Debate rages between the generations. Each seems convinced the other had it easier in their day to get on the property ladder. Auckland Council’s Chief Economist David Norman discusses who had it tougher.
If you were buying a house in the 1970s or 1980s, they were cheap relative to incomes, according to today’s 20-somethings, allowing you onto the property ladder of untaxed capital gains.
The baby boomers argue they weren’t spending money on overseas holidays and avocados like today’s younger generation and made do with ‘an apple crate for a dining table for the first three years’.
Who had it tougher?
Auckland Council’s Chief Economist Unit compared median household incomes, house prices, floating mortgage rates, inflation rates, and tax regimes between 1981 and 2019 to understand the implications for servicing debt for a purchaser in each year. There were data challenges, however, with several indicators unavailable as recently as the 1980s. Data limitations also prevented analysis of Auckland before 1999.
“When looking at the time it would take to pay back your mortgage, it appears the mid-1980s were the worst time to buy, taking an average across the country of 23 years to pay back the loan,” Chief Economist David Norman says. “This compares to an estimated 17 years today nationwide.
“Today’s challenge, however, is not loan serviceability, but getting a loan approved with a suitable deposit in the first place.”
In Auckland, payback periods have always been higher as the city’s income premium hasn’t bridged the house price gap. It’s been a mix of the ability to secure a loan in the first place as well as serviceability challenges. At the peak of the boom in the year to March 2017, payback periods were as high as 27 years in Auckland but have since moderated to just under 22 years.
In the nearly 40-year period of analysis, New Zealand median house prices increased almost 18-fold between 1981 and 2019. In the same time, median household incomes increased only 5.4-fold.
Despite this, today’s lower taxes and inflation mean mortgage serviceability has improved, and on paper, median income households have a far larger share of gross income available (44 per cent) for spending on the mortgage.
So theoretically, household incomes today seem adequate to cover the cost of servicing a mortgage at the New Zealand level at least, even with small deposits. But the combination of a small deposit and a high share of gross income going to servicing a loan appear too risky to lenders and the Reserve Bank, making it tougher for younger generations to get on the property ladder.
Out with the waterbeds in with massages
The changes in what people spend their money on over the past four decades is evident in the changing basket of goods and services measured by the Consumer Price Index (CPI).
The CPI’s job is to measure price changes, but changes in the basket mix point to bigger changes in society not captured in overall price changes: quality of life improvements evidenced by the goods and services people choose to consume today.
Since 1981, some items have been removed from the CPI because they no longer play a big role in consumption patterns: offal, canned meat, delivered milk, sewing machines, VCRs, buzzy bee toys, and waterbeds (added in 1988 and removed in 1993). Added since 1980: avocados, exotic cheese, muesli bars, free-range eggs, packaged leaf salad, craft beer, massages, cellphones and internet services.
In other words, not only have preferences changed leading to a different mix of items, but as incomes have risen, people have chosen to spend more of their income on other household spending and not primarily the mortgage. At the same time, banks have managed their risk by assuming a much lower share of income will be used on the mortgage than is theoretically available.
“It is evident that as technology and competition have lowered the price of various goods and services, consumers have acted in line with economic theory and consumed more of these goods and services,” Norman adds.
“These choices have left less money for spending on the mortgage. Banks respond to this observed behaviour by being more cautious about how willing they are to lend.”
Key findings:
- New Zealand median house prices increased almost 18-fold between 1981 and 2019. In the same time, median household incomes increased only 5.4-fold
- The 1970s appear to have been the glory days for house buying, with much lower interest rates and inflation than in even the early 1980s, although data is too limited for the evidence for this period to be unequivocal
- Arguably the mid-1980s was the toughest in the last 38 years to buy a home in New Zealand
- Today’s lower taxes and inflation mean mortgage serviceability has improved, and on paper, median income households have a far larger share of gross income available for spending on the mortgage
- But, median income households today often can’t secure loans because of small deposits and the share of gross income that would be required to service their loan, even though theoretically they could meet these payments
The full report
Read David Norman’s full Insights paper here: Avocado versus apple crates: Housing woes through time [PDF]
