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Home loan affordability deteriorates to record worst in 2009
Rising house prices and interest rates combined in August to weaken home loan affordability to its worst level in 2009, the BNZ Home Loan Affordability measure shows.
The apparent recovery in the housing market and higher long term interest rates are adding to pressure on affordability caused by virtually no income growth and rising unemployment, the monthly measure calculated by Interest.co.nz found.
The BNZ 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 by 2.5 percentage points to 58.7%, its highest level in 2009 and its biggest deterioration in 15 months.
The median house price rose 2% in August to NZ$347,000 from NZ$340,000 in July and is now just 1.4% below its November 2007 peak of NZ$352,000. The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, rose 25 basis points to 6.5% over the month and has now risen from an average 5.9% in February. Variable mortgage rates, meanwhile, have fallen in the last month, meaning some borrowers may have chosen to go variable rather than fixed to improve their immediate affordability.
Meanwhile median incomes have been flat in the last month and have fallen slightly from April after a slight increase in the ACC earner's levy and very flat wages growth, due largely to lower overtime worked.
"Affordability has decreased significantly in the last month because longer term fixed mortgage rates, house prices and incomes have all moved against home buyers," BNZ Chief Operating Officer Stephen Mockett said.
"However, variable mortgage rates have fallen in the last month, meaning some borrowers will have chosen to go variable which will in turn enable them to pay off their principal at a faster rate," Mr Mockett said.
"The question for many borrowers will be whether any decision to borrow at these lower variable interest rates remains affordable as interest rates rise in later years," he said.
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 this year to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and stabilised prices. But short term mortgage interest rates flattened out in late March and longer term mortgage rates began to rise in line with rises on wholesale markets and higher local term deposit rates.
Affordability is increasingly out of reach for most home buyers 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 deteriorated in August. The proportion of a single after tax pay needed to buy a first quartile house rose to 50.1% for the first time since December 2008 as fixed mortgage rates rose. The rise from 49.4% in July was not as strong as for median home buyers because the move in house prices was most pronounced in the upper price ranges, dragging the median higher. The first quartile house price actually fell in August to NZ$245,000 from NZ$247,100 in July.
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 also deteriorated and are now back to levels 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 38.5% in August from 36.8% in July. 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. This is the worst level of standard household affordability since December 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 to 23.7% in August from 23.4% in July. This compares with the trough of 22% in January, February and March when some first-home-buyers returned to the market. This measure peaked at 35% in July 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 36.9%, while the Central Otago Lakes (Wanaka and Queenstown) is the least affordable on 79.4%. Auckland sits at 71.4%, Wellington at 62% and Christchurch at 51.6%.