Land Costs Major Driver in Housing Affordability

News Release 5 February 2008

Land Costs the Major Driver in reducing Housing Affordability – BRANZ Group

Increasing section prices have been the major factor in reducing housing affordability over the past decade, according to a recently released report from the BRANZ Group.

The Changing Housing Need study undertaken by Ian Page, economics manager with BRANZ Limited and funded by Building Research included an analysis of the impact of the key drivers of housing affordability. The report concludes that the major factor impacting housing affordability has been section prices, which were ahead of both interest rates and the cost of new house construction

Ian Page says, “Housing affordability has fallen markedly since 2001 due to a number of factors. The fact that average wages have only increased by an average of 2.2 percent per year over the past decade has exacerbated this trend. The rising cost of land, with sections increasing by an average of over 14 percent per year over the past five years has been the major contributor to the decline in housing affordability.”

The following table shows the relative impact of each factor on housing affordability.

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Note: These figures show the average increase per annum and have compounded over these periods

“Given that home ownership has also fallen over the last 10 years, we believe it is reasonable to assume that there is a relationship between housing affordability and home ownership.”

Home ownership has been declining and was down to 66.9 percent in the 2006 census. Tenure and new housing affordability are shown in the graph below which indicates downward trends from 1996 onwards:

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The study also tracks new housing affordability in an index since 1970, see graph below:

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Note: The above graph is for new housing affordability, but the author notes that the affordability of existing housing has followed a very similar pattern since 1993. See Figure 31, page 53

Between 1993 and 1998 wages rose around 9 percent but construction costs rose 30 percent and interest rates increased by around 1 percent. This caused affordability to fall over this period. In 1998 the increase in affordability was mainly due to a fall in mortgage rates from around 11 percent to
7 percent.

Since, 1999 affordability has declined markedly due to increasing section prices, construction costs and home lending interest rates.

The report provides two sets of forecasts which depend on the assumptions made for growth in incomes, new housing construction cost changes, land prices and interest rates.

The ‘expected’ scenario indicates a flattening out of affordability and is based on modest wage growth, lower rates of increase for construction and land costs, and a slight reduction in interest costs. With the ‘optimistic’ scenario, wage growth is quite high while house and land price escalation is relatively low, and the interest rate for home lending (6.0 percent in 2016) is 3.0 percent below current rates.

“Should these factors come into play, housing affordability could improve. However, when we look at what factors have contributed to housing becoming less affordable over the last decade and particularly the last five years, we can conclude that relatively low wage increases and escalating land prices are the two most important factors. These are followed by the cost of funding and then the cost of new house construction,” Mr Page said.

ENDS

A copy of the report, Changing Housing Need can be downloaded from the BRANZ website, see:
http://www.branz.co.nz/branzltd/bookshop/info.php?ask=free&idnum=1666

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