But we need to put this into context – the concept of “too expensive” will generally mean the house prices relative to income.

There are two parts to this;

  1. House prices – these will generally increase over time
  2. Income – if incomes could increase then it helps the overall affordability

The key to getting into a more affordable position is to have your income increasing at a faster rate than house prices are increasing, and given the current economic environment this is difficult unless you are to make a fundamental change.

How Banks Are Changing Lending Decisions

There is some new CCCFA regulation that is being introduced and this means they will be asking more about suitability and affordability both as at the date of applying for finance and any future or potential future changes.

There is also talk of a debt to income ratio (DTI) being introduced by The Reserve Bank. Some banks are already testing applications to see if they meet an in-house DTI which is generally restricting lending to seven times the income. This means the New Zealand median income of about $1,100 weekly ($57,200pa) recently published by Stats NZ would mean you could apply for lending of up to $400,000 assuming that you have no other loans and that your expenses are not more than the bank determined average.

The banks and non-bank lenders are already testing affordability using their own mechanisms, but it may be that soon they will be obliged to use an industry standard formula. We do not yet have much detail on what this may look like; however we can expect that higher levels of lending may become harder.

This will affect some first home buyers of course.

For better and more current advice you would be best to contact a mortgage adviser.