How unaffordable is the Auckland house market on an international scale?

Amy Hamilton Chadwick
How unaffordable is the Auckland house market on an international scale?

The unaffordability of Auckland houses is a hot topic. But are there other cities in the world that have it worse?

The best data we have comes from Demographia and it’s often used to demonstrate that Auckland has one of “the world’s least affordable” property markets. But it only ranks cities from nine countries. On a global scale*, Auckland’s unaffordability is far less severe than places with:

  • Extremely low incomes, like the Democratic Republic of Congo, where the average income is in the hundreds of dollars annually.

  • Extremely wealthy inhabitants, like Monaco, where US$1 million buys only 17m2 of luxury property, described by Forbes as “the world’s most overpriced real estate market”.

  • Extreme inequality, like Namibia, where it is estimated that fewer than 10 percent of households can afford even the lowest-priced properties.

SEE ALSO: What’s so different about Auckland?

However, when we think about Auckland’s house prices, we don’t usually want to compare them to Namibia or Monaco. We’re more interested in countries similar to our own, like Britain and Australia. This is where Demographia is useful, and the 2015 rankings look like this:

Rank: Least Affordable

Nation

Metropolitan Market

Median Multiple

1

China

Hong Kong

17.0

2

Canada

Vancouver, BC

10.6

3

Australia

Sydney, NSW

9.8

4

USA

San Francisco, CA

9.2

5

USA

San Jose, CA

9.2

6

Australia

Melbourne, VIC

8.7

7

UK

London

8.5

8

USA

San Diego, CA

8.3

9

New Zealand

Auckland

8.2

10

USA

Los Angeles, CA

8.0

This survey recorded a median Auckland house price of $613,000, with a median household income of $75,100. Since that data was collected, the median house price in Auckland has risen to $755,000 and our median household income to $85,212, giving us a current multiple of 8.86, according to this table.

For Auckland to reach a median multiple of 17, equal to Hong Kong’s, our median house price would need to increase to around $1.45 million. That’s a fairly staggering number.

All the cities at the top of this list, and others, are grappling with affordability issues similar to Auckland’s. There’s a housing affordability crisis in Sydney and Melbourne; in New York and San Francisco; and in London, a city of 8.6 million residents where only 43 houses were affordable for first-time buyers earlier this year.

Of course, the fact that some other cities are much less affordable than Auckland doesn’t make property in Auckland any cheaper. But it does point to some of the reasons why the city is expensive and some trends in the global housing marketplace:

 

1. Property is seen as a safe investment

In 2008 as the global financial crisis bit hard, prices dropped almost everywhere. But they quickly surged back, according to Kate Everett-Allen, a partner in residential research for Knight Frank, based in London.

“Nervous investors were trying to find a safety asset – a safe haven for their money,” she says. These buyers want certain criteria when they buy, and Auckland fits many of these criteria.

 

2. Global investors want to buy in the premium cities

International buyers want to put their money into cities where prices will keep increasing, says Everett-Smith. They look for:

  • A firm and stable political situation.

  • A transparent property market where they can easily track sales and prices.

  • A good legal system.

  • Good universities and schools.

  • Accessibility: ideally no more than an hour to reach the airport, the beach and/or the ski field.

Cities with these assets are also appealing to locals and new immigrants and almost all the cities at the top of the Demographia table are ranked highly by quality of living surveys, especially Vancouver, Sydney and Melbourne.

Again, Auckland follows this trend, ranked strongly as one of the world’s most liveable cities.

Vancouver

Vancouver is ranked highly by quality of living surveys

3. Key cities operate by different rules

“Particularly in the last few years, we’ve seen the phenomenon of key cities becoming detached from their wider housing market and operating by different rules,” says Everett-Allen. She cites London, Sydney, Melbourne, and Manhattan Island in New York as prime examples.

Again, Auckland fits the bill; if these other international cities are any indicator, there’s no pressing reason why Auckland prices will come into line with the rest of New Zealand.

Pull out quote Global Citie

4. Supply is not able to match demand

It’s no coincidence that many of the world’s most desirable, least affordable housing markets are located near the sea. These port cities, like Hong Kong, San Francisco and Sydney, are usually attractive to live in and well-connected by sea, rail and air.

The downside of those beautiful waterfronts? They restrict a city’s physical growth – in Auckland’s case, in two directions.

“The twin harbours mean Auckland is far more constrained in terms of its ability to grow out. Auckland effectively operates as if it has 1 million more people than it actually has,” says Chris Parker, Chief Economist, Policy and Planning Division at the Auckland Council, citing work done by NZIER economist Kirdan Lees.

Transport and land ‘bottlenecks’ caused by Auckland’s shape mean that the house prices and traffic congestion seen here are more typical of a city of 2.5 million residents.

In addition to geographic land restrictions, regulations on land usage limit supply and push up prices in many of these cities, including Sydney and Auckland. Parker says if you were to point to one prevailing factor as a cause for high Auckland house prices, the ability to use land “in the way people demand it” has perhaps the biggest impact.

“It is valid to criticise Council policy, but there are also other factors,” he says. “There’s a huge amount that can be done to reduce house prices. If we do a host of brave things, we can get it down considerably in the long run.”

 

5. Policy makers are trying to cool down hot markets

Hong Kong, Singapore, and parts of mainland China have all introduced policies designed to restrict house price growth. New York’s Mayor considering a pied-à-terre tax, the UK’s Labour Party is proposing a mansion tax, and Australia is cracking down on foreign buyers.

Our own Government and Reserve Bank have taken measures aimed at cooling the Auckland market – Everett-Allen says cooling measures, in general, do deter foreign and speculative investment.

“On a global scale we see two contrasting trends,” she says. “On the one hand increasing global wealth with an appetite to invest in property; on the other hand governments want to improve affordability for the domestic population. There’s a tussle between the two; policy makers want some revenue from [rising house prices] too.”

Auckland Sunset Med

A good news story

Parker believes it’s possible to take Auckland from its current median multiple of nearly 9 to a median multiple of around 5 over the next few years. That would require some serious shifts in our systems, particularly in reducing land use restrictions and reducing the cost of construction.

He doesn’t want to see the price of each individual house drop, but rather increase the volume of houses at the affordable end of the market.

Greater housing density would yield more value from every piece of land in the city by building more apartments, attached townhouses and units.

Freeing up land alone won’t be enough, he adds: “Hypothetically, if we gifted land free to a builder and had no resource, compliance costs, and building costs, the average house is still 200m2 square and costs about $400,000 – 5 multiples of household income. It won’t be economically feasible to intensify and develop if we only loosen land restrictions.”

Auckland’s high house prices are a significant problem, says Parker, but they’re also a symptom of its success.

“It’s the agglomeration of lots of talented people in one place. Auckland is caught up in that globalisation story – imagine if we missed that boat, we’d be kicking ourselves. It’s a good news story, even though it creates massive challenges.”

SEE ALSO: What’s so different about Auckland?

 

*International surveys don’t always rank Auckland so high on the list of least affordable cities; Numbeo compiles user-contributed data and finds that Auckland is around halfway down its list of 574 cities. Numbeo ranks Hamilton as more affordable than Dunedin; local data disagree. The least affordable city is Port Moresby, Papua New Guinea, where a mortgage on a median-priced house will cost almost 900% of the median income. Hong Kong is 8th on this list.

 

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