Home loan affordability worst in nearly 3 years in May as rules are tightened for high LVR lending; mortgage brokers can help negotiating with banks

Rising housing prices and flat interest rates have seen housing affordability deteriorate to its worst levels in almost three years in May, according to the Roost Home Loan Affordability reports.

Affordability was the hardest for first home buyers on the North Shore in Auckland, where the Roost reports estimated a single first home buyer would have to spend almost 95% of their after-tax income on servicing their mortgage, even with a 20% deposit.

Affordability for regular home buyers and first home buyers worsened across most of the country and remains at its toughest in the biggest cities of Auckland, Christchurch and Wellington, where housing supply shortages and a fall in fixed mortgage rates over the last year have heated up the housing market.

Life looks set to get even tougher for first home buyers in the big cities in coming months if, as expected, the Reserve Bank puts 'speed limits' on low deposit home loans.

The government is pushing for some sort of exemption for first home buyers, but the Reserve Bank is determined to slow riskier lending growth. About a third of mortgages with deposits of less than 20% are to first home buyers.

"First home buyers will need to work harder in their negotiations with their bank to achieve their aims," said Colleen Dennehy, a spokeswoman from Roost Mortgage Brokers, which sponsors the reports prepared by Interest.co.nz.

"A mortgage broker can help a first home buyer negotiate the best deal when the banks toughen their rules," Dennehy said.

Roost Mortgage brokers had already seen some banks tighten their rules around low deposit lending over the last month in response to Reserve Bank pressure, she said. Some banks had reduced their availability of 90% plus mortgages or effectively increased interest rates for very low deposit mortgages.

The Roost Home Loan Affordability reports showed a slight deterioration in Auckland, Hamilton, Christchurch and Invercargill, with more significant falls in Tauranga and Nelson because of sharp rises in house prices. Affordability improved slightly in Wellington, Whangarei, Palmerston North and Wanganui.

Only interest rates remaining near record lows is stopping a further worsening, the Roost Home Loan Affordability reports show.

It is toughest for first home buyers in Auckland. It took 87.7% of a single median after tax income to afford a first quartile priced house in South Auckland in May, while it took 94.8% in the North Shore.

Central Auckland affordability is at its worst level since March 2010, although it remains below its worst ever levels of 107.3% of income required in November 2007 when interest rates were over 10%. They are now closer to 5%.

Nationally, affordability for someone on a single median income worsened by 0.1% in May from April, which meant it took 56.3% of after tax income to afford an 80% mortgage on a median house, according to the Roost home loan affordability report released today.

Interest rates were broadly flat in May and after-tax wages rose just over NZ$1 per week. A rise in the national median house price to NZ$392,000 in May from NZ$390,500 in April was the main cause of the deterioration.

Housing affordability is shaping up as a major economic and political issue over the next 18 months. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls last month that could see the central bank impose limits growth in high loan to value ratio mortgages. Central and local governments are also moving to address housing supply shortages.

For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was also a deterioration in affordability in most cities.

It now takes 48.3% of a  single first home buyer's income to afford a first quartile priced house nationally, up from 48.0% a month earlier.  The most affordable city in New Zealand for first home buyers is Wanganui, where it takes 22.9% of a young person's disposable income to afford a first quartile home. The least affordable is the North Shore of Auckland.

Any level over 40% is considered unaffordable, whereas any level closer to 30% has coincided with increased buyer demand in the past.

For working households, the situation is similar, although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 37.1% of their after tax pay in May to service the mortgage on a median priced house. This is up from 37.0% in April.

On this basis, most smaller New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group.  This household is assumed to have one 5 year old child.

For households in the 25-29 age group (which is assumed to have no children), affordability also worsened, with 23.4% of after tax income in households with two incomes required to service the debt, up from 23.2% the previous month.

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.

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.

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Full regional reports are available below: