Housing affordability is an important issue affecting the wellbeing of households and can even constrain regional economic growth, as unaffordable housing can make it harder to attract workers from other regions. We’ve been reporting on high-level housing affordability for many years in our Regional Economic Profile and Quarterly Economic Monitor. Recently, we dove deeper on housing affordability for two Waikato Region clients. This article explores several new ways of exploring local housing affordability to inform decision making.

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 estimate the mean household income was $133,800 over the year to June 2024. However, for renters, we estimate a mean household income of $104,800, which is 22% below the all-household average household income. For owner-occupiers, we estimate 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 that the hurdle for renters to become owner-occupiers is higher than previously thought.

Average rents in New Zealand amounted to $568 per week in the year to June 2024, which would account for 22% of average household incomes, based on the all-household average. For those earning the average income for a renting household, rents would account for a more substantial 28% of household income.

Using the average household income for renting households to calculate the affordability of buying a house serves to illustrate the challenge for renters to transition into home ownership.

To purchase an average house worth $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% of income is saved until a 20% 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% of the all-household average income to 69% of renters’ average income.

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

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 is likely that households who transition from renting to buying have higher incomes than households who stay renting, however, we are unable to quantify this. Nonetheless, 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).

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 all exhibit different patterns. Our analysis of Waipa District found that, although the districtwide house price to income ratio was 7.3 in the year to March 2024, the ratio varied widely across its two main towns (see Chart 2). The average household income was around $11,000 higher in Cambridge than Te Awamutu, but house prices were around $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 districtwide 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% higher than Te Awamutu’s, Cambridge’s average rents was only 8% higher, so there was little difference in rental affordability between the two towns. In Cambridge, the average rent accounted for 26% of mean household income, and 27% 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 that 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 toughest.

In our housing affordability analysis for the Future Proof partners, we observed that the average rent in Waipa District ($581 per week) was $89 higher than in Hamilton City ($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 that readily observed housing characteristics explained most of the differences.

Chart 3 shows that, despite the appreciable difference in the overall average rent, the average rent for 3-bedroom houses are just two dollars different between Hamilton and Waipa. The difference in average rent for 4-bedroom houses is $37 – still an appreciable difference, perhaps reflecting newer and larger 4-bedroom housing stock in Waipa. The fact that the gap between Hamilton and Cambridge closes when focusing on specific housing types shows that the overall difference is heavily influenced by the housing mix available in each area. Hamilton has a greater supply of small dwellings, with 25% of its occupied dwellings in 2018 being of 1-2 bedroom size, compared to 18% in Waipa.

Differences in the number of bedrooms explain 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, $45 higher than in Te Awamutu. If we home in on 3-bedroom houses, the gap actually widens to $68, indicating that differences in housing quality and desirability are more significant within Waipa.

Housing affordability is clearly a huge challenge in all corners of New Zealand. Our analysis of housing affordability using average income for renters highlights the particular challenge for those renting to save a deposit and purchase their own home. Increasingly, communities are looking at ways to bridge this gap and help residents into their own home. South Waikato District Council (SWDC) are 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.

To answer this, we used Stats NZ’s administrative population census data to understand the distribution of household incomes within South Waikato’s three main towns. Armed with a detailed understanding of household income distribution, we built a model which estimated how many households could afford a mortgage at each price point, assuming a 20% deposit, 30-year mortgage term. We considered three different thresholds for affordability – mortgage repayments amounting to less than 30%, 35% or 40% of a households’ income.

Across South Waikato District, the average house price was just under $430,000 over the year to March 2024. If housing could be offered at $380,000, ($50,000 below the district’s average), we estimated that just over 600 additional households could afford to buy their own home over and above those who could afford to buy at the current average market price. If housing could be offered at $330,000, ($100,000 below the district’s average), we estimated that 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.

Housing affordability is an enduring challenge in New Zealand, and with housing generally being the largest cost a household will face, it is incredibly important to address this challenge to improve the prosperity of our communities. In this article we’ve shown that affordability can be incredibly nuanced even within a single district, so it’s important to have good data to inform decision making. A wide range of housing insights are possible, even for suburbs, towns, and different demographics. If you would like to dive deeper into housing affordability in your area, we’d love to talk.