Questioning Demographia and their dodgy figures on housing affordability

Earlier today I drew attention to the faulty Demographia reports that the media have lapped up. Larry Mitchell emailed me about it:

Yes! … you have raised some significant issues of measurement, largely those related to income data concerned with the Demographia Housing affordability index.

I too have some major reservations principally concerned with the survey’s obdurate stance that ignores the influence of movements of incomes which affect Housing affordability.

I have tried, (on a number of occasions and unsuccessfully) to point out to its authors that the Demographia index/survey of Housing affordability, by ignoring income effects results in merely a good, but far from comprehensive “first cut indicator” of Housing affordability. To claim for the survey anything more rigorous than this, or to base affordable housing public policy on these findings moves toward the much more problematic.

Housing costs above all else in this context rely on many, mostly market-driven variable preferences, simply put, the matching of needs/wants with resources. From this complex situation the Housing Affordability index takes just two of the many variables, Housing costs and Incomes. 
What is worse, the survey findings blithely ignore the impact (index movement-causation) of the income variable blaming all! of the Housing affordability woes on the other element … of Housing costs.This myopic focus severely limits the usefulness of the survey.

Lets briefly examine any presumption that the Income to House price ratio is a “reliable” indicator of housing affordability driven as is claimed by its authors by Housing costs alone.

If the ratio moves from (say) 3.0 to (say) 4.0 (less affordable) how is it possible to simplistically just attribute the ratio increase merely to the single Housing cost element? After all, there are two variables in the ratio, Both influence the measure but one is ignored in the analysis … that is, “Incomes”.

Housing costs are not the sole Housing affordability determinant obviously for if (real) Incomes have (say) declined at the same time as (say) housing costs have remained constant, then housing will be less affordable solely as a result of lower incomes. “QED”.

Using Demographia’s evaluations though, the index movement to lower affordability would (wrongly) be attributed to increased Housing costs (that had not changed!).

Until this Demographia measure accepts that some form of regression or other statistical weighting analysis is used to tease out the relative influences of BOTH factors upon the ratio we should treat the Demographia findings for what they are … simplistic “first cut indicators”.


Larry N. Mitchell

Finance & Policy Analyst (Local Government)
Host/Proprietor “Kauriglen” Puhoi’s only Country Lodge.
email to [email protected]
NZ web site www.kauriglen.co.nz

  • thor42

    *All* that is needed to make the whiners STFU is to do a search on realestate.co.nz using the criterion that the cost be $150K or less. You will get 8,500 results.

    The so-called “crisis” is *bullshit*. People whine if they can’t get a house in the “right” suburb at the “right” price.

    They should pull their heads in, HTFU and look in towns that they *can* afford to buy in. There are *lots* of them, and some bloody nice houses at really cheap prices.

    • Phar Lap

      Quite right.In Tawa Wellington,a superb house can be bought for about 60% Of Auckland prices,Most of them are weatherboard with decent sections.Tawa as an extra bonus has a super rail system.Fifteen minutes into Wellington.Train runs every thirty minutes.

  • Mr_V4

    I think it’s generally accepted that the Demographia survey is simple in the measures it uses, but to some extent this is to enable an international comparison The more variables you use the more difficult it is to do such a compaison because each country will track those variables in different and not necessarily comparable ways.
    Also if you are doing a comparison over long periods of history this measure will be used because other data may not even exist. This doesn’t make it ‘dodgy’.

    If you look at the report as a whole you have to question why our land prices are forced so high (note it is not the house value so much as the land value that is squeezed) compared to other cities. (Green Taliban, RMA, Zoning issues etc etc have something to do with it.)

    Larrys point is true, but again if national incomes were falling, in the long run it is doubtful falling incomes could sustain a plateau in house prices, due to the fact buying a house is a leveraged investment. If the bank will lend 95%, then $50,000 potentially will get you into a million dollar house.

    Also in aggregate incomes don’t really increase or decline much in any year, maybe low single digit %’s. Compare that to Aucklands double digit % house price growth, the only reason that can happen is the effect of leverage.

    It is a useful report if you look at the broad trend, rather than any specific year/year variations.

  • Wellingtoncommuter

    Following on from Mr_V4 good points, for me the key point to the survey is to highlight the long-term trend. As outlined in Section 3.0 Long Term Trends of the survey:
    “As was noted above, Anthony Richards of the Reserve Bank of Australia has shown that the national price to income ratio was at or below 3.0 in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States until the late 1980s or late 1990s, depending on the nation.” (New Zealand is now over 5 . . . Auckland much higher)
    and then:
    “This historic Median Multiple affordability range of 2.0 to 3.0 continues in many markets of the United States and Canada” (so it IS possible to have affordable housing in some places).
    The very simplicity of this sort of “cost/benefit” index means it only changes over the long term if something quite fundemental also changes. Now New Zealand incomes have not reduced over this period, it is clear that housing costs (and, if you read other reports, the underlying urban land prices) is the major cause of increasingly unaffordable housing.
    Finally, the long term country graph (figure 5) shows the NZ affordability index climbing from about 2.7 in 1991 to settle around 3.4 and then climbing again from 2002 to over 5. Perhaps the Resource Management Act 1991 and the Local Government Act 2002 (with its focus on “sustainability”) gave councils the strengthened mandate to “stop sprawl”.

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