Is housing affordability the issue?

The productivity commission has released its final report on “housing affordability”.  Now there are a number of important points in the report, and there are undeniable issues in the New Zealand housing market which have caused a “misallocation” of resources.

However, the justification for their being a housing affordability issue in the report is not fully covered off – something that is surprising given that this is the issue that appears in the title of the report.

Now this claim may seem surprising – after all everyone knows that house prices relative to income have risen considerably, and so getting on that housing ladder is indeed a lot lot harder.  However,there are many solutions on the market and  this is only part of the story – our real interest when looking at affordability is what has happened to the cost of buying a given lump of housing service.  In the report (p4) they state:

This apparently benign aggregate situation disguises a more difficult position for renters on lower incomes.
In particular, people in the lowest two income quintiles spend a much higher proportion of their income on
rent than people on higher incomes (Figure 0.5). Even though the situation appears to have improved since
the late 1990s, those in the two lower income quintiles still spend, on average, more than 30% of their
disposable income on rent, after allowing for government assistance.

To me this says that housing affordability has improved over the last decade, but it would be nice if it is more affordable.  This is a significant value judgment from a result that seems to contradict the idea that affordability is a rising issue – and so it requires more discussion before it can be said to be justified.

As mentioned before, when adjusted for quality rent relative to income has been declining – sure the relative price of home ownership has risen, but the share of your income you need to give up to get a housing service has been falling.

Furthermore, although we do not have access to quality figures for difference deciles rental properties, we can say that comparing current income to the cost of purchasing a housing service is likely to exaggerate the level of true inequality!

Remember, through a persons lifecycle they move between income deciles – students get jobs, working people retire.  As a result, we want a way that we can take into account the fact that people earn more and less over their lifetime.  One way to look at this is to accept that people do smooth consumption over their lifecycle, and as a result comparing costs to total spending gives us a better (although imperfect due to uncertainty and credit constraints) way of understanding spending on housing services.

And what do the HES figures tell us when we compare housing costs to consumption?

	Decile 1	Decile 2	Decile 3	Decile 4	Decile 5	Decile 6	Decile 7	Decile 8	Decile 9	Decile 10
Housing services	26.9%	25.0%	22.1%	23.0%	20.0%	19.1%	20.2%	19.4%	18.4%	20.9%
Rent only	14.8%	16.3%	14.1%	14.5%	10.5%	9.0%	8.1%	7.1%	5.7%	4.1%

People that earn less spend more of their total budget on housing – that is unsurprising.  However, the fact that this gap is only small makes any claims about it being a massive relative issue a little more tenuous.  Preferably I would compare this to a “minimum” housing service level, where people are given whatever service we subjectively define as a need – discussing it in these terms is then both honestly, and completely, subjective.

Conclusion:

I’m not saying that there may be an issue about the affordability of housing – and that we may believe the poorest among us deserve more.  Of course my solution there would be to have a higher minimum income rather than mess around with marginal things, but I digress …

Fundamentally, this piece by the productivity commission was sold as a description of housing affordability, and they stated that there was essentially issues with affordability that warranted investigation.  And I’m just not sure that this initial case was made.

Now don’t get me wrong, what has happened in the housing market has undeniably represented a structural issue for the New Zealand economy – one which may well be negative for social welfare, and one which is due to many of the factors they diligently noted and discussed.  But fear labeling this as an issue of affordability will lead us towards the wrong sort of policies for dealing with any underlying issues in the housing and residential investment sectors (eg increasing subsidies for first home purchases) – exacerbating the negative impact of the New Zealand economy instead of improving it.

P.S.  I am also surprised that, after identifying high subcontactor fees and a dearth of skilled staff in the industry there was no explicit mentioning of how higher returns in the Australian labour market are making it difficult to retain labour in the building industry here [from my cursory reading – it is possible I may have missed this] – further reducing investment and impairing the productivity of the industry.  Although I do not know how to fix this, I was under the impression it had been a significant issue for some time.