HOT TOPICS:   2015 series  |  Double shots  | Top 10 at 10                                                  RESOURCES:    Economic calendar   |   Rent or buy

The comment stream

Reader poll

Which country's economy is likely to improve the most in 2015?

Choices

Roost home loan affordability for first-home buyers - New Zealand

Posted in Property

The Roost home loan affordability index for first-home buyers - November 2014:

It now takes 53.5% of one median income of a person in the 25-29 age group to pay the mortgage on the lower-quartile priced house in November, up from October’s 49.5%.

This index was 49.7% a year ago and 48.7% four years ago. This affordability index reached its highest point of 74.6% in June 2007.

Essentially a single median income for a first-home buyer is not high enough to buy a lower-quartile priced house, even with a deposit around 10% of the house’s value. However, a couple/family with more than one income may find the lower-quartile house price is affordable. (See household income section below.)

For comparison, it takes 48.6% of one median income for the 30-34 year old age group to pay the mortgage on the lower-quartile house price, up from October’s 45.0%.

This index was 45.1% a year ago and 43.8% four years ago.

Auckland Central Auckland North Shore Auckland South Auckland West Wellington City Hutt Valley Porirua Kapiti Coast Whangarei New Zealand Hamilton Tauranga Rotorua Napier" Hastings Gisborne New Plymouth Palmerston North Wanganui Nelson Christchurch Timaru WairarapaQueenstown Dunedin Invercargill

 

Deposit

The first-home buyer index is calculated assuming that the house buyer has been saving for four years, and that amount saved in the four years is then used as a deposit. Based on current income and house prices it will take an individual 3.4 years to save a 10% deposit, and 6.9 years to save a 20% deposit as now required by most banks.

Key drivers of home loan affordability:

House prices

The lower-quartile house price was $304,812 in November, up from $285,000 last month. Annual growth was 7.0%, from the $285,000 lower-quartile house price in November 2013.

After-tax income

The median weekly take-home pay for a first-home buyer was $753.60 in November, up from the $752.87 last month and up from $740.59 in November 2013.

Five years ago, median weekly take-home pay was $656.31.

Disposable Income (wages minus mortgage payment)

Weekly disposable income was $350.65 in November, $21.65 lower than the $372.30 in November 2013 (and compares with $380.08 one month earlier). This measure shows why current property prices exclude so many potential buyers.

Interest rates and mortgage payments

There have been no more OCR rises since July. The average bank interest rate for two year fixed mortgage rate was 5.98% for November, 93 basis points higher than the 5.75% twelve months earlier.

The July OCR rise of +0.25% is the fourth of a series of increases, and flowed through quickly in August. There was little movement in mortgage rates in September, due in part to an ‘election pause’, and in part to signals for the Reserve Bank that the imperatives for immediate hikes had faded. The international situation also weighs on rate decisions.

Wholesale interest rates often move differently to the OCR and borrowers should check their options to switch to a fixed rate.

Our model assumes borrowers switched to a 2 year fixed rate in June 2014, following the shift reflected in RBNZ data. (See note below). Despite the OCR rise, two tear fixed rates actually fell in August as banks launched rate ‘special’.

 

 

Household affordability:

Household income is a key criteria for lending institutions. We have established a set of standardised household profiles, and these can be used to check affordability.

Based on our first-home buyer household profile, it now takes 28.2% of the median take-home pay to service a mortgage of a lower quartile home purchased in November. Lower quartile housing is affordable for families in New Zealand when both adults work.

This is up from 26.1% in the previous month, October. A year ago, it was 24.2%.

The profile we use for a first-home buyer household is one adult male working full-time, one adult female working full time, with no children.

 

Refer to our Median Multiple reports for a reconciliation of this report to the internationally comparable benchmarks, by city.

Details of our household profiles, the data sources, and the methods used, are set out in the Notes section of this report, below.

Full regional reports are available below:

Auckland region Auckland Central Auckland North Shore Auckland South Auckland West New Zealand Wellington region Wellington City Hutt Valley Porirua Kapiti Coast Northland Whangarei New Zealand Waikato and BOP Hamilton Tauranga Rotorua Hawkes Bay and Gisborne Napier" Hastings Gisborne Taranaki Manawatu and Wanganui New Plymouth Palmerston North Wanganui Nelson and Malborough Nelson Canterbury Christchurch Timaru Otago Cent Otago Lakes Southland Queenstown Dunedin Invercargill New Zealand

Note to Editors:

This work must be referred to as The Roost first-home buyer home loan affordability series. There are two related components – the Standard home loan affordability series, and the First-home buyer home loan affordability series. They have both been produced by www.interest.co.nz. Please direct queries via email to info@interest.co.nz, or see our contact information below.

This research has been sponsored by Roost since July 2010. Roost, owned by AMP, is one of New Zealand’s largest independent home loan and investment property brokers with 16 franchisees nationwide. Roost offers to source the perfect loan for its customers from a panel of lenders, and insurance advice from Roost insurance specialists. Roost was established in 1996. For more information please visit www.roost.co.nz

Sources / Definitions / Methodology

*a first-home buyer: An individual in the 25-29 year old age group that buys the lower-quartile priced house with a deposit as calculated below.

Interpreting this Index:
These affordability indexes measure the proportion a weekly mortgage payment is of weekly take-home pay. A separate measure is generated for each region, plus a national one, and for other various mortgage interest rate terms.

Weekly Income (source change):
From the July 2007 Report onward, the source on which we base our estimates of weekly income, is now the LEEDS (Linked employer-employee data survey) data from Statistics New Zealand.

The first-home-buyer home loan affordability report is based on the LEEDS data for the 25-29 age group.

Income tax rates from IRD are used to calculate a take-home pay (which is the LEEDS-based data net of the specific income tax rate).

Deposit - First home buyer index:
As house prices vary by region to a larger extent than wages, we refrained from using a simple 10% deposit-90% mortgage rule to emulate a first home buyer. Instead, to capture the disparity between incomes and house prices we estimate the deposit as a function of savings – that is 20% of weekly income saved for 4 years, plus interest earned at a 90 day deposit interest rate.

Home Loan: (Lower quartile house price less the deposit)
Mortgage repayments are based on the value of the home loan, paid weekly for 25 years, using the 2 year bank average interest rate. The home loan is assumed to be a standard table mortgage, where both interest and principal is repaid in a fixed weekly payment made in arrears. The repayment is calculated using the tools at http://www.interest.co.nz/calculators/mortgage-calculator.

Mortgage Rates:
Average mortgage interest rates are sourced from www.interest.co.nz. These averages are for banks only as banks have 90%+ of the mortgage market. Affordability calculations are done for mortgages at the floating rate and one year through to the five fixed-rate terms. In this report, the two-year fixed mortgage interest rate is used. Until August 2010 this series used a 2 year fixed rate loan as the basis for interest rates. In September 2010 it was switched to the floating rate, reflecting actual market shifts by borrowers. In June 2014, it was switched back to the 2 year fixed rates, again reflecting market shifts.

House price data:
Median house prices are as reported by the Real Estate Institute of New Zealand. Although the REINZ series is more volatile than the QV equivalent, there is a highly positive correlation between the two series. The REINZ series is more current and offers an earlier indication of market trends.

In September 2013, REINZ advised that there were calculation errors in some first-quartile house prices supplied over the past twelve to eighteen months. We are now using the updated and corrected data. Earlier published results may not be accurate on this aspect

Saving Rates:
Average savings interest rates are sourced from www.interest.co.nz. These averages are for banks only, and use the 90 day term deposit rate. Saving calculations take into account the individuals marginal tax rates as defined by IRD.

Household affordability:
Household affordability is calculated in the same way as individual affordability except instead of individual income, a household income is used. The household income for a first-home buyer household is made from 1 full time male median income, and 1 full time female median income (from LEEDS data) both in the 25-29 age range. Our first-home buyer household profile does not have any children.

Disclaimer
IMPORTANT – PLEASE READ
No reader should rely on the contents of this report for making a specific investment or purchase decision. The information in this report is supplied strictly on the basis that only overall market trends are being reported on, and that all data, conclusions and opinions expressed are provisional and subject to revision.

If you are making a specific investment or purchase decision, you are strongly advised to seek independent advice from a qualified professional you trust.

The conditions and disclaimers set out in our http://www.interest.co.nz/terms-conditions  are applicable to this report as well.

This report is made available on these terms only, and JDJL Limited or www.interest.co.nz or Roost is not responsible for any actions taken on the basis of information in this report, or for any error in or omission from this report.

Contact
For more information, contact

David Chaston
Publisher,
www.interest.co.nz
JDJL Limited
206 Jervois Road, Herne Bay
PO Box 47-756, Ponsonby
Auckland, New Zealand

Phone:  (09) 360-9670
Mobile:  021 997-311
Fax:       (09) 360-9619
Email:   david.chaston@interest.co.nz