Record improvement in housing affordability in January; housing seen affordable again by the end of 2009

Housing affordability improved a record amount to its best levels in 5 years in January because of further falls in house prices and a sharp reduction in mortgage interest costs, a monthly survey by interest.co.nz has found.

After years of housing being unaffordable for most New Zealanders, interest.co.nz is now forecasting that housing will be affordable again for most New Zealanders by the end of 2009 if the current trend of improvement continues.

“All of the trends are converging to make housing much more affordable for both families and single income home buyers. House prices are sliding, interest rates have fallen fast, taxes are set to be cut again and incomes are rising. These have all combined to reduce the proportion of after tax income needed to service the mortgage on a median home,” said interest.co.nz editor Bernard Hickey.

“The one big silver lining of the credit crunch is this rapid improvement in housing affordability,” Hickey said.

The standard measure of affordability nationally showed the proportion of a median after tax pay needed to service an 80% mortgage on a median house fell to 54.1% in January from 59.8% in December, which was a record improvement for any one month since the survey data started in January 2002. This is sharply better than the 82.9% record worst level recorded in November 2007 when house prices peaked.

This was the best level since April 2004. Interest.co.nz sees this measure being affordable for most when it dips below 40%.

The standard first homebuyer measure improved to 46.8% from 52.4% last month and is well below the November 2007 peak of 73.8%. It is at the best levels since November 2004. This measure uses the median income for a 25-29 year old buying the first quartile home. Interest.co.nz sees this as affordable when it dips below 40%.

Our measure of the standard household (one male aged 30-34 years earning the median income, one half time female 30-34 year old and one 5 year old child receiving working for families) shows their proportion was at 35.3% in January, down from 39% in December and a November 2007 peak of 53.9%. Interest.co.nz sees this as affordable when it reaches 30%.

Our measure of the standard first home buyer household (one full time male aged 25-29 and one full time female aged 25-29 with no kids) buying the first quartile home shows an improvement to 22.0% from 24.7%. We think that this is now affordable, being below the 30% threshold.

What I think

The immediate conclusion many will draw from this forecast of housing being affordable again is that demand will return for houses and prices will stop falling.

That would have been the case if this had happened in 2005, 2006 and even in 2007. Home loans were still extraordinarily easy to get then and interest rates were low. Also, workers were still very comfortable about their job security.

The wider picture now is much more uncertain and will mean house prices continue to fall through 2009 and into 2010.

Home loans are much harder to get for those looking to buy houses at the margin as investment properties or first homes. Deposits have to be larger and the leverage allowed is much smaller. Hopes for capital gains have evaporated for property investors and positive cash flow is much more important.

This shortage of easy loan money is the dominant factor now for house prices. In 2006 a couple earning a combined NZ$150,000 who had a NZ$40,000 deposit could easily get a 95% home loan to buy an NZ$800,000 house. Now that same couple with the same deposit would only be able to buy a NZ$200,000 house with an 80% home loan. Most banks would probably still rattle the tin for such a couple to lift the loan to value ratio over 80%, but the best they could afford now would be around NZ$500,000, That’s the power of leverage and deleveraging.

Unfortunately, this tsunami of develeraging sweeping the globe is driving down property prices everywhere. New Zealand is not immune. The employment outlook is also much more uncertain than 2005, 2006 and 2007. Unemployment is forecast to rise from 4.6 to over 6% this year. It may be over 7% by the end of 2010.

The other major influence here is interest rates. The lowest fixed mortgage rates in the 6-12 month range are now just under 6% and may head into the low 5% range if the Official Cash Rate is cut to 2% from its current 3.5%, but I’d be surprised if they headed much below 5.5% given the enormous pressure on margins most banks have now because of higher funding costs on foreign debt.

Not everyone with a fixed mortgage will be able to, or want to, switch to Kiwibank. Kiwibank has plenty on its plate right now and already has quite a churn rate of customers who signed up a year or two ago and are now looking to go back to a major bank because Kiwibank is having problems handling the volume or providing the service many major bank customers wanted.

ASB increased its 3,4 and 5 year rates back over 6% on Friday because longer term interest rates have actually risen in recent weeks. That’s because of market fears about big new debt issues globally by governments planning huge fiscal stimulus packages. Home buyers should be aware interest rates will not stay below 6% for longer than a year or two and are then likely to rise and potentially quite quickly if savers globally start choking on all this extra government debt and if central banks get their timing wrong on when to turn off the printing presses, thus creating inflation.

We’re sticking to our forecast that the REINZ median house price will fall around 30% to around NZ$250,000 in the two to three years from the November 2007 peak. We don’t see house prices hitting their trough until the end of 2010 and are then likely to take at least 8-10 years to recover back to that November 2007 peak.

This article has kindly been republished courtesy of interest.co.nz. To view this article and other news updates from interest.co.nz click here.

Posted: 16 Feb 2009