Rising wages are moderating the effect of rising interest rates on first home buyers

The latest figures suggest very little change has occurred in housing affordability for first home buyers over the last six months.

Housing affordability is affected by three main factors - house prices, mortgage interest rates and household incomes. Interest.co.nz tracks all three of those measures for typical first home buyers to get a standardised affordability measure.

Here's what's been happening with all three of those indicators:

House Prices

Although it's median house prices that usually get the most scrutiny it's lower quartile prices, the price point at which 75% of sales are above and 25% are below, representing the bottom end of the market, that's of most interest to first home buyers.

Real Estate Institute of NZ figures show the national lower quartile price peaked at $670,000 in November 2021, and by March 2023 had declined by $85,000 (-12.7%) to $585,000.

By comparison, the median price, which also peaked in November 2021, at $925,000, had declined by $150,000 (-16.2%) to $775,000 by March 2023.

Significantly, the lower quartile price has shown very little movement between December last year and March this year, dropping to $585,000 in December, dipping down to $567,000 in February this year then back up to $585,000 in March.

So most of the decline in the lower quartile price occurred between November 2021 and December 2022.

Mortgage Interest Rates

Back in November 2021 when prices peaked, the average of the two year fixed mortgage rates offered by the major banks was 4.08%.

It then rose steadily to a hit a high 6.58% in December last year and has since fallen back slightly to 6.44% in March this year.

Household incomes

Interest.co.nz estimates the national, combined, median after-tax pay for couples aged 25-29 and working full time was $1818 a week in November 2021, when lower quartile prices peaked.

By March this year that had increased to $1947 a week, giving them an extra $129 a week (+7.1%).

What does all that mean for affordability?

Firstly, the drop in prices meant the amount required for a 10% deposit on a home purchased at the national lower quartile price dropped from $67,000  in November 2021 to $58,500 in March 2023, while a 20% deposit would have dropped from $134,000 to $117,000, so buyers would find it easier to get a deposit together.

That also means they would need to borrow less.

In March 2023, buyers with a 10% deposit on a lower quartile-priced home would need to borrow $526,500, down from $603,000 at the November 2021 peak, while buyers with 20% deposit would need a $468,000 mortgage in March 2023, down from $536,000 in November 2021.

So by those measures, first home buyers are significantly better off now than they were when prices peaked in November 2021.

Unfortunately higher interest rates are spoiling the party by pushing up mortgage payments.

Interest.co.nz estimates the mortgage payments on a lower quartile-priced home purchased with a 20% deposit at the market peak in November 2021 would have been $596 a week. By March tis year that would have increased to $678, up by $82 a week (13.8%).

If the buyer had a 10% deposit the mortgage payments would have increased from $770 a week to $861, up by $91 a week (+11.8%).

However the pain of higher mortgage payments would have been partially offset by the rise in incomes that has already been noted above.

Interest.co.nz tracks affordability as the percentage of after-tax pay that's eaten up by mortgage payments, with payments that take up 40% or more of income considered unaffordable.

This shows that at the market peak in November 2021, mortgage payments on a lower quartile-priced home purchased with a 10% deposit surged past the 40% of after-tax income threshold to 42.4%, up from just 30.2% a year earlier.

It has stayed above 40% ever since, but has been relatively stable at around 44% since October last year.

For buyers with a 20% deposit, affordability was 32.8% of income in November 2021 and has remained around 35% since October last year.

What those trends mean is that nationally, housing is still affordable for first home buyers if they have a 20% deposit, but could be considered unaffordable for those with just a 10% deposit.

And although affordability has worsened since the market peak, it hasn't worsened by much, thanks to rising wages.

However, those are national figures and there are substantial regional differences.

In Auckland, the country's largest housing market, aspiring first home buyers can probably forget about buying a home of their own regardless of whether they have a 10% or 20% deposit unless they are on higher than average wages. Those in the Bay of Plenty are heading towards a similar situation.

And buyers with just a 10% deposit and average incomes would likely struggle to get a home of their own in Northland, Waikato, Hawke's Bay, Wellington and Canterbury.

The tables below give the main affordability measures for typical first home buyers with either 10% or 20% deposits in all regions.

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