The rapid decline in mortgage interest rates since the COVID-19 crisis started to bite has made the mortgage payments on a starter home the most affordable they have been in nearly four years.
The average of the two year fixed mortgage rates offered by the major banks was 3.52% in February before severe lockdown restrictions were put in place, and had fallen to 2.76% in June. Over the same period the Real Estate Institute of New Zealand's national lower quartile selling price moved marginally, from $458,500 in February to $452,000 in June, after briefly peaking at $480,000 in March.
Lower quartile prices around the rest of the country followed a broadly similar pattern, mostly with relatively small movements up or down over the last few months, but generally staying close to their recent highs.
For a home purchased with a 20% deposit at the national lower quartile price of $458,500 in February, the mortgage payments at the average two year fixed rate would have been around $380.59 a week (assuming a 30 year term).
The slight reduction in the lower quartile price from $458,000 in March to $452,000 in June and more importantly, the reduction in the average mortgage interest rate from 3.52% to 2.76%, would have reduced the mortgage payments from $380.59 a week to $340,91, a saving of almost $40 a week.
However to get a better feel for housing affordability, you need to measure mortgage payments as a percentage of income.
If a couple were both earning the median pay of people aged 25-29, the mortgage payments in the examples above would have gobbled up 22.5% of their after-tax pay in February, but by June that would have dropped to just 20.0%. That is the lowest that the mortgage payment-to-income ratio for lower quartile-priced homes has been since October 2016.
A traditional financial planning measure of housing affordability has been that mortgage payments are considered affordable when they take up no more than 40% of the borrower's net income. By that measure, the current record low interest rates have made mortgage payments on lower quartile-priced homes extremely affordable for younger people on median incomes.
Even in Auckland, the most expensive region in the country where the lower quartile price was $726,000 in June, falling interest rates saw the mortgage payments on a lower quartile-priced home drop from $581.06 a week in February to $547.57 a week in June, a saving of $33.49 week, while the ratio of mortgage payments to net pay dropped from 33.8% to 31.6% over the same period.
So by traditional measures, Auckland should now be considered affordable for typical first home buyers. However the main hurdle facing most first home buyers is probably not being able to afford the mortgage payments, but being able to raise the deposit. A 20% deposit for a home at the national lower quartile price would be $90,400, and at Auckland's lower quartile price it would be $145,200.
Interest.co.nz estimates that if a young couple earning the median rate of pay for 25-29 years olds, set aside 20% of their after pay each week, it would take them five years to save a 20% deposit at the national lower quartile price and almost eight years to save a 20% deposit at Auckland's lower quartile price.
So it would not be surprising if they opted to take on a low equity mortgage, which would need a lower deposit. While that would push up their mortgage payments, interest rates are now so low that they would likely still be affordable for most first home buyers.
If a couple purchased a home at the national lower quartile price of $452,000 with a 10% deposit, the mortgage payments would be $443 a week. That's just 26% of the after-tax pay for couples earning the median wage for 25-29 year olds, putting it well within affordable limits.
If a couple purchased a home at Auckland's lower quartile price of $726,000 with a 10% deposit, the mortgage payments would be $712 a week, which would be 41.1% of the median after tax pay of Auckland couples aged 25-29. That's getting into unaffordable territory, but only just.
So provided potential first home buyers on average incomes can get a deposit together, even if it's less than 20% of the purchase price, they should be able to afford the mortgage payments on a cheaper home without over-stretching themselves.
The tables below show the mortgage affordability measures for lower quartile-priced homes in all of the main housing districts throughout the country, based on 10% and 20% deposits.
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|Lower Quartile Housing Affordability with 20% Deposit|
|Region||20% Deposit $||Years required to save 20% deposit||Amount of 80% mortgage $||Weekly mortgage payments $||Median take home pay $||Affordability: Mortgage payments as a % of income|
|Bay of Plenty||102,000||6.0||408,000||384.66||1,601.71||24.0%|
|Districts & Cities|
|Auckland North Shore||170,000||9.2||680,000||641.09||1,733.17||37.0%|
|Notes: Deposit figure is 20% of the REINZ's lower quartile selling price in each area. Years to save the deposit and median pay figures are based on the combined after-tax pay for couples working full time at the median pay rate in each each area, who save 20% of their net pay each week. Weekly mortgage payments based on a 30 year mortgage at the average of the two year fixed rates offered by the major banks.|
|LOWER QUARTILE HOUSING AFFORDABILITY WITH 10% DEPOSIT|
|Regions||10 % Deposit $||Years Required to Save 10% Deposit||Amount of 90% Mortgage $||Weekly Mortgage Payments $||Median Take Home Pay $||Affordability: Mortgage Payments as % of Income|
|Bay of Plenty||51,000||3.0||459,000||499.88||1,601.71||31.2%|
|Cities & Districts|
|Notes: Deposit figure is 10% of the REINZ's lower quartile selling price in each area. Years to save the deposit and median pay figures are based on the combined after-tax pay for couples working full time at the median pay rate in each each area, who save 20% of their net pay each week. Weekly mortgage payments based on a 30 year mortgage at the average of the two year fixed rates offered by the major banks.|
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