By Bernard Hickey
Home loan affordability worsened in June as the national median house price rose to record highs, however record low interest rates continue to make housing affordable for double income households outside of central Auckland and Christchurch.
Housing supply shortages in central Auckland and Christchurch have powered a surge in house prices this year. An intensification of competition between banks has also boosted housing market activity as the outlook for interest rates remains subdued at current lows.
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. See the regular reports here and the first home buyers' reports here.
Banks are offering a variety of discounted fixed mortgage deals that include discounted legal fees, lower interest rates for borrowers with high equity and, in some cases, the discounting of break fees. First home buyers are also dipping into their KiwiSaver funds for deposits and obtaining high loan to value ratio loans.
“Mortgage borrowers are in a strong position to negotiate with their banks through a broker,” said Colleen Dennehy, a spokeswoman for Roost Mortgage Brokers, which sponsors the Roost Home Loan Affordability report from Interest.co.nz.
“Banks are offering various types of discounts to various types of customers so it helps to have a mortgage expert help borrowers through the maze ,” Dennehy said.
Banks cut their fixed mortgage rates through May and into early June as wholesale interest rates fell. There was a pause in June, but some banks restarted discounting in July as the European crisis has worsened and wholesale interest rates fell again.
Financial markets are now expecting the Official Cash Rate to be flat at 2.5% over the next year. Economists see the OCR rising from mid 2013 to a peak of 4% over the next couple of years.
Affordability worsened slightly nationally in June as the median house price for all of New Zealand rose to NZ$372,000 from NZ$369,000 the previous month. This increased the proportion of single after tax income needed to service an 80% mortgage on a median house to 54.0% in June from 53.6% in May, the Roost Home Loan Affordability report shows.
However, household affordability for first home buyers improved to 21.7% of income from 22.0% the previous month and remains around its best levels since late 2004. This difference is because the first quartile house price fell in June to NZ$257,000 from NZ$259,875.
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 Hawkes Bay and Manawatu/Wanganui, but worsened for most other regions 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% 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 June 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 35.5% from 35.3% in May.
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.