New Zealand home loan affordability improved in July by its biggest amount in 18 months to its best levels since September last year as fixed mortgage rates dropped and house prices eased, the Roost Home Loan Affordability report shows.
Affordability is set to improve further through the second half of 2010 if house prices keep falling in a ‘buyers market’ and further concerns about the global economy drive market interest rates lower. Personal tax cuts from October 1 are also set to further improve affordability.
The national median house price fell 1% to NZ$349,000 in July from June and is now down 3.2% from a record high of NZ$360,500 in March. The average two year mortgage rate fell to 6.98% in July from 7.18% in June and has fallen further since the end of July to around 6.75%.
Concerns about the growth outlook globally drove wholesale interest rates lower through July and early August. Banks passed some of these declines on in the form of lower fixed mortgage rates, despite the Reserve Bank’s increase in the Official Cash Rate to 3%. Variable mortgage rates have risen around 0.25% to around 6.25% in the last month.
The Roost Home Loan Affordability report measures the affordability nationally and regionally for income earners and households, taking into account house prices, interest rates and incomes. See all the regional reports here.
Queenstown more affordable than Auckland
Affordability improved significantly in Queenstown, Waikato/Bay of Plenty, Hawkes Bay, Nelson, Wellington and Canterbury because house prices fell. But affordability worsened slightly in Northland, Manawatu, Otago and Southland because house prices rose.
Auckland is now the least affordable area in New Zealand, taking that mantle from Queenstown for the first time since January 2002.
Affordability has been improving since December 2009 as house prices have flattened out and interest rates have fallen, the monthly measure calculated by interest.co.nz in association with Roost found.
“The combination of lower fixed mortgage rates and a buyers’ market is improving affordability,” said Roost spokeswoman Margaret Smith.
“Homebuyers are in a strong position in a market where house prices are flat to falling and the outlook for interest rates is more subdued,” Smith said.
The Reserve Bank lifted the Official Cash Rate (OCR) as expected to 3% on July 29, but also cautioned that the economic outlook had deteriorated and that future OCR hikes would be smaller and slower than it had previously forecast.
Wholesale interest rates have fallen around 40 basis points since then and financial markets are now expecting the OCR to rise just 50 basis points in the next year to around 3.5%. Most home owners are still on fixed mortgages, but more borrowers have chosen to float in the last year given floating rates at around 6.2% are cheaper than longer term fixed rates at around 6.75%. However, the gap has closed over the last month, making the fixed vs floating decision more evenly balanced.
The Roost 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 improved to 59.5% in July from 61.3% in June and is closer to its 57.4% level from July 2009. This was the biggest improvement since January 2009 and takes affordability to its best level since September 2009.
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 moved early in 2009 to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and raised prices. But house sales volumes have weakened in recent months as tax changes in the May 20 budget and softer economy have affected sentiment and activity.
Affordability is difficult in the central areas of Auckland, Wellington, Christchurch, Hamilton and Tauranga for those on a single median income, but homebuyers in smaller provincial cities will find home ownership much more affordable. Households with two incomes are also in a stronger position. Affordability for the typical first-home-buyer also improved to 52% in July from 53.8% in June.
Household affordability better too
Meanwhile, affordability for households with more than one income improved to its best levels since September 2009.
This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house fell to 39.9% in July from 41. 2% in June. 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.
Any level over 40% is considered unaffordable for a household, whereas any level closer to 30% has coincided with increased buyer demand in the past. The survey’s 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 fell to 25.1% in July from 26.0% in June. 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, while any level closer to 20% is seen as attractive.
Full regional reports are available below:
- New Zealand (159kb .pdf)
- Northland (159kb .pdf)
- Auckland (159kb .pdf)
- Auckland Central (159kb .pdf)
- Auckland North Shore (159kb .pdf)
- Auckland South (159kb .pdf)
- Auckland West (159kb .pdf)
- Waikato and Bay of Plenty (159kb .pdf)
- Tauranga (159kb .pdf)
- Hawkes Bay and Gisborne (159kb .pdf)
- Taranaki (159kb .pdf)
- Manawatu and Wanganui (159kb .pdf)
- Wellington region (159kb .pdf)
- Wellington City (159kb .pdf)
- Wellington Hutt Valley (159kb .pdf)
- Nelson and Marlborough (159kb .pdf)
- Canterbury (156kb .pdf)
- Christchurch (156kb .pdf)
- Central Otago Lakes (159kb .pdf)
- Otago (159kb .pdf)
- Southland (159kb .pdf)
|Regional home loan affordability comparison:|
|mortgage payment as a % of weekly take-home pay|
|- North Shore||76.4%||82.7%||74.2%||93.1%||107.0%||88.9%|
|- Hutt Valley||53.1%||56.6%||50.6%||68.0%||74.2%||63.6%|
|Central Otago Lakes||71.9%||78.0%||72.5%||137.6%||115.5%||97.1%|
Question and Answers about the report
How does interest.co.nz work out these numbers?
Interest.co.nz gathers data from Statistics New Zealand and IRD on wages in each region, data from the Real Estate Institute from each region each month, and data from banks and non-banks on interest rates. It has calculated home loan affordability going back to the beginning of 2002.
How is this survey different from the Massey University survey of affordability?
The Massey study is only done quarterly rather than monthly and uses an index of Home affordability rather than actually measuring home loan affordability. It uses an index rather than the actual measure of the proportion of after tax pay needed to service an 80% mortgage on a median home. The exact composition and meaning of the index is not detailed.
Why use a single median income?
It’s true that most homebuyers are using a combination of one or more full or part time incomes to service their mortgage. Each household is different and may be using incomes from different sources. The best measure of average national household income is calculated officially once in every three years by Statistics New Zealand. However, we have also calculated the household measures using a 'standard' household of 1 male median and 0.5 of a female median with one 5 year old child receiving Working For Family payments. We also have a first home buyer's household on two median incomes.
Interest.co.nz chose to use the median income data series from IRD and Statistics NZ because it can be measured monthly and can be drilled down by region and by age.
Why is home loan affordability important?
It is a useful way to work out if a housing market is overvalued. It’s clear house prices stopped rising when the national affordability ratio rose above 80% or 2 median incomes to service the average home loan. It’s a way of comparing affordability of housing markets with a national average and comparing housing values from one year to the next. For example, the affordability ratio in 2002 before the housing boom really took off was around 41%.
About Roost Roost is the sponsor of this Report, and the Reports must be referred to as the Roost home loan affordability reports. Roost, owned by AMP, is one of New Zealand’s largest independent home loan and investment property mortgage 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