Guest Comment from Phil Hayward

 

Talking Auckland welcomes guest posts around Auckland issues. If you would like to submit a guest post you can contact me at view[dot]of[dot]auckland[at]gmail[dot]com. Please remember all guest posts (and comments) are subject to The Rules.

In this guest post Phil Hayward read of the Auckland Council “Auckland Affordability Spatial Trends” that was released recently, and put together some comments critiquing the report. Before we get to the report (as an embed) below I remind readers and guest posters that I apply The Arts regime when it comes to debates, contestation of ideas, and academic critiques. Anyone who has done Bachelor of Arts or higher at a university as I have know what happens when your lecturers gave you questions to write on as an Arts student. That is no technical right or wrong answer but an opinion or critique is to be given backed up with research and/or logical follow through processes in making your case.

In short? Treat the critiques with respect especially if they disagree with your own view points.

 

Onto the Council report:

Note: I have not read it myself yet

 

Phil’s Comment in Reply to the report

Pricing out” first home buyers from efficient Locations

I have just become aware of the attached detailed analysis of the Spatial Trends in Housing Affordability for First Home Buyers in Auckland.

I wonder if this analysis was provoked by the questions I have been raising on this point for some years now?

It seems to have attracted nil coverage or comment on any of the forums I follow.

 

I believe it confirms my criticisms of UGB-related distortions to urban land markets, following the observations of Alain Bertaud, Patrick Troy, Anthony Downs, Peter Gordon, Peter Hall, and others, of this phenomenon in other cities around the world. That is, systemic inflation of house prices in an urban area, because the prices are always highest anyway in efficient locations, results in first home buyers being increasingly “priced out” of the more efficient locations; and in the long-term, this has to be a negative input in urban efficiency. I claim that this is one of the reasons that more compact cities do not have shorter average commute times at all; the contrary mechanism being presentbecause all compact cities have systemically unaffordable house prices. (Worse congestion delays is the other obvious cause of longer average commute times in more compact cities, and/or cities with a low ratio of major road lane-miles to population).

 

See particularly the graphics on page 33 (page 42 of the PDF). (embedded above)

 

This relates to “3 bedroom homes”. The following page has a graph of “all dwellings”, which does not look quite so bad. However, it is honest of these authors to include the graphic for “3 bedroom homes”, as “all dwellings” will of course be distorted by falling size of the dwellings being bought, in the face of the price inflation.

In general this paper is an impressively thorough analysis.

However: note that it uses “mortgage affordability”, taking interest rates into account. Now in one sense, this is fair because first home buyers will generally decide on their location based on the burden of mortgage repayments at the time they are in the market for the house. However, as I had published in the Sunday Star-Times a couple of weeks ago:

Because the interest rate generally correlates with inflation and hence nominal income growth, it hardly matters what the inflation rate and interest rate is, it can literally be stated as a kind of general rule:

• House price multiple 3: total share of 25 years income required to pay off a house: 10 percent’
• House price multiple 6: total share of 25 years income required to pay off a house: 30 percent
• House price multiple 8: total share of 25 years income required to pay off a house: 40 percent

 

But this is not all – with a lower initial interest rate combined with a large mortgage principal, the chances of an interest rate increase that is immediately catastrophic for the household budget, is much higher.

In fact households are left far more vulnerable to financial reversal of any kind during a much longer period; sickness or injury of either breadwinner; or of one of their children; a child with a disability; loss of employment; a natural disaster; being the victim of a crime; an increase in interest rates – a whole host of scenarios that tend to affect a certain proportion of the population during their lifetimes – will tip a much higher proportion of households into bankruptcy during that lifetime. Professor – now US Senator – Elizabeth Warren calls this “The Coming Collapse of the Middle Class”

Of course this aspect was not intended to be the focus of the analysis of location choices presenting themselves to first home buyers, but it is possibly the most important “missed point” that everyone taking an interest in housing affordability needs to stop missing.

Very likely young first home buyers are not considering this or getting advice of sufficient quality that includes this reality. I say the best advice to potential first home buyers, is DO NOT BUY, rent and wait for the crash. It does not matter how long it takes, because one feature of the kind of bubble the property market is in, is that renting is considerably cheaper than buying. However long it takes the crash to come, every household that has been renting meanwhile will be in a superior cash position, and with sensible savings practices, will be well placed to buy their own first home at a significantly lower price than in earlier years. As with the USA’s post-crash monetary easing, new super low-interest rates can be expected to apply as well……..!

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The above comment has been presented without edit from my end.

Your thoughts fellow readers?

 

I have a follow-up guest post again from Phil that fleshes out the above comment further as well as a ‘reply’ to Minister of Finance Bill English’s ” NZ Herald Wednesday Oct 8, 2014: ‘Illegal’ to build a house in Auckland for less than $500k – English” statement that I will put up later today for your reading.

My thanks to Phil for his contributions.