By Bernard Hickey
Home loan affordability weakened slightly in May as the national median house price bounced back to near record highs. However, record low interest rates continue to make housing affordable for double income households outside of central Auckland and Christchurch where supply shortages are driving house prices higher.
Hot competition between the banks through May and into June increased the bargaining power of many homebuyers, sparking a lift in home buying and borrowing activity.
The Roost Home Loan Affordability monthly reports show affordability for young working couples remains near its best levels in almost eight years, although affordability for home buyers in central Auckland, Wellington and Christchurch remains difficult.
“Borrowers looking for a good deal are able to negotiate hard between banks when they use a broker,” said Colleen Dennehy, a spokeswoman for Roost Mortgage Brokers, which sponsors the Roost Home Loan Affordability report from Interest.co.nz.
“Some banks are offering discounted interest rates and are waiving some fees to some customers, which is improving affordability too,” Dennehy said.
Banks cut their fixed mortgage rates through May and into early June as wholesale interest rates fell. However, the rate cuts dried up in mid June as wholesale interest rates bounced.
Financial markets are now expecting the Official Cash Rate to be flat at 2.5% over the next year, although the Reserve Bank’s forecasts imply a small increase from mid-2013. Economists see the OCR rising from March 2013 to a peak of 4% over the next couple of years.
Affordability worsened slightly nationally in May as the median house price for all of New Zealand rose to NZ$369,000 from NZ$365,000 the previous month. This increased the proportion of single after tax income needed to service an 80% mortgage on a median house to 53.6% in May from 53.1% in April, the Roost Home Loan Affordability report shows.
Household affordability for first home buyers worsened to 21.9% of income from 21.7% the previous month, but remains around its best levels since late 2004. First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.
Affordability improved for Northland, Hawkes Bay, Wellington and Central Otago Lakes because of lower median house prices, but worsened in Auckland, Waikato/Bay of Plenty, Taranaki and Otago due to higher median prices. See the main report for links to regional reports.
The Roost Home Loan Affordability report measures affordability nationally and regionally for individual income earners and households, taking into account median house prices, interest rates and incomes in their regions and cities.
Affordability has generally been improving since December 2009 as house prices have flattened out and interest rates have fallen, although there has been some deterioration in recent months as house prices have firmed again.
More than 61.7% of home owners are now on floating mortgages, although there has been a surge in fixed rate borrowing in recent months as banks pared their rates. Advertised floating rates at around 5.75% are higher than 1 year fixed rates at around 5.3%, but many banks are offering ‘unofficial’ floating rates of around 5.3% to solid customers with high levels of equity that threaten to leave their bank. The Home Loan Affordability reports use the advertised floating rate.
Affordability for households with more than one income worsened slightly in May because of the higher median house price. 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 35.3% from 35% in April.
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 first home buyer household 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 and coinciding with strong demand.