Housing Minister's claim homes are more affordable now than when Labour was in government only tells part of the story

Housing Minister's claim homes are more affordable now than when Labour was in government only tells part of the story

By Greg Ninness

Earlier this month Housing Minister Nick Smith told Parliament housing was now 24% more affordable than it was in 2008, when Labour was in government.

In making the claim he pointed to interest.co.nz's Home Loan Affordability Reports (previously called the AMP360 Home Loan Affordability Reports), which track movements in house prices, incomes and mortgage interest rates to give monthly measures of affordability throughout the country.

Since interest.co.nz began producing the reports in 2007 they have regularly been quoted in parliamentary debates by politicians on both sides of the house.

But Smith's claim that housing is now 24% more affordable than it was when Labour was in government would have taken many by surprise, given the extraordinary increase in house prices that has occurred over the last couple of years.

So how well does the Housing Minister's claim stack up?

The Home Loan Affordability reports contain a great deal of data that can be sliced and diced in various ways, but the information in them that is probably the most relevant to the current housing debate is the section on affordability for first home buyers.

This tracks regional movements in the lower quartile selling prices around the country and matches these with the movements in the median after tax income for couples aged 25-29 in the same regions, to estimate how much of their weekly income would be taken up by mortgage payments.

The reports show that in April 2008 the mortgage payments on a lower quartile-priced home would have taken up 33.9% of typical first home buying couple's after tax pay.

But in April this year, that percentage had dropped to just 22.8%, driven mainly by declining mortgage interest rates, with the average two year fixed rate dropping from 9.61% in April 2008 to 4.47% last month.

Which suggests the Minister was correct.

By that measure housing is more affordable now than it was back in 2008.

Affordability has worsened in Auckland 

However he should probably hold off on breaking out the Champagne, because those figures only tell part of the story.

Although they show that housing affordability has improved over the last eight years, they are national figures and do not reflect the situation in Auckland, which is the only region in the country where affordability, or the lack of it, has become a major issue.

In Auckland, the amount of money typical first home buyers would need to set aside for mortgage payments on a lower quartile-priced home has risen from 48.8% in April 2008 to 50.5% in April 2016.

So affordability has worsened in Auckland over the last eight years, even though mortgage interest rates have more than halved in that time.

Although the decline in affordability seems relatively modest, it masks a bigger underlying problem.

Between April 2008 and April 2016 the lower quartile selling price of homes in Auckland increased from $353,600 to 666,600, up 88.6%.

Over the same period, the median take home pay of an Auckland couple aged 25-29 increased from $1297 to $1579 a week, up just 21.7%.

Which means house prices in Auckland have increased at more than four times the rate of incomes for typical first home buyers.

That creates problems for first home buyers trying to save a deposit.

The Home Loan Affordability Reports track how much money typical first home buyers would have to put towards a deposit, if they saved 20% of their take home pay for four years and earned interest on it at the prevailing 90 day bank deposit rate.

In April 2008 that would have given them $59,528 to put towards a deposit, which would have been 16.8% of the price of a lower quartile-priced home.

In April 2016 they would have saved $72,228, which is more money than in 2008, but house prices in Auckland have risen so much that it would be just 10.8% of the [price of a lower quartile-priced home.

That contrasts sharply with the figures for the whole of the country.

They show that in April 2008, typical home buyers would have saved a 22.6% deposit for lower quartile priced house,and in April 2016 that figure had declined only marginally to 22.1%.

So while the national figures show that first home buyers should be able to save a 20% deposit for a home within four years, in Auckland they would have saved only slightly more than 10% of the purchase price.

Out of kilter

That illustrates how far out of kilter the Auckland housing market has become compared with the rest of the country.

And because first home buyers outside of Auckland are more likely to have a deposit of at least 20%, they are also more likely to qualify for the extra low "special" mortgage interest rates that banks advertise from time to time, while typical Auckland first home buyers probably wouldn't qualify because of their low deposit, compounding their problems.

But perhaps the most worrying change in Auckland's housing market over the last eight years is the amount of debt first home buyers need to take on to get into their own home.

In April 2008, if typical first home buyers in Auckland had saved a deposit of 16.8% of the purchase price of a lower quartile-priced home, they would have needed to borrow $294,072, which would have been been 4.4 times their annual take home pay.

But in April this year they would only have a deposit equivalent to 10.8% of a much higher purchase price and would need to borrow $594,372 to buy a lower quartile-priced home.

That is 7.2 times the annual take home pay of typical first home buyers and is a worrying large amount of debt for young couples to take on to get into their own home.

So are first home buyers in Auckland better off now than they were in 2008?

By almost any measure you care to use the answer would be no.

They are likely to be considerably worse off than they were in 2008.

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59 Comments

21
up

Lies, damn lies and statistics.

This article illustrates quite well that the problem isn't so much supply, it is the availability and serviceability of debt really driving these house prices. Banks conjure money into existence, people borrow the absolute limit and then some, and then spend most of their working life enslaved trying to pay it off.

If you try to be responsible, for example, by wasting your time educating yourself, or saving a more substantial deposit you get financially slaughtered as they keep pumping the credit and inflating the bubble around you.

No way out of the madness, if you don't drink the kool aid, you lose. It just makes you shudder to think of when the next recession or bout of interest rate rises come along. There are people borrowing stupid amounts money today who probably can't even remember what interest rates looked like before the "emergency" rates were put into place.

The banks need to be restrained and this government needs to be taken out behind the garden shed.

It was a good time when my savings account earned 9%. Not for anyone with a mortgage though.

I had a large student loan back then, accruing interest. Wish I hadn't prioritised paying it off.

I didn't prioritise paying my student loan off as the minimum payments were ample. I didn't see any need to contribute more as I got more effective use out of the money.

Mortgages are voluntary

.....about as voluntary as death and taxes.

Bollocks. Ive managed to avoid one!

..yes but you are special. Everyone should be like you.

Over the last 30 years mortgage lending rates have been as high as 16% and low as 4.5%. It may go lower still in future, but history tells us it will go up again. Anyone who thinks otherwise is drinking the kool aid, and whoever's not drinking it and can be patient is going to be in a great position when the rates go up again.

With New Zealand's lowest residential mortgage interest rates in history - and investors clamoring for even lower interest rates - because somehow they are being disadvantaged - it would be good if somehow the playing field were leveled rather than being continually tilted to favour investors as seems RBNZ's current policy. (And 16% is a low reality for the 1980s - my mortgage was raised to 20% interest - and I've heard others say their interest got to 22%.)

You nailed it! Nicely put

Using the Auckland figures above, the difference over a 30 year loan is $131k in total payments. Try and pay it off quicker and, with more capital to pay, this position worsens. 20 years = $212k more, 15 years = $247k more.

To achieve the 15 year payoff required raising your payment in 2008 from $3002 to $3716 (+714/month). At current rates and prices, the payment goes from $3366 to $5089 (+$1723/month)

In short, having higher prices and lower rates means you are tied to paying the mortgage for longer as it is harder to overpay.

The oldest joke - how d'ya know when a politician is lying?

Their lips move.

Basing home affordability on mortgage costs is spin to cover up a huge issue.
Sure you can make a home look affordable by extending the loan term to 25 or 30 years. But is a 30 year loan term really affordable? How will you save for retirement?, and how will you save for your kids raising education costs? Shouldn't housing affordability be measured on a reasonable mortgage payback period, such as 10 to 15 years? Also, when buying a home you need to take into account the risk of raising interest rates. With homes only being barely "affordable" on a 25-30 year mortgage, chances are interest rates will raise over this period, as well as a rescission or two will occur. People could lose their homes after paying a mortgage for 5-10 years.

Well no shit!

But are you guys moving this article a little further and calling out Nick Smith publicly, perhaps a news station, to say that he's been hugely selective in his statistics and that they do not tell the true story.

22
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I am gazing at this screen with a feeling a incredulity at this comment by Smith , and I am now totally convinced that this man has lost touch with us mere denizens of New Zealand , or has completely lost his mind .

While provincial New Zealand property prices have remained static and mortgage interest rates have fallen from double digits to sub 4% its little wonder home ownership costs in these rural backwaters is less .

Quite simply , most of us cannot live in these towns , there is simply no work .

He ignores that fact that around 40% of New Zealanders live in Auckland where the situation is the complete reverse . Home ownership cost in Auckland has increased from 10 times the median wage of $45k , to 20 times the median annual wage .

Add to that the additional handicap imposed on ordinary Kiwis who need 20 % deposit in cash ( a rule that does not to people borrowing offshore ) , and you have a crisis of affordability .

He hasn't so much as lost his mind as just deeply dis ingenious in my opinion. He's been caught out a few times too but somehow we let him keep his job! And sadly I live in Nelson and hear his BS all the time!

Great report Greg - I hope the opposition make use of it! I certainly appreciate the regular affordability reports too.

10
up

Off course mortgages are more affordable when we have record low interest rates. The affordability at any one point in time is a misleading way of looking at it. When interest rates return to historically normal levels what will he be saying then. I wonder what he would say if he had to front up to the first time house owners who will then not be able to service the mortgages and probably have lost all their equity. The price to income ratio is a better yard stick for comparison as it is not affected by interest rates.

11
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agree with you Chris-M. A mortgage typically takes 20 years to pay off. By only looking at today's interest rates, rather than those in 10 years, picture of affordability is highly distorted. If rates return to norms, they are at historical lows now, anyone buying now could be in real trouble in future.

I suggest National put Nick Smith in car for a month to live, then send him back out to look at housing solutions. He will not be so smug then.

10
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My wife and I are lucky enough to have a mortgage free home . I would probably go overseas if I was graduating right now , home ownership would be all but impossible today .

Paying off someone else's property as a tenant is just ludicrous , I would refuse to do it , and rather emigrate

Paying the bank twice the amount of interest on a property comparative to rent is even more ludicrous. We've got to the stage where investors have so much faith in an infinite capital gain, that the fever pitch has reached levels of religiosity.

Research shows that you're right about the younger generation - they're much more geared towards experiences than assets.

Most of the anglosphere suffers from the same disease to varying degrees unfortunately.

Due to the 20% requirements, you need a windfall or two high incomes. It is not possible otherwise.

Plenty of homeowners where I work took advantage of the 0% and 5% times to get into the market, sitting pretty now, none of them savers in any way.

We had to find over 100k in the mattress (a.k.a 5 years of saving). Doesn't seem fair, but I guess I should have arranged to be born earlier, eh?

5 and 10% loans are still possible. Some can have equity requirements addressed by Kiwisaver. The 10% equity mortgage for a first home should be the starting point for most. Although you are much better off with 20% due to the difference in interest payments.

Lets see the sacrificial lemon that is our excuse of a housing minister quoting this Interest.co.nz report in parliament.

If anything, the Home Loan Affordability index understates the problem.

Recent FHB's in Auckland are incredibly vulnerable to even a modest rise in interest rates. If the index explicitly included the costs of hedging against rate rises we would have a truer picture.

You also touch on the level of debt Auckland FHB's have to take on. Again the index doesn't really reflect the opportunity costs these people face compared to those who took on lower debts during periods of higher inflation. There is no chance of inflating away the debt or using rising nominal income to pay down the principal more quickly and then move on to increasing spending on other things than just the mortgage.

That index isn't worth a damn and this just highlights such tables as nothing more than total academic rubbish that fulls the halls of our universities and only serves for great political propaganda.

It sounds like 'ol Nick Smith has been taking financial advice from Bill English.
God help any fool who does that.

it's like calling us idiots. Directly.

45% are! Going by the index called a "poll".

Come and get it - easy as - you can have it now
Strewth - how things have changed
On the radio this morning, "a bank" was advertising loans of up to $50,000 approved in 3 minutes

Never ever never heard that sort of thing when I was in my 20's - unheard of

What sort of message is being broadcast to the young? - they are being conditioned - NLP

Marketing is teaching consumerism, then when there's no money left for consumption then there is the temptation of easy money. It's pretty safe to assume the ad didn't focus on repayments and living within your means.

Given the rapid increase in household debt it's hardly surprising that there are ads like this. There's plenty of money to lend at the moment.

.. hold off on breaking out the Champagne.

I could never do that.

"I drink it when I’m happy and when I’m sad.
Sometimes I drink it when I’m alone.
When I have company I consider it obligatory.
I trifle with it if I’m not hungry and drink it when I am.
Otherwise, I never touch it – unless I’m thirsty."

Lilly Bollinger

Who heard Mike Hosking on the radio this morning trying to tell everyone the average wage was $76K ? I think he may of had it wrong and thats more like the average HOUSEHOLD income looking at the numbers in this artical. I do love Mike most of the time, however he is the kind of guy who would be sitting at the bar on the Titanic, totally pissed and telling everyone there was nothing wrong and its "Happy Days" as the ship went down.

11
up

I think he's generally a dick. He simply sits there and parrots what the majority wants to hear. If anyone challenges the status quo, he will dress it up as a left / right ideological schoolyard scrap. Whether or not he wears wanky Italian shoes and drives a Lamborghini or Ferrari is all rather beside the point.

And his mate jk would be next to him trying to flog cruises on Titanic's second, third and fourth voyages with mostly kiwi passengers from 1st class signing up en masse, completely ignoring the chill that was starting.

Wow, I didn't expect Greg to find Nick Smith's claims correct, but they are.
"in April 2008 the mortgage payments on a lower quartile-priced home would have taken up 33.9% of typical first home buying couple's after tax pay but in April this year, that percentage had dropped to just 22.8%"
What's even more surprising is that:
"In Auckland, the amount of money typical first home buyers would need to set aside for mortgage payments on a lower quartile-priced home has risen from 48.8% in April 2008 to 50.5% in April 2016"

Australians think 60%-80% of net income is fine. Allowing money for unexpected costs doesn't even factor in.

80% is fine if your a practical can fix anything type of person. Was on 80% myself for a couple of years, you just have to pull your head in and make the mortgage your priority. Its all about choices at the end of the day.

In my next life im going to come back as a battery hen.
Way more pleasant than a member of todays consumer society.
Its yesterdays society really but we are slow to understand that.
I suspect Debords belief that the consumers will reject consumerism aka capitalism was a good guess.

Surprised to find a reference to Debord here! Perhaps, but capitalism is a flexible ideology.

15
up

I am surprised John Key persists with Nick Smith , he is utterly incompetent , says the most outrageous things and is in charge of the housing portfolio , which in Auckland is in crisis .

We need someone with a clear , well articulated strategy on housing ( in Auckland) , so we understand not only what needs to be done , but what is actually going to happen .

Smith is just hopeless , from taking the media and wandering across empty fields he does not own , promising new houses , to suggesting houses are affordable , no plan of action , nothing , just lies , spin and incoherent nonsense

12
up

..he's the fall guy. Key has been quiet, keeping well away from the issue and media of late so he will not be guilty by association. When we think of housing and the mess...we think Nick Smith or Paula Bennet....not John Key - well I rekon tha's what they hope anyway!

And while they fanny about with this petty party bullchunder citizens are suffering.

Why use the 25-29 age group couple income , as if by some vague notion that this age group are first home buyers . Average age of a New Zealand first home buyer is 39 years. Whether it is higher for Auckland , and by all likelihood it would be, makes nonsense that a happy little couple in their twenties are able to buy their picket fence . Additionally , using the lower quartile as the price range for first home buyers , again mistates the affordability issues, they are in fact in competition with investors , who by all accounts are rampant , simply by mortgage data substantially for the lower half of the market. Simply using the lower quartile is flawed reasoning, having government ministers spout the data from the index to somehow suggest affordability is not so bad is drivel

So.. I take that when interest rates get to 1% or less NS will claim everything is free?

Bit of chit chat across the ditch that housing may be turning from boom to bust. We often get the sniffles when Aus catches a cold right?

Good summary here by SMH commenter:

"We're no longer managing an economy. We're just trying to keep the worlds most grotesque property bubble from bursting... by constantly pumping it up.
Open the immigration floodgates to goose demand.
Soak the country in the loose credit.
Strangle land supply.
Watch the ensuing 'growth'.
When the locals get tapped out, flog everything you can to China.
Great plan, great country"
http://www.smh.com.au/business/the-economy/rba-governor-glenn-sevens-war...

And don't forget 45% of voters are ok with that plan apparently. Either that or too damn stupid to see what's happening.

The latter.

Sadly the alternative parties are just a nightmare and are a huge unknown. David Little is useless and all he is, is a Labour attack dog going after everything he can on National to try and bring them down without promoting a single shred of policy. Yes National are going to win the next election again, sorry folks but 45% of the population are clearly happy with the way things are going for them.

The nightmare is already building thanks to National. They have had long enough to sort these issues just as Labour did. Both have failed this country miserably for decades. It's time for a complete change of leadership. Otherwise the flag referendum should of been a choice between a red flag or one with stars & stripes. If nothing is done and quickly of "significance" then bring on the south pacific spring. You make enough people homeless and or strip their hopes and dreams from them, then watch as NZ becomes the next Tunisia

The people who don't vote will decide the next election.

Check this out:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1164...

Presumably the seller should be paying tax on the gains, given it was bought and sold within the 2 year brightline period?

good luck on collecting it if the money is transfered back to china straight away.

yeah so there you go....Chinese speculation is out of control
But move along, Key says there is no issue with foreign investors and that the market will solve everything....
This thing is going to crash, and this country will be truly in the crap.

It will probably be on sold for $1,200,000.00 in a couple of months time. These sure are stupid times. Reminds me of the speculation before the 1987 share market crash.

Did you see Liam Dann's article on sharemarket returns vs real estate which was published a week or so ago? Comments show that people burned by the 1987 sharemarket crash didn't learn the right lesson. The right lesson was 'don't be stupid and reckless and greedy', but the takeaway seems to have been 'shares are scary', and they've run off to blow up exactly the same speculative bubble in another market.