House-price-to-income ratios have fallen, but home ownership bills are up 84%: is New Zealand housing really more affordable?
After several years of adjustment, New Zealand’s housing market has finally shown a positive sign.
After several years of adjustment, New Zealand’s housing market has finally shown a positive sign.
Cotality’s latest housing affordability report shows that all four main measures of the pressure New Zealanders face when buying and renting have returned to around their long-term averages. Falling house prices, rising incomes, easing rents and earlier mortgage rate cuts have made entering the market somewhat easier than at the 2021 house price peak.
However, another set of figures reveals a very different picture.
Analysis by Simplicity chief economist Shamubeel Eaqub for Stuff shows that New Zealand households’ annual spending on council rates, house insurance and property repairs and maintenance has risen from around NZ$4946 in 2016 to about NZ$9100 today, an increase of roughly 84% over a decade.
Over the same period, the labour cost index rose by only around 35%.
This points to a seemingly contradictory situation in New Zealand’s housing market: house-price-to-income ratios have fallen and the barrier to buying has eased, but once a home is purchased, it is becoming increasingly difficult to afford its upkeep.
Buying pressure has eased, but homes are still expensive
Cotality’s figures show that New Zealand’s current house-price-to-household-income ratio is 6.7, broadly in line with the long-term average since 2004 and well below the peak of 9.8 in late 2021.
Deposit pressure has also eased. Based on current house prices and incomes, a household takes an average of 8.9 years to save a deposit, slightly below the long-term average of 9 years.
For households already in the market, a more immediate measure is mortgage payments as a share of household income. This currently stands at around 40%, below the long-term average of 42% and well below the previous peak of 54%.
Conditions have also improved for renters. With the rental market remaining weak, median weekly rent now accounts for around 25% of household income, broadly back at its long-term average.
These figures do show a marked improvement in New Zealand’s housing affordability. However, that does not mean homes have become cheap again.
A house-price-to-income ratio of 6.7 times is still high, and a household may still need almost nine years to save a sufficient deposit. More importantly, these traditional measures mainly assess prices, deposits, loans and rents, without fully accounting for the annual expenses that follow home ownership.
Basic home ownership costs have risen 84% in a decade
Once you become a homeowner, expenses extend well beyond weekly or monthly mortgage payments.
Council rates, house insurance, routine maintenance, exterior and roof upkeep, and all kinds of unexpected repairs continually draw on household income.
Eaqub’s analysis shows that in 2016, New Zealand homeowners spent around NZ$4946 a year in total on council rates, insurance and home maintenance. That spending has now reached about NZ$9100, equivalent to roughly NZ$758 a month.
Within that total, house insurance has risen by around 123% over a decade, while council rates have increased by about 86.9%. Both have grown far faster than the roughly 35% increase in labour costs over the same period.
And NZ$9100 is only an estimated average. It excludes mortgage principal and interest and may not cover major expenses such as replacing a roof, repairing leaks, renovating exterior walls or addressing structural problems. Actual costs may be higher for older or poorly maintained homes, or those in areas with high insurance risk.
So when the data tells buyers that ‘housing affordability has returned to normal’, another question still needs asking: does this measure the cost of buying a home, or the full cost of housing?
Even an annual income of NZ$200,000 may not make things easy
Lighthouse Financial head of wealth James Blair says rising fixed living costs have begun affecting clients with annual household incomes above NZ$200,000.
In the past, these households would generally have been considered high earners with relatively comfortable financial headroom. Today, a growing share of their income goes straight into property and everyday essentials.
The pressure does not necessarily come from a single exceptionally large bill. It comes from seemingly ordinary expenses such as council rates, insurance, electricity, food, loan interest and repairs that rise almost every year. Together, they squeeze the money available for savings, travel, education and retirement planning.
Earlier mortgage rate falls from around 7% into the middle of the 4% range did give some borrowing households breathing room. But with inflation still elevated and the OCR potentially rising again, that relief may not last.
If mortgage rates rise again while council rates, insurance and living costs keep increasing, homeowners could face pressure from both directions. This also explains why many households still feel stretched despite macroeconomic data showing improved housing affordability.
House prices determine whether you can enter; costs determine whether you can stay
When house prices were rising rapidly, council rates, insurance and repair costs were easy to overlook.
If a home gained more than a hundred thousand, or even several hundred thousand New Zealand dollars in value within a few years, paying a few thousand dollars extra each year seemed to make little difference. Many people also judged whether a property had made money simply by comparing its purchase and sale prices.
But when house price growth slows or stalls, those long-overlooked bills come back into focus.
Suppose a property is held for ten years. Using only the current average annual spending of around NZ$9100, council rates, insurance and repairs could add up to almost a hundred thousand New Zealand dollars. Major repairs during that period, or further increases in these expenses, would push the final cost higher.
These expenses do not appear directly in the difference between a property’s purchase and sale prices, but they have a real effect on the homeowner’s eventual return.
Selling a home for more than its original purchase price therefore does not necessarily mean a real profit has been made. The true result becomes clear only after mortgage interest, council rates, insurance, repairs and transaction costs are all included.
Investment properties can no longer rely solely on capital gains
For investment property owners, this shift is even more apparent.
In the past, many investors accepted rent failing to cover the mortgage and other expenses fully because they believed future capital gains would make up for annual cash flow shortfalls.
But when house prices remain weak for several years while council rates, insurance and repair costs keep rising, investors need to contribute more money each year, and the future price gains needed to compensate become larger.
Blair says property’s weak performance over the past five years partly reflects the ultra-low interest rates of 2021, which pushed up prices with some gains lacking long-term support. It also reflects the broader weakness of New Zealand’s economy.
Meanwhile, strong international sharemarket performance has prompted some investors to compare property returns with other assets again. The S&P 500 index has risen around 75% over the past five years, leaving some landlords wondering whether investing in more liquid assets would have produced a different result.
This does not mean investment properties have lost their value, but the investment rationale is changing. Assessing a rental property in future will require more than asking how much its value could rise in a few years. Investors must also calculate how much of its expenses rent can cover, how much cash they need to contribute each year, and whether the household could keep holding it if house prices did not rise for five years.
EnableMe national head of financial coaching Katie Wesney believes rental properties can still be effective investments, provided owners manage cash flow rigorously rather than simply hoping for future house price growth.
The cheapest home may not be the easiest to keep
Cotality’s report shows that, among New Zealand’s main cities, Tauranga carries the heaviest burden for buying and owning a home, while Wellington’s is relatively lower.
However, even within the same city, two similarly priced homes can have entirely different long-term ownership costs.
A cheaper older home may need more frequent repairs and carry higher insurance costs. A newer townhouse may require less maintenance but come with residents’ association or body corporate fees. Homes in areas exposed to flooding, landslides or coastal erosion may face higher insurance costs in future, or even difficulty obtaining cover.
When assessing whether a home is affordable, buyers should therefore budget for council rates, insurance, building inspection findings, future maintenance plans, energy bills and commuting costs, alongside the deposit and mortgage.
A low house price does not necessarily mean low housing costs, and a bank’s willingness to lend does not mean a household can comfortably afford ownership.
The meaning of ‘affordable’ has changed
New Zealand’s housing affordability returning to its long-term average is undoubtedly a positive sign. For first-home buyers waiting to enter the market, lower house prices and higher incomes have indeed created better opportunities than in 2021.
But ‘easier than at the peak’ and ‘truly inexpensive’ are different things.
For owner-occupiers, true affordability means more than assembling a deposit, securing a loan and settling the purchase. It means still being able to save after paying the mortgage, council rates, insurance, repairs and living expenses, while having the capacity to cope with unemployment, illness, rising interest rates or unexpected repairs.
For investors, true affordability means a reasonable balance between rent, cash flow, holding costs and expected capital gains, rather than relying over the long term on future house price growth to cover today’s losses.
The fall in the house-price-to-income ratio from 9.8 to 6.7 shows that the barrier to entering the market has eased. But home ownership bills rising by around 84% over a decade remind every buyer that settlement is only the beginning of housing costs.
House prices determine whether you can enter the market; council rates, insurance, interest and repair costs determine whether you can stay for the long term.
When considering a home that looks ‘affordable’, are you more concerned about the deposit and mortgage, or the ever-rising costs of ownership after buying?