There has been a structural change in the housing market.

OPINION: We're often told house prices are "affordable" when they're about three times a typical household income.

The problem is, we're now at levels of least double that in most parts of the country.

But it's pointless to hope for a return to the affordability of previous decades.

There has been a structural shift, moving house prices permanently higher for modern generations of house-buyers.

READ MORE:

* Shamubeel Eaqub: The debt that banking owes the housing market

* Nervous investors may hand Auckland house buyers an opportunity

* Shamubeel Eaqub: Kiwi lessons for Aussie house dreams

Here are some of the factors that drove the change.

SUPPLIED We haven't been building enough houses.

1) LOWER INTEREST RATES

Inflation was a problem in New Zealand over the 1970s into the 1990s. Fighting it produced very high mortgage rates peaking above 20 per cent in the late-1980s with lesser peaks above 11 per cent in 1998 and 2008.

There was a structural adjustment in average inflation downward from the very early-1990s and that produced a structural fall in borrowing costs from 1992 which opened up home ownership to a great many people.

We saw another structural adjustment downward in mortgage rates about ten years ago which initially we put down to simply the effects of the global financial crisis. But some people fairly early after the GFC saw that interest rates would be permanently lower and they shifted funds out of other assets like term deposits into housing.

This year has produced a further structural adjustment and acceptance of lower interest rates as we have all seen monetary policy tightening cycles around the world flounder in the face of evidence of changes in the way firm growth and shortages of resources like labour feed through into inflation.

The structural declines in borrowing costs and alternative investment rates since 1992 have been factored into house prices.

2) FASTER POPULATION GROWTH/HIGHER NET MIGRATION INFLOWS

I have heavily emphasised this factor since 2012.

What has changed is that following the changes in immigration rules from 1987, and development and deepening of the economy following the economic reforms of the same era, more people come here and fewer leave.

Over the ten years ending in 1988, New Zealand suffered an annual net migration loss on average of 16,000 people. In the ten years ending in 1998 that switched to an average annual gain of 9000. In the ten years to 2008 that net gain rose to an average of 26,000 per annum. In the ten years to now the gain has averaged 29,000 and the actual flow in the year to October was around 55,000.

More people means more demand for houses. But as with our infrastructure, the level of construction has not kept up with the unexpected acceleration in population growth.

SUPPLIED Tony Alexander: "Too many analysts up until recently have failed to acknowledge these many structural factors relevant to the demand for and supply of housing."

3) DOUBLE-INCOME HOUSEHOLDS

Up until the 1970s there were few females in the workforce on a permanent, family-supporting basis.

Those households in which both partners worked sustainably full-time were able to bid more for a desired property and had access to a greater level of bank funding than single-income families.

Over the years the entry of more females into the workforce has boosted the proportion of households with two incomes. House prices have adjusted to reflect the structural lift in buying power, to the point where we commonly say that you need two incomes to support a mortgage these days.

4) HIGHER CONSTRUCTION COSTS

By this we mean not just the cost of materials like wallboards, but consenting fees, inspection fees, health and safety-related costs, and developers' fees.

In addition, over the years new requirements have been introduced regarding seismic strength, insulation and so on. Houses these days also on average are bigger than in earlier decades, have toilets on the inside, and often have more than one of them.

The average dwelling built today is not the same as the average one built in the past – though it seems to leak more and utilises less durable material in many instances.

CHRIS McKEEN/STUFF More people have been moving to New Zealand than leaving.

5) IMPROVED CREDIT ACCESS

Some people may grumble about loan-to-value ratio restrictions. But the truth is that prior to deregulation of the banking sector in the mid-1980s, getting a mortgage was quite difficult and banks rationed credit according to government rules which seemed to follow an electoral cycle.

The structural impact on house prices of this structural shift in credit availability ended quite some time ago however.

6) SAVE OR STARVE

For three decades now governments have been telling us that not only was our access to New Zealand Superannuation at risk because of worsening fiscal prospects, but that enjoyment of retirement necessitated both higher savings and ownership of a mortgage-free house.

Unsurprisingly, people have reacted to the constant drumming of these messages by boosting their retirement preparations.

The problem, however, is that we Kiwi householders seem not to like to save. So, we have partly sought to prepare for this apparently precarious retirement by borrowing money to create housing assets.

7) FOREIGN HOUSE BUYING

This effect has officially waned now since last year's ban. But internationalisation of housing markets from the 1980s brought new buyers into our cities who were not there before. More demand means higher prices.

Note that anecdotal evidence out of Australia is that foreign buyers have developed ways of getting around rules there, and maybe we will see the same eventually happen here.

RNZ What's happening in the crazy world of New Zealand's fluctuating house prices?

8) COUPLES DIVORCING

At the same time as average households have shifted from one income to two, more households have been splitting in two, requiring two houses instead of one.

More recently, demographers have been noting increasing splitting of older couples in their late-50s and onward. The financial resources these people have and perhaps an aversion to becoming a flatmate, has seen one couple splitting into needing and perhaps owning two houses instead of one.

9) AIRBNB

The shift in house use from rental or owner occupancy toward the provision of accommodation for the tourism sector has removed many thousands of houses from the pool available for Kiwis to occupy.

This reduction in supply places upward pressure on prices – especially with increasingly stringent requirements being placed on landlords causing people to purposely purchase property for Airbnb use.

10) FOREIGN STUDENTS

An export education sector has developed in fits and starts over the past quarter of a century and this has logically boosted demand for housing accommodation. Construction of student units has taken resources away from construction of housing for owner occupancy.

11) LAND AVAILABILITY

Whether it be because of the restrictions imposed by the Resource Management Act, insufficient investment in transport networks, or simply organic growth, relative availability of land for housing in locations near to where people work has structurally declined in recent decades.

12) HOUSING SHORTAGE

Not enough houses were built in Auckland from about the middle of the 2000s. Then, after the global financial crisis, while our population kept growing, construction fell to the lowest levels since the 1960s with only 13,500 consents issued in 2011 versus 34,000 in 2004. Consents are now running at 37,000 but our population is almost 5 million.

And Treasury noted something in their half-year outlook which I had not considered before: "The compositional shift towards higher-density dwellings, which typically take two to three times longer than houses to complete, ... ."

And it pays to note that the just announced $12 billion boost to infrastructure spending will mean fewer people available to build houses. "However, the labour market is tight and some resources will likely need to be reallocated to meet the increase in demand."

Too many analysts up until recently have failed to acknowledge these many structural factors relevant to the demand for and supply of housing.

Their focus was on expecting New Zealand to follow (temporary) price collapses overseas from 2006, low rental yields versus equities yields and concluding an adjustment would come via lower house prices, adherence to old rules of sustainable house prices not relevant to the modern age, continuing to think in terms of a "brain drain" from New Zealand, and simply being too "victim" focussed.

That is, seeing a group of people missing out and feeling sad (young people who missed buying before prices jumped from 2011), concluding things simply have to change so that this sadness can be removed.

Auckland reached its new equilibrium factoring in all these factors and others in 2016. The rest of New Zealand continued apace in a lagged catch-up to the earlier Auckland surge. Auckland has now turned up again in response to new acceptance of low interest rates, confirmation of no capital gains tax, and sustained strong net migration inflows more than offsetting introduction of ring-fencing, new tenant-friendly legislation, and rising new house supply.

The regions are sustaining their strength longer than earlier thought because of low interest rates in particular. Their flattening periods will be cushioned by Auckland's new period of price rises producing expectations of another lagged regional price catch-up somewhere down the track.

Tony Alexander is an independent economist and economics speaker and was formerly chief economist at BNZ. He now offers a free weekly update on the economy, with a special focus on housing. People can sign up by emailing tony@tonyalexander.nz