The unwritten laws of housing affordability

“There used to be a sort of unwritten law that a man should give a day’s pay for a week’s rent, but that cannot be done now.” – Alfred Washer, House and Land Agent, 1912

One hundred years on, there are a few familiar aspects of Alfred Washer’s thoughts on  housing affordability, which he related to the Royal Commission on the Cost of Living in New Zealand (p.27). First: like him, many of us have an idea about what constitutes a fair price to pay for having a roof over our heads. Second, housing is getting harder and harder to pay for.

There are different ways of whether people live in affordable housingy. According to Statistics NZ, “there is no single measure for housing affordability”, but it is related to the ability of households to meet their costs after their housing is paid for.* (This is different from measures of house price affordability, which are also contested: Demographia’s annual surveys are often cited in the media, but  Professor Lawrence Murphy of the University of Auckland has argued that they are “simplistic”.**)

Alfred Washer related housing affordability to wages, recalling a time when rent cost about 1/6th of wages, or 17 per cent (if, as I imagine in an uninformed way, people worked six days a week at this time). These days, housing affordability is assessed by relating rent or mortgage costs to household income. The relevant threshold for housing being considered unaffordable varies, as a Treasury report notes, even within New Zealand: sometimes 25%, or 30% of income; sometimes net, sometimes gross. Or 30% of income, but only for the lowest two income quintiles (the “30/40″measure”). (The latter indicator is quite useful: someone who earns a $900 k a year and spends $300 k on housing can probably easily meet other vital costs with the remaining $600 k).

The government provides housing to state (and some community) housing tenants through income related rents. We might consider this as a way the government has defined affordability: tenants pay a maximum of 25% of their income in rent. It’s not clear where this threshold came from. Alan Johnson’s report for the Salvation Army on housing assistance, Give Me Shelter, pointed out that, when income-related rents were reintroduced for state housing tenants in 1999, “the setting of rents at 25% of net income was not preceded by any public debate on the question of adequacy but appears to have been simply a reinstatement of a former policy setting which predated the reforms of 1991.”

Those pre-1991 policy settings may be related to housing affordability standards overseas. What constitutes affordable in the income-to-housing-expenditure ratio changes over time and place – in the Canadian context, what the government considered unaffordable changed from 25%, to 20%, to 30% as Hulchanski (1995) has written. Schwartz and Wilson (2006), of the US Census Bureau, provide a similar history of the changes in the affordability standard from 20% of income for housing costs in 1937, to 30%. In New Zealand, Washer thought 17% was reasonable in 1912; Statistics NZ said that 25% of income was a “widely-used” threshold in the mid-2000s***; and in 2010, the Ministry of Social Development considered that people were affected by lack of housing affordability if they spent more than 30 percent of their disposable income on housing costs.

What has gotten most attention in the last few days, however, is not how we measure housing unaffordability, but what to do about it. Everyone agrees that housing affordability has a number of causes, but people place different weight on different causes, and call for different solutions – whether it’s reform of the RMA, as the Government’s recently proposed or reforming the current tax system which encourages investment in property, as Gareth Morgan wrote last week,**** or any number of things, as the Productivity Commission found.

No doubt we’ll be discussing some of these issues at the University of Otago Wellington Summer School one-day course next week (11 Feb). The course is called “Affordable housing: What is it? Who needs it? Who is best placed to provide it?”. I’ll be speaking about social housing reform in its historical and international context. There’s a whole lot of great speakers, including some I’ve those I’ve cited here – Laurence Murphy and Alan Johnson.  Registrations are open if you’re interested – more information here.

*And then there’s the cost of transport, which is also related to housing, as Dr John Morrissey and Kerry Mattingly pointed out in a study of car and property costs in Auckland last year. 

**For more on this, see Laurence Murphy’s recent article in Housing Studies where he looks at how “a US-based private consultant’s metric of housing affordability, and analysis of the causes of housing unaffordability, has been incorporated into policy-making and new legislation in New Zealand.”

*** The website is undated, but the latest stats cited are from the mid-2000s.

**** On this, I talk about some of the ways home-ownership is subsidised by the taxpayer here).