Insights: Middle-class earners increasingly locked out of home ownersh…
Middle-income groups are facing the largest declines in housing affordability in Auckland, analysis from Auckland Council’s Chief Economist Unit has found.
Auckland house sales data shows that the median dwelling price increased from $494,000 in 2012 to $847,000 in 2017 – an increase of 71 per cent. However, the median household income increased from $78,100 to $97,300 – or just 25 per cent - during the same period.
There are different ways in which housing affordability can be measured and the Chief Economist Unit focused on the highest percentile of house price that is affordable to households in different income bands.
“Housing affordability is not as simple as comparing house prices to incomes,” Senior Economist Harshal Chitale says.
“Although useful as an indicator of the demand and supply forces in the housing market, it ignores the impact of interest rates on the ability to meet mortgage repayment obligations.”
Instead, the Chief Economist Unit looked at people’s ability to afford their mortgage payments.
“Interestingly, mortgage interest rates were almost identical in 2012 and 2017, which means that differences in affordability were driven purely by changes in house prices and household incomes,” Mr Chitale says.
What we discovered
In 2017, a household on Auckland’s median (50th percentile) household income could afford only the 11th percentile house with a 10 per cent deposit – houses at an asking price of around $537,000. With a 20 per cent deposit, these households could afford the 18th percentile house, which has an asking price of about $604,000.
Households with incomes below the 35th percentile had practically no likelihood of being able to purchase a freehold home (whether a stand-alone house, townhouse or apartment) - even with a 20 per cent deposit.
“We also examined how affordability by income percentile has changed over the five years since 2012. Practically every household income group saw the range of houses they could afford fall sharply," Mr Chitale says.
"But the biggest declines were for households in the 50th to 75th percentiles. These middle-class income groups have been increasingly locked out of home ownership.”
The study also discovered that a household would need to be in earning around the 55th percentile of household income ($105,200) with a 20 per cent deposit to afford a house at even the Kiwibuild “affordable home” cut-off price of $650,000. With a 10 per cent deposit, this price point would only be affordable to a household on the 60th percentile income ($118,300 a year).
“To deliver houses that even households in the top half of earners could afford, Kiwibuild would need to deliver a lot of houses below the $650,000 cap,” Mr Chitale says.
“Another way of looking at affordability across income deciles is to ask how many year’s income a household would need to buy a house from a corresponding decile.”
“In 2017, using the same assumptions as we have above, households could afford to a home that was up to 6.2 times their household income, assuming a 20 per cent deposit.
“But in reality, we found that households across all income deciles could not afford houses within the same decile of the housing stock.
“Put another way, there is a large mismatch between your income decile, and whether you can afford a house in the same decile.”
The full Insights report 'Who can buy Auckland's houses' can be found here.
Find more Insights pieces and quarterly updates on Auckland's economic challenges and opportunities from our Chief Economist here.