Why global house price comparisons might not be as reliable as you think

Thursday, 11 May 2023

The suburbs that have seen the biggest falls were in Wellington, including Seatoun, where median values fell $389,800 in a year, Plimmerton, which fell $359,950, and Southgate, which fell $333,150.

House prices are still falling around the country, but the question of how New Zealand’s prices compare to those in the rest of the world has not gone away.

With the borders open, and the cost of living soaring, more people are heading overseas to live, with house prices often cited as a reason.

Global house price indexes sometimes add heat to this debate – showing how our homes stack up in affordability compared to other countries’ properties.

But some commentators question their relevance for the average home buyer.

What are these rankings?

In New Zealand, the global rankings that get most coverage are the Demographia international housing affordability report, and Knight Frank’s global house price index, and prime global cities index.

Some other international real estate companies, such as JLL and Colliers, produce global price indexes, but they are more industry-focused.

Less regular offerings also appear. These include a global cost of property report, released by Compare the Market last year, and recent NetCredit research showing the costliest capital cities to buy homes in.

The OECD and the IMF chart international house price data, but the figures are used as part of broader economic analysis.

Global house price rankings tend to attract lots of attention.

What are the differences between the most popular ones?

The annual Demographia international housing affordability report assesses affordability using the 'median multiple', a measure of median house price divided by median household income.

It ranks 94 housing markets, with populations of over one million, in Australia, Canada, Hong Kong, Ireland, New Zealand, Singapore, the UK and the United States.

In contrast, Knight Frank’s global house price index tracks the performance of 56 national housing markets using official data from central banks or national statistic offices in each country.

Until recently, it was published quarterly, but it will now be published twice a year.

Knight Frank’s prime global cities index tracks prices across 150 cities worldwide, and is released quarterly.

How does New Zealand rate?

In the Demographia report, New Zealand - which is represented by Auckland - does not fare well.

This year, Auckland was rated the seventh least affordable housing market in the world, with a 'median multiple' of 10.8.

But while its median multiple has got worse, its ranking has improved from 2021 when it was rated the fourth-least affordable market.

In the latest Knight Frank global house price index, New Zealand ranked at 54 in the final quarter of last year. That is because the country’s prices fell by 11.3% from the same time the year before.

Auckland is the seventh-least affordable housing market in the world, according to the Demographia report.

But New Zealand has taken a rapid tumble from the top. In mid 2021, at the height of the boom, the country was ranked number two, with an annual price increase of 22.1%.

What about other countries like New Zealand?

Hong Kong is the most unaffordable market in the world with a median multiple of 18.8, according to this year’s Demographia report.

It is followed by Sydney in Australia, and Vancouver in Canada, and Honolulu, San Jose and Los Angeles in the United States make up the top six.

The most recent Knight Frank rankings have Australia at 52, Canada at 45, the UK at 38, the United States at 31, and Ireland at 20. Turkey is ranked number one.

So what are the problems with the rankings?

There are too few countries included in the Demographia report, property developer David Whitburn says.

Criticism of the Demographia report’s sample of countries is not new, with former prime minister Helen Clarke saying it included too few countries to be meaningful back in 2008.

Property developer David Whitburn, a former president of the Auckland Property Investors Association, says the fact the report covers just eight countries means it is not an international report.

Leaving out most countries, and leading cities such as Zurich, Geneva, Paris, Copenhagen and Tel Aviv, and ignoring expensive housing in Japan and South Korea, is seriously misleading, he says.

“If a truly representative sample of countries was added, Auckland would be ranked very differently, especially as liveability factors, such as jobs, infrastructure, and access to amenities, should come into it too.”

Some of the more 'affordable' cities in the Demographia report have significant issues with depopulation, higher crime rates, higher pollution, social deprivation, and are well away from jobs and infrastructure, he says.

Quotable Value operations manager James Wilson says global price rankings over-simplify local market dynamics, because they need easy points to rank things on.

An example is that New Zealand is often ranked as a country, but outside of Auckland, Queenstown, Wellington, and a few pockets, it has some relatively affordable markets, he says.

“If you look at the country as a whole that is not obvious, and so the whole country is portrayed as very unaffordable.”

Most global rankings do not take into account what is going on in the local markets, and who is actually buying and selling in those markets, he says.

“To get a true picture of the market you need to break down the data further, and look at local dynamics, buyers and stock at different levels of the market.”

Global house price rankings give an over-simplified idea of local markets, Quotable Value’s James Wilson says.

Do they serve any purpose then?

Wilson says the rankings are popular, because they are accessible and easy to understand, and that gets them noticed, but they are not particularly useful for research purposes.

It comes down to who uses them and how, because if people are buying and selling in a local market, they should be looking at that market, he says.

“Investors tend to disregard them because they look at micro-specific drivers in the markets they are interested in. But first-home buyers just look at the affordability ranks, and it is a big thing for them.”

CoreLogic chief property economist Kelvin Davidson says comparisons with overseas markets are interesting, but have little relevance to what is going on in the local market.

“And a ranking in one index can’t be looked at in isolation. Instead, you have to look at a country’s ranking relative to its long-term average in the index.”

It is necessary to take a broader perspective, and look at how different drivers may have changed too, he says.

“For example, if you are looking at affordability, it is too simple to look at just house prices and incomes. You have to look at mortgage rates and servicing costs to get the true picture.”