By Frank Newman on 7th August 2017
There has been a lot of election talk about housing affordability. There are various ways to measure affordability but Demographia take a simple price-to-income approach which links median house prices to median household incomes.
Their 2017 study found Auckland was severely unaffordable with a 10x price-to-income multiple, up from 5.9x when they carried out their first survey in 2004. Auckland was the fourth least affordable among the 92 major housing markets internationally. The other “unaffordable” housing markets in New Zealand were Christchurch at 5.9x and Wellington at 5.7x.
This price-to-income approach is similar to the price-earnings (PE) multiple that sharemarket investors will be familiar with. The PE multiple is the relationship between an investments market value and annual earnings. For example, if a company listed on the stock exchange is trading at $1, and is earning 10 cents a share then it has a PE ratio of 10x. This is a mechanism to measure how expensive a share price is, and its risk. High PE stocks carry additional risk in that there is an expectation built into the price that earnings will grow in the future to justify the high PE valuation.
And so it is with property markets trading at a high price-to-income multiple. At some point a high price-to-income property market will become unaffordable and property prices will decline or level out for a number of years – which is the current status of the Auckland market.