December 10, 2013

It’s all in the definition

The most-read story on the NZ Herald right now is “Cost of home dream in Auckland – 19 incomes. Only six months ago, the NZ Herald published an infographic which showed that a median house costs 6.9 times the annual median household income in Auckland. It’s enough to make anyone confused.

The new article says:

“It would take 19 median incomes in Auckland to buy a home for the city’s median house price.

In the 1,119,195 Census forms filled out for Auckland, the median annual income was $29,600, a Herald analysis found.”

I checked with the Stats NZ Census figures (Excel spreadsheet) and found the $29,600 figure is for the usually resident population count aged 15 years and over. In other words, this includes everyone who is not in paid employment: all the students, retirees, parents who are staying at home, those on benefits and not working etc.

Using Statistics New Zealand’s income survey data for the June 2013 quarter (Excel spreadsheet), the median earnings for people in paid employment was $45,864. This figure is only from those earning wages and salaries and/or self-employment income.

Strictly speaking, the median house price we’re comparing to should be for the same period but for now, I’m using the June 2013 median Auckland house price from the Real Estate Institute (PDF): $555,000.

This means the statement could be revised to:

“It would take 12 median incomes in Auckland to buy a home for the city’s median house price.”

However, this misses the point that the accepted method is to look at median household incomes. Statistics New Zealand recommends a more complex calculation:

The ratio of housing cost to income is often used as a way of measuring affordability. Here, the ratio is calculated as housing cost as a proportion of disposable household income (income after tax). A housing cost to income ratio of 25 percent has been used as a threshold for the purpose of comparing groups. This threshold is widely used both nationally and internationally.

Again, using Statistics New Zealand’s income survey data for the June 2013 quarter, the median household income was $70,616 for the Auckland region (NZ.STAT tool).

This means the statement could be revised to:

“It would take 7.9 median household incomes in Auckland to buy a home for the city’s median house price.”

Comparing simple figures from New Zealand with overseas without taking into consideration tax and the cost of living really isn’t meaningful. Further, the mixing of means and medians means that they are not comparing like with like…

It’s easy to use figures to make things seem much worse than they actually are.

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Rachel Cunliffe is the co-director of CensusAtSchool and currently consults for the Department of Statistics. Her interests include statistical literacy, social media and blogging. See all posts by Rachel Cunliffe »

Comments

  • avatar

    Pretty sure the international standard is household income. But Hugh Paveltich’s Demographia survey is the one to be checking. Your 7.9 looks like what I remember from his recent figures on Auckland, so expect you’re right.

    http://www.demographia.com/dhi.pdf

    10 years ago

  • avatar
    Rob Ueberfeldt

    Of course the unemployed, the sick and retired shouldn’t be allowed to buy houses.

    10 years ago

    • avatar
      Thomas Lumley

      A better way to put Rachel’s summary would be that houses are typically bought by households, not individuals.

      These households may contain people with no or low income, but that doesn’t mean the household has no or low income.

      10 years ago

      • avatar
        Thomas Lumley

        In more detail: when retired people buy houses they probably aren’t paying for them with their income but with their assets/savings.

        If unemployed or unable-to-work-because-of-illness people buy houses they are probably paying for them as part of households.

        In either case, individual income is not the right metric for affordability.

        10 years ago

  • avatar
    Martin Connelly

    Why not?

    10 years ago

  • avatar
    Nick Iversen

    Parkinson’s law of house prices: house prices rise until they absorb all the money available to pay for them.

    This pretty much means that house affordability doesn’t depend on household incomes – if you double household income you will double house prices therefore the affordability hasn’t changed.

    So the ratio of price to income isn’t of much use for comparisons. Difference between different countries are more related to differences in interest rates – if one country has half the interest rates then its houses will be (roughly) twice the price. Yet both countries have the same affordability.

    A more useful measure of affordability might be some ratio to do with owners vs renters but I can’t think of one.

    10 years ago

    • avatar
      Dale Smith

      Hi Nick, House price increases are not directly related to incomes, that is why in some Countries or States house prices are only 3x gross median household income and others they are 6x or more, and this has nothing to do with interest rates etc. For example Texas, has very high GDP, the fastest population growth in the US, low interest rates, and yet has one of the lowest medium multiples, about 3x. There are a number of reasons for this, but in summary their system allows them to build at the rate of demand, ie supply equals demand in almost real time in the building industry. Therefore, in spite of the GFC, there was no boom or bust in Texas house prices, but just a stable CPI rise over time. Because of this low stable capital growth, there is very little opportunity in Texas for non-valued added speculative gains, so speculators are mainly absent, which help further stabilise the market. Also a stable market takes away the feeling that people get that they MUST buy now or miss out. This stops people from putting down roots before they should, thus gives them more mobility for employment, which increases productivity. There is a lot of great research on this. The medium multiples should be a measure only, but not a target. The target is what really needs to be done to make the measure meaningful. For example if you take the multiple of 3x as being the target of success, then Invercargill has already achieved it. However as there has been little growth in Invercargill over decades the housing stock is on average very old and generally in very poor condition. If Invercargill was to experience any growth similar to Auckland or Christchurch, then you would see the multiple climb as the underlying systematic failure is still present, ie New Zealand’s lack of being able to build at the rate of demand.

      10 years ago

  • avatar
    sharon vera

    I guess using the measure of 25% of income after tax spent on housing costs is usefulwhen applying this to those on low wages – many people in NZ are living on the minium wage as the sole income for a houseold or single person- for those of you out there who do not seem to know that.. A lot of households have only 1 occupant.. Obviously this measure is only useful when applied to low incomes as those on high incomes — it really depends on how much money is left for spending on food, power, medicals, clothing etc after the rent is paid. We know that many people have very little left after HRC applied.

    10 years ago

    • avatar
      Thomas Lumley

      We’ve got no real quarrel with the 25% measure — that’s fairly standard, and that’s where our 7.9 times household income comes from.

      Actually, though, the 25% may be too low in some ways. I don’t know as much about NZ, but certainly in the US before the housing bubble there was a phenomenon where low-income people would routinely have to pay more in rent than the banks believed they could pay as a mortgage.

      10 years ago