NZ home loan affordability worsens as house prices nudge up

New Zealand home loan affordability worsened slightly in March from February as house prices nudged higher, more than offsetting a slight fall in fixed mortgage rates, Interest.co.nz�s Home Loan Affordability report shows.

New Zealand home loan affordability worsened slightly in March from February as house prices nudged higher, more than offsetting a slight fall in fixed mortgage rates, Interest.co.nz’s Home Loan Affordability report shows.

The housing market remains fragile, however, as new listings have surged onto the market at the same time as many buyers are holding back ahead of the May 20 budget and future interest rate rises.

Affordability worsened most in the big cities of Auckland and Wellington, where housing market sentiment and prices remain strongest, while affordability in the provincial areas and smaller cities improved marginally as house prices fell.

Affordability is better than its worst levels hit in early 2007 near the peak of the housing boom and interest rates, but has deteriorated in the last six months as house prices rebounded in the wake of interest rate cuts in late 2008 and early 2009, the monthly measure calculated by interest.co.nz found.

“Affordability continues to worsen in the biggest cities where house prices have bounced off their lows from last year,” said Interest.co.nz Editor Bernard Hickey.

“However, there is pressure on the housing market as the supply of new listings builds up and both first home buyers and property investors are holding back from the market ahead of the budget and an expected increase in the Official Cash Rate within months,” Hickey said.

The Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80% mortgage on a median house rose to 63.2% in March from 62.1% in February.

The median house price as measured by REINZ rose to a record NZ$360,500 in March from NZ$350,000 in February, and was 10.9% above its January 2009 trough of NZ$325,000. The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, fell to 7.13% in March from 7.26% in February as weaker economic data shifted market expectations towards a later hike in the Official Cash Rate.

The Reserve Bank has indicated the OCR would be lifted in ‘mid 2010’.

Variable mortgage rates, meanwhile, were flat at an average 5.86% and remain at their lowest level in at least 7 years, meaning some borrowers may choose to go variable rather than fixed to improve their immediate affordability.

Affordability hit its worst level of 83.4% in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10%. Many home buyers jumped in March, April and May of 2009 to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and boosted prices. But short term mortgage interest rates flattened out in late March 2009 and longer term mortgage rates began to rise in line with rises on wholesale markets and higher local term deposit rates.

House sales volumes flattened off in the last three months of 2009 and early 2010 as first home buyers and rental investors stayed away, leaving most of the activity at the top end for owner-occupiers using equity stored up during the 2002-07 boom, or trading down to reduce debt. Volumes slumped in January and February sales were their lowest since REINZ records began in 1992. They recovered slightly in March, but remain well below previous year’s volumes.

Affordability is now often out of reach for most home buyers in the big cities on a single income. The threshold proportion of after tax income considered prudent to sustainably own a house is around 40%. Anything above that is starting to become unaffordable.

Affordability for the typical first-home-buyer also worsened slightly in March from February. The proportion of a single after tax pay needed to buy a first quartile house rose to 54.9% from 53.8%. The first quartile house price rose to NZ$257,500 from NZ$250,275 in February. This measure is for a median income earner aged 25-29 buying a first quartile home. Interest.co.nz thinks the ‘affordable’ threshold is 40% for such a home buyer.

Meanwhile, affordability for households with more than one income worsened to levels last seen at the end of 2008.

This measure of a ‘standard typical household’ found the proportion of after tax income needed to service the mortgage on a median house rose to 41.6% in March from 40.8% in February. This measure assumes one median male income, half a median female income aged 30-35 and a 5 year old child that receives Working-for-Families benefits.

This remains near the worst level of standard household affordability since November last year and significantly above the 35% trough seen in January, February and March, when buyer demand returned to the housing market. Any level over 40% is considered unaffordable for a household.

Our measure of a ‘standard first-home-buyer household’ found the proportion of after tax income needed to service the mortgage on a first quartile home rose was 26.1% in March from 25.5% in February. It has worsened from its best levels of 22% in February and March when some first-home-buyers returned to the market. This measure peaked at 35% in June 2007.

This measure assumes a first home buyer household includes a median male income and a median female income aged 25-29 with no children. Any level over 30% is considered unaffordable in the longer term for such a household.

Southland remains the most affordable region for home buyers with a standard affordability measure of 36.4%, while the Central Otago Lakes (Wanaka and Queenstown) is the least affordable on 83.1%. Auckland worsened by the most in March to 78.4% from 75.6%, while Wellington worsened to 66.4% from 64.4% in January. Christchurch affordability improved slightly to 55.1% from 55.7%.

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Posted: 26 Apr 2010