Traditionally, housing affordability estimates use overall average household incomes.

However, census data shows that renting households have significantly lower household incomes than owner-occupied households.

This difference means that using overall household incomes can overstate the ability of renting households to afford rents or to save a deposit to buy their own home.

Nationally, we estimated the mean household income was $133,800 over the year to June. For renters, we estimated a mean household income of $104,800, which is 22 per cent below the all-household average household income.

For owner-occupiers, we estimated household incomes are slightly higher than the all-household average at $148,900.

This makes a big difference to affordability calculations, suggesting that renting is even more unaffordable than traditional measures would suggest, and the hurdle for renters to become owner-occupiers is higher than previously thought.

Renters’ incomes

Average rents in New Zealand amounted to $568 per week in the year to June, which would account for 22 per cent of average household incomes, based on the all-household average.

For those earning the average income in a renting household, rents would account for a more substantial 28 per cent of household income.

To purchase an average house at $923,900, it would take 9.2 years on an all-household average income, blowing out to 11.8 years on an average renting household income – assuming 15 per cent of income is saved until a 20 per cent deposit is built up.

The house price-to-income ratio for an average house with an all-household average household income is 6.9, but this rises to 8.8 using the mean income for renting households. Mortgage repayments rise from 54 per cent of the all-household average income to 69 per cent of renters’ average income.

These figures make it clear that for renting households with an average renters’ income, it is extremely difficult to buy a house near the average house value.

Useful tool

Renter incomes tend to be lower than owner-occupier incomes because renters tend to be younger than owner-occupiers, and those with sufficient income to buy a house are more likely to be owner-occupiers.

In practice, a portion of renters will be close to transitioning to ownership, whereas other renters will be a long way from home ownership. It’s likely households who transition from renting to buying have higher incomes than households who stay renting, although we are unable to quantify this.

However, renter-specific incomes are a useful tool to better reflect the housing stress placed on renters and prospective first home buyers, who are currently renting.

Affordability monitor

Housing affordability is easiest to monitor at a city or district-wide level on a regular basis, but there can be significant variation in affordability within a district as household incomes, house prices and rents can exhibit different patterns.

Our analysis of Waipa District found that, although the district-wide house price-to-income ratio was 7.3 in the year to March, the ratio varied widely across its two main towns of Cambridge and Te Awamutu.

The average household income was about $11,000 higher in Cambridge than Te Awamutu, but house prices were about $300,000 higher in Cambridge.

As a result, the house price-to-income ratio in Cambridge was 8.5, and a more reasonable, but still fairly unaffordable, 6.6 in Te Awamutu.

Interestingly, Waipa’s district-wide average household income is higher than those for its two main towns, indicating that high household incomes in smaller towns and rural areas bring up the district’s average.

Although Cambridge’s average house price was 42 per cent higher than Te Awamutu’s, Cambridge’s average rent was only eight per cent higher, so there was little difference in rental affordability between the two towns.

In Cambridge, the average rent accounted for 26 per cent of mean household income, and 27 per cent in Te Awamutu. By this measure, renting in Cambridge is more affordable than Te Awamutu because Cambridge’s higher incomes make more of a difference than Te Awamutu’s lower rents.

This doesn’t mean renters from Te Awamutu will be better off if they move to Cambridge. However, it does highlight that although Cambridge has the highest rents, it doesn’t necessarily mean their renters have it the toughest.

Housing stock

In our housing affordability analysis, the average rent in Waipa District of $581 per week, was $89 higher than in Hamilton city at $491.

This was a somewhat curious result — normally, we would expect rents for a metro area to be higher than in satellite towns, reflecting the higher desirability and more limited supply within a metro area. Diving deeper, we found housing characteristics explained most of the differences.

Despite the appreciable difference in the overall average rent, the average rent for three-bedroom houses is just $2 different between Hamilton and Waipa.

The difference in average rent for four-bedroom houses was $37 – still an appreciable difference, perhaps reflecting newer and larger four-bedroom housing stock in Waipa.

The fact that the gap between Hamilton and Cambridge closes when focusing on specific housing types shows the overall difference is heavily influenced by the housing mix available in each area.

Hamilton has a greater supply of small dwellings, with 25 per cent of its occupied dwellings in 2018 being one or two-bedroomed, compared to 18 per cent in Waipa.

Differences in the number of bedrooms explains most of the difference in rents between Hamilton and Waipa, but it’s a different story within Waipa. The average rent in Cambridge is $595 a week, $45 higher than in Te Awamutu. For three-bedroom houses, the gap actually widens to $68 a week, indicating that differences in housing quality and desirability are more significant within Waipa.

What price points would make a difference?

Housing affordability is huge challenge in all corners of NZ.

Increasingly, communities are looking at ways to bridge this gap and help residents into their own home.

South Waikato District Council (SWDC) is looking into facilitating affordable housing development in their communities. Although cheaper housing is by definition more affordable, SWDC wanted to know what price points would be needed to make a difference; that is, how many extra households could afford to buy their own home at each price point below the market average.

We used Stats NZ’s administrative population census data to understand the distribution of household incomes.

We then built a model which estimated how many households could afford a mortgage at each price point, assuming a 20 per cent deposit and 30-year mortgage term. We considered three different thresholds for affordability – mortgage repayments amounting to less than 30 per cent, 35 per cent or 40 per cent of household income.

Across South Waikato District, the average house price was just under $430,000 over the year to March.

If housing was offered at $380,000, $50,000 below the district’s average, we estimated just over 600 additional households could afford to buy their own home.

If housing was offered at $330,000, $100,000 below the district’s average, we estimated an additional 1,100 households could afford to buy their own home.

Armed with this information, SWDC now knows how many households could benefit from more affordable housing, and what price points might need to be achieved to make a dent in the housing affordability challenge.