There’s a couple of different measures of housing affordability:
Ratio of price to income (i.e. house price divided by income before tax).
Percentage of income (before tax) required to own a house.
The target for these two measures are generally:
A ratio of less than 3.0 is a good target for “affordable”
Spending 20% - 30% of gross income on home ownership is “affordable”
So what does this look like in New Zealand?
In 2017, the median personal income from wages and salaries was $45,883 (before tax). The median household income from wages and salaries was $79,000 (before tax).
Using the target of a 3:1 ratio of house price to income, a house costing more than about $280,000 isn’t affordable for 50% of households.*
Using a target of 30% of income going to housing costs and making some simplifying assumptions about costs and equity** 50% of individuals cannot afford a house costing more than $212,500.***
So with a national median house price of $549,000, and just over $850,000 in Auckland (our largest city), how can we buy houses?
Try looking at it this way:
A 20% deposit on a $550,000 house is $110,000, leaving $440,000 to be financed.
An individual earning the median income of around $46,000 can afford a mortgage of $170,000 (using the same assumptions as earlier**).
That means 3 individuals can afford to buy a house. You’ll need 4 in Auckland.
That’s how we do affordable housing: Together
*For an individual income the price would be around $138,000.
**Assuming mortgage has a 7% interest rate, 25 year term with bi-weekly payments, ignoring rates, insurance and maintenance costs etc, and assuming a 20% deposit is required.
*** For a household the price would be just over $370,000.