Numbers

The Illusion of Accuracy

There’s a new beer around with 0.0% alcohol. Except that it’s actually 0.0%* alcohol.

Notice the difference? It’s the *.

The * means that there’s “less than 0.05% brewed alcohol”. Because there isn’t actually 0.0%.

If there were no alcohol, it would say no alcohol. Or may 0% alcohol. But then it also wouldn’t be beer, it would be a ‘beer flavoured’ fizzy drink, and I doubt that would sell very well.

The accuracy of the label gives the illusion of certainty and correctness.

If you’re buying or selling a house, 0.05% doesn’t make much of a difference. It’s $250 of real estate agent’s commission on a $500k house sale. Or just under $3,500 more (or less) in total mortgage payments for a 30-year $300k mortgage.

But an agent with 3.95% commission gives an impression of being more reasonable, more fair and less out to make money than an agent with a 4% commission. And a bank with 4.65% interest rate seems more generous than a bank with a 4.70% interest rate.

If percentages were written to make more sense, then we wouldn’t buy the service.

The accuracy of the value gives the illusion of affordability and fairness.

An affordable housing solution

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There’s a couple of different measures of housing affordability:

  1. Ratio of price to income (i.e. house price divided by income before tax).

  2. 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:

  1. A 20% deposit on a $550,000 house is $110,000, leaving $440,000 to be financed.

  2. An individual earning the median income of around $46,000 can afford a mortgage of $170,000 (using the same assumptions as earlier**).

  3. 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.