Affordability can have dramatic impact: Dickens

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The way people behave when houses become less and less affordable can have a dramatic impact on how many houses are needed to satisfy demand, Strategic Risk Analysis managing director Rodney Dickens says.

Monday, December 20th 2010, 12:00AM 2 Comments

by The Landlord

Responses to housing becoming unaffordable range from young couples staying or moving in with parents, those with spare rooms renting them to help pay the mortgage or rent and retired people, perhaps hit by finance company failures, moving in with their kids or with each other, Dickens says.

Other people may convert garages to living quarters or move mobile homes onto their properties to house children or in-laws.

"It only takes a small increase in the number of people per house to result in a significant reduction of houses required to house the population which translates into a large fall in demand for new housing," he says.

At the beginning of the latest housing market boom, back in 2002, the average house cost the average employee about 4.5 times their annual gross income - the average house price was $167,000 and the average annual gross wage was $36,000.

By the time the boom peaked in 2007, the average house cost eight times income.

"It should therefore be no wonder that in recent times the level of demand for housing, both existing and new houses, has been well below even the average level that existed prior to 2002," Dickens says.

The 2006 census showed the average number of people per dwelling was 2.46. If the number of people per dwelling has increased to 2.5, "it means we need 27,317 less new houses than would be the case otherwise."

If the number of people per dwelling has risen to 2.52, New Zealand needs 40,650 fewer houses than otherwise.

The impact is just as dramatic at the local level: in Tauranga, for example, if the number of people per dwelling rises from 2.33 to 2.39, 1,239 fewer houses are needed.

Dickens says many economic forecasters are failing to take such behaviour into account in predicting what will happen to residential building "which is why they have been way too optimisic in recent times."

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