Home loan affordability improved in August for the third consecutive month as lower interest rates and reduced mortgage payments more than offset a slight rise in house prices.
The Roost Home Loan Affordability reports show national affordability improved with 61.1% of one median income needed to pay the mortgage on a median priced house in August, down from 61.8% in July.
There were improvements in 12 regions including Auckland Central, Manukau, Waitakere, Christchurch, Hamilton, Tauranga, Porirua and Queenstown. However, there were affordability declines in another 12 regions including Auckland's North Shore, Wellington, Hutt Valley, Dunedin, Nelson and Napier.
Competition between banks in the fixed-term mortgage market saw average two-year fixed mortgage rates drop to 6.13% in August from 6.33% in July. That saw weekly mortgage payments down $4.48 from July to $505.38 in August.
With low funding costs and moderate growth in the mortgage market, banks have been competing aggressively for fixed-term borrowers both through interest rate "specials" and cash incentives.
This combination of lower interest rates and reduced mortgage payments offset a 1% rise in the national median house price in August to $420,000. A typical buyer is assumed to be in the 30-34 age group.
"Banks are competing hard for good business, which for customers means there are good deals to be had," said Roost Home Loans spokeswoman Colleen Dennehy. "A broker can assist customers understand what's on offer and negotiate the best deal available."
Essentially the median income for the typical buyer is not high enough to buy a median priced house, even with a 20% deposit. However, they may find the lower-quartile priced house is affordable. And a couple/family with more than one income may find the median house price is affordable.
Housing affordability has become a major economic and political issue over the past couple of years. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls that have seen the central bank impose limits on banks' high loan-to-value ratio (LVR) residential mortgage lending. Central and local governments are also striving to address housing supply shortages through housing accords.
The Reserve Bank's LVR restrictions have been in place since October last year. In its September Monetary Policy Statement the Reserve Bank said annual house price inflation has fallen to 6% from 10% since the LVR restrictions were introduced. It acknowledged four increases to the Official Cash Rate this year, taking it up 100 basis points to 3.5%, have also been a factor in slowing house price inflation.
Affordability worsens for first home buyers
The Roost Home Loan Affordability reports show, for first home buyers, affordability worsened slightly in August from July. For first home buyers, which in this Roost index are defined as a 25-29 year old who buys a first quartile home, it now takes 51% of one median income to pay the mortgage, up from 50.7% in July.
The median first quartile house price rose 2.31% to $281,000 month-on-month in August. On top of this first home buyers' weekly mortgage payments rose by $2.71, or about 0.71%, to $383.23.
Essentially a single median income for a first-home buyer is not high enough to buy a lower-quartile priced house, even with a deposit equivalent to around 10% of the house’s value. However, a couple/family with more than one income may find the lower-quartile house price is affordable. For comparison, it takes 46.4% of one median income for the 30-34 year old age group to pay the mortgage on the lower-quartile house price, up from July’s 46.1%.
Auckland's North Shore remained the most difficult region for first home buyers, where they require 109% of a single median income after tax to afford a first quartile priced house, up from 107.6% in July. Manukau was also over 100% at 104.2%, albeit down from 106.7% in July.
Wanganui remained the most affordable city for first home buyers, taking 17.1% of a young person's disposable income to afford a first quartile home in August, down from 17.9% in July.
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 40.7% of their after tax pay in July to service the mortgage on a median priced house. This is down from 41.5% the previous month.
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.