Gareth Morgan, Director of Gareth Morgan Investments
Robin Clements’ defence of his affordability index is inadequate. My dictionary describes affordability as “the position of being able to do something without adverse consequences”. On this measure of basic English comprehension the index title is devious. If one bought a house on the back of the Clement’s index of affordability there could be little but adverse consequences. Consider the plight of a shelter-seeking client who, on listening to Clement’s affordability commentary, took one of the mortgages he’s pushing. Over the next 10 years house prices fail to keep pace with inflation to the extent that the owner’s equity in the house is eradicated and the Clement’s bank calls in the loan. His index excludes measure of such “adverse consequences”. The solace gained from the assurance that the house was “affordable” would be of small comfort to the victim – or the lender. Clement’s specific points included: –
- “The index considers solely cashflow..”, indicating he never purported to promote it as an indicator of the investment value of housing. Even on a cash basis the index is deficient. The present value of the future cashflow of funding a mortgage at today’s abnormally high real interest rates, is more expensive than it’s been in the past, not cheaper.
- “Most households decide to buy a house on the basis of shelter and security…” – rather than as an investment. While first home buyers may give most emphasis to the shelter requirement, they are a minority of house buyers. Most buyers are trading.
- He argues the “ordinary bloke” doesn’t take account of the outlook for property prices when buying. This insults the intelligence of most people, but perhaps Clements has a target audience in mind.
- Changes in the affordability index explain trends in the issue of residential permits. A piece of selective econometrics if ever there was. Rather like arguing that because cumulative rainfall is correlated with a time trend that time cause rain – or does rain cause time? If the theory of Clement’s index is flawed, no amount of data mining will redeem it.
Any public claim by a vendor that something is “affordable”, should be beyond reproach. While Clements acknowledges in a footnote to his index publication that excluding the house price outlook is a limitation of his index, he goes ahead anyway in his press releases to talk about improved affordability. The published commentaries should be of concern to consumer groups interested in protecting the public from misleading advertising.
The fundamental problem with the index is that it doesn’t consider time. Housing is a long term asset so both the future cost of finance, and the time profile of house values, are important to any purchaser. If Clements is going to use the word “affordable” when coveting press coverage, then he has to include his views on the outlook for house prices and interest rates. As it stands the index is little more than statistical flatulence. It’s certainly a misrepresentation of the affordability of housing.
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