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Home loan affordability deteriorates to record worst in 2009

Posted in News

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 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. 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%.

Here is our measure of the ratio of house prices to household income.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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so it's not just cheese,

so it's not just cheese, milk, petrol, school uniforms, vegetables, meat, rates, electricity, insurance and the likes - homes are expensive too - little wonder when they are actually permanent structures (unless you got a leaky one).

where's the surprise in that???

Great Stuff One question

Great Stuff

One question is there any dollar figure figure or indication of what most people are borrowing from banks at this point?



@POP, I think thats why

@POP, I think thats why they use the comparitive graph to show what proportion of take home pay goes on servicing the mortgage showing that even though things are getting more expensive, your home is the largest liability you have.

Also not that this is

Also not that this is with interest rates at all time lows. What will happen when interest rates return to more normal levels?

Couldn't this low interest rate

Couldn't this low interest rate environment be part of a ploy to replace the over-leveraged with the plain-old-ordinary-leveraged? Sure, I see it's not in the interest of the country to collapse house prices ( that's where the majority of savings are stored), but a bit of debt reallocation withing the country might not be a bad thing? I guess it's 'keeping it orderly' that's the trick.

Are people concerned with home

Are people concerned with home loan affordability and future increases in interest rates when they buy houses?

I, personally, am not hung

I, personally, am not hung up about future increases in interest rates - TO A POINT! If they get to around 10% I wouldn't be concerned as I'd be chanelling every spare cent on to my mortgage whatever the rate was. Anything above that would be breaking a psychological barrier for me and knowing how much debt I'd have to take on to buy a half decent house in Wellington, I'd be getting pretty alarmed at around 10% or higher. IF I was to be a house now or sometime in the near future, I'd fully expect interest rates to start taking off sometime next year so would definitely factor that in. The one thing that would blow the whole thing wide open would be if one of us lost our jobs. I don't see that as likely, but you never know.

But I don't think the average Kiwi is overly concerned with home loan affordability. Not when they think the price of whatever house they buy will increase by 24% over the next few years. What's there to be concerned about in that case? Worst case scenario you could always sell it and make $$$ - easy peasy!

veedub, your house could go

veedub, your house could go up 24% in a few years but it could also go down 24% in a few years as per USA and England, who really knows how easy peasy $$$ will be?

I'm a realist when it comes to property prices in NZ, look around there's room to house half of India in this country and we even grow the timber in abundance to build cheap houses.

Their is a serious lack of supply (for no other reason than politicians own interests) affecting the supply side of the demand equation and as in overseas countries when the adjustment takes place heads will be under water.

Aarron - my "easy peasy

Aarron - my "easy peasy $$$" comment was tongue in cheek, meaning that the eternal optimists out there no doubt think that selling at the peak of the next/current boom could solve whatever potential problems they find themselves in. I strongly suspect that the average Kiwi believes the worst is over and it's up, up, up from here in terms of house prices. Why else would they be rushing out to buy overpriced, inferior quality houses? (I'm talking about the sub $500,000 bracket here). Bring on the adjustment! That's an insane amount of debt to be saddled with!

I agree with you veedub

I agree with you veedub the average kiwi (if they read the paper) probably believes the worst is over and it's time to get back in the game. They are wrong! As our trading currency the US dollar continues to slip and the Kiwi rises this will place all sorts of pressure on export growth $$$.

We have seen this with fontera and their payout and proposed capital restructuring multiply the effect by all of our produce and subtract the tourist dollars which buy more from over seas (except of course that tourists aren't as cashed up as they used to be).

Our fundamentals are not right for sustained growth in housing, so over the next few years it's probably not going up in value.



Pretty good post. I just

Pretty good post. I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I'll be subscribing to your feed and I hope you post again soon.